The Duty to Disclose Inside Information: The Subtle Relationships Within the European Market Abuse Regulation

In our recent paper we discuss the European regime governing the disclosure of inside information. In particular, we try to find an answer to the question of which duties of the disclosure regime have been violated in two situations: where i) inside information is selectively disclosed to third parties and ii) the confidential nature of the inside information is no longer ensured if the disclosure of that information has been delayed. The requirements of the public disclosure of inside information are set out in Article 17 of the Market Abuse Regulation (MAR).[1] The issuer’s primary duty to disclose inside information follows from Article 17(1) MAR. Separate disclosure duties have been included in Article 17(8) and Article 17(7) MAR for, respectively, the two situations referred to above. Commentators have raised doubts over the necessity and function of Article 17(8) MAR. Similar doubts could be raised over Article 17(7) MAR. In our paper we defend the independent status of these legal provisions by focusing on their function of serving legal certainty.

Legal Framework and Rationale for the Duty to Disclose Inside Information

According to Article 7(1) MAR, inside information is of a precise nature, has not been made public, relates directly or indirectly to one or more issuers or to one or more financial instruments, and would, if it were made public, be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. Article 17(1) MAR contains the primary duty to disclose inside information, which, in short, stipulates that the issuer in question must disclose inside information that directly concerns that issuer as soon as possible. Hence, Paragraph 1 contains a continuous duty for issuers to disclose inside information. The main purpose of Paragraph 1 is to prevent insider dealing by putting investors on an equal footing and, hence, to reduce the risk of insider dealing. A subsidiary objective of the duty to disclose inside information is that all relevant information is made available to the investing public as soon as possible, which increases market transparency and, ultimately, improves the efficiency of the price formation process.[2]

Selective Disclosure of Inside Information

Article 17(8) MAR stipulates that an issuer must make complete and effective public disclosure of any inside information shared with any third party by that issuer in the course of its business or by a person acting on behalf or for the account of that issuer in the normal course of the exercise of his employment, profession or duties (“selective disclosure”), unless this third party owes a duty of confidentiality. Selective disclosures include, for example, the sharing of information with (major) shareholders during a shareholder meeting and the sharing of information with investment analysts. Article 17(8) MAR is the European counterpart to Section 243.100 of Regulation FD (“Reg FD”). In the U.S., information regarding the issuer was frequently first shared with investment analysts before it was made publicly available.[3] Partly based on the fact that a continuous duty to disclose inside information is absent under U.S. federal law, it has been argued that copying Section Reg FD into the European legal framework has the undesirable effect of (unjustly) granting issuers a second chance to disclose inside information. From this point of view, it has even been advocated that Article 17(8) MAR should be deleted entirely.[4]

Although Article 17(8) MAR is derived from a legal system with its own distinct disclosure regime, we believe that this provision also has its independent status in the European legal system. Imagine, for example, that an issuer’s chairman accidentally (partly) discloses inside information during a presentation given at the annual shareholder meeting and that the attendees owe no duty of confidentiality. It’s a slip of the tongue. If the issuer has not opted to delay the disclosure of the inside information, an infringement of Article 17(1) MAR occurs. After all, the issuer did not comply, or at least not in the appropriate manner, with its primary duty to disclose the inside information. However, in our example, the issuer must still make complete disclosure of the inside information pursuant to Article 17(8) MAR, because the chairman selectively disclosed (part of the) inside information in the normal course of his employment, profession or duties. Whether the duty to disclose the inside information can still be based on Article 17(1) MAR depends on the circumstances following the selective disclosure. Indeed, if the inside information is disclosed during a presentation, it could be that that information has lost all or part of its non-public nature. If that is the case, that information no longer (fully) qualifies as inside information in the sense of Article 7(1) MAR, and the duty to disclose can no longer be based on the primary duty of Article 17(1) MAR. The previous example illustrates the independent value of Article 17(8) MAR, because it clearly states that, in the case of selective disclosure of inside information, the issuer must at all times disclose the information in question in full – and not only to the extent that it is still non-public. This also means that, after the selective disclosure of inside information, the issuer does not have to (re)assess whether the inside information has (completely) retained its non-public nature.

Extending the previous example, consider that the issuer lawfully delayed the disclosure of the inside information. In this case, the selective disclosure of (a part of) that information during a presentation will not by itself infringe Article 17(1) MAR. After all, the primary duty was lawfully suspended by invoking the exception of Article 17(4) MAR.[5] However, following the selective disclosure, the issuer must yet again make complete disclosure of the inside information pursuant to Article 17(8) MAR. Indeed, whether the obligation to (fully) disclose the inside information can also be based on Article 17(1) MAR depends on whether the inside information has (fully) retained its non-public nature.[6] This example also shows the independent value of Article 17(8) MAR.

What If the Confidential Nature of Inside Information Is No Longer Ensured?

As long as the inside information remains confidential, the issuer may lawfully delay its disclosure under Article 17(4) MAR, provided, of course, that the two other requirements of this provision are met. If, however, the inside information is no longer confidential, Article 17(7) MAR stipulates that the issuer shall disclose it as soon as possible. At first glance, the disclosure duty of Article 17(7) MAR may seem superfluous. After all, if the inside information is no longer confidential, the issuer can no longer lawfully delay its disclosure, and the primary disclosure duty of Article 17(1) MAR comes into play.

In practice, inside information may lose its confidential nature to the extent that it also loses – at least in part – its non-public nature, as a result of which it no longer (fully) qualifies as inside information within the meaning of Article 7(1) MAR. From our perspective, Article 17(7) MAR states beyond any doubt that, if the inside information is no longer confidential, no matter whether it has partly or fully become public, the issuer must completely disclose that information – and not only to the extent that the information remains non-public.[7] This once again means that, if the information is no longer confidential, the issuer does not need to (re)assess whether the information has (completely) retained its non-public nature.

In our paper, we also discuss whether inside information is no longer confidential when it is selectively disclosed. We argue that the selective disclosure typically means the information is no longer confidential, but not in all cases. Though the events constituting the loss of the confidential nature and the loss of the non-public nature of that information, respectively, can overlap in practice, we contend that the loss of the information’s confidentiality and non-public status should be distinguished legally from one another. Furthermore, in the context of Article 17(7) MAR, we argue that – without a plausible alternative explanation – volume or price developments may be sufficient to show that the inside information is no longer confidential. Nonetheless, we once again explain why the aforementioned distinction must be made between the loss of the information’s confidentiality and non-public status.

ENDNOTES

[1] Regulation (EU) No 596/2014, OJ 2014 L 173/1.

[2] See in this respect, amongst others, J Payne, ‘Disclosure of Inside Information’ in V Tountopoulos & R Veil (eds), Transparency of Stock Corporations in Europe. Rationales, Limitations and Perspectives (2019) 89-107.

[3] For the sake of completeness, we note that insider dealing – under certain circumstances –is prohibited under U.S. federal law. However, insider dealing, as opposed to the selective disclosure of inside information, does not constitute the main focus of our paper, and, hence, we have excluded the regulation of insider dealing under U.S. federal law from our analysis.

[4] GTJ Hoff, ‘Openbaarmaking van voorwetenschap volgens het nieuwe regime van de Verordening marktmisbruik’ (2016) Tijdschrift voor Financieel Recht 507, 522.

[5] Indeed, if the inside information has been disclosed during a presentation, this raises the question whether the third condition of the exception to the primary duty, namely that the confidentiality of the information concerned must be ensured, is still met (see Article 17(4)(c) MAR). We refer to § 5.2 of our Paper for the answer to this question.

[6] For the sake of completeness, we emphasize that the obligation to (fully) disclose the inside information can only be based on Article 17(1) MAR (or Article 17(7) MAR) if the confidential nature of the inside information is no longer ensured. Again, we refer to § 5.2 of our Paper.

[7] C Mosca, ‘Article 10: Unlawful Disclosure of Inside Information’ in M. Ventoruzzo & S. Mock (eds), Market Abuse Regulation: Commentary and Annotated Guide (2017) 279-280.

This post comes to us from Mathijs Giltjes, a PhD candidate at Erasmus School of Law, and Arnoud Pijls, an assistant professor at the school. It is based on their recent article, “The Subtle Relationship between Paragraphs 1, 4, 7 and 8 of Article 17 of the Market Abuse Regulation,” available here.

Leave a Reply

Your email address will not be published. Required fields are marked *