MAR comliance is still challenging

After MAR came into force in July 2016, issuers have devoted considerable resources to learning about the new rules and adapting their internal procedures – and both issuers and regulators have built up valuable experience concerning how the new regulatory regime functions.

Anne Bruun can note that the major challenges faced by companies are the disclosure obligation, the assessment of inside information and the related handling of insider lists.

Assessment of inside information is a challenge

According to MAR, the disclosure obligation arises at the time when information becomes inside information – in contrast to the former regime, in which the reality principle was the main principle governing the disclosure obligation. This marks a significant change.

“The change in the disclosure obligation means that it is essential for issuers to be able to assess inside information correctly – and to decide either to disclose the information as soon as possible, or to postpone disclosure according to the rules under MAR. It is our impression that issuers still face challenges regarding the assessment of inside information. In many cases, the fact that the disclosure obligation is now linked to the assessment of inside information seems to have led issuers to classify inside information too late. It is important that issuers distinguish between inside information as defined in Article 7 and the obligation to disclose inside information under Article 17. Article 7 is the key provision when an issuer is to determine whether information is inside information,” says Anne Bruun.

Insider lists: a very import task…

“If information constitutes inside information, the rules to prevent insider trading and the unlawful disclosure of inside information will apply. Persons with access to this information must be included on the respective insider list. In any case, we recommend issuers to be highly aware of these issues and to keep a critical eye on their internal rules and procedures. We consider transaction processes in particular to be very challenging. Transaction processes are often “bumpy” – they run, stall and then run again. In practice, we can see that insiders are sometimes first included in the ad-hoc insider list, then removed and then included again. The question is whether this is ok, or whether these individuals hold inside information. Issuers must exercise caution if they chose to remove insiders from the insider list during processes that may possibly lead to transactions,” says Anne Bruun.

… giving a need for tight internal handling

Anne Bruun continues: “In their attempts to cope with the aforementioned potential problems, we know that some issuers have created ’restricted trading lists‘ for selected groups of employees, which prohibit these employees from trading the issuers’ shares. Some issuers have also created ‘confidentiality lists’ or ’grey lists‘ to be used when initiating processes that may eventually develop into inside information. Furthermore, a number of issuers, especially the larger issuers, have anchored the assessment of inside information in a ‘disclosure committee‘ – with the purpose of assisting the Executive Board and the Board in their compliance with the disclosure obligation. Our experience shows that these initiatives are very useful, since they lead to greater awareness of the assessment of inside information.”

After nearly two years with MAR, it is best practice among issuers to operate with three types of insider lists: a permanent list (typically including the Board of Directors, the executive management and selected key employees); ad-hoc lists (related to specific projects); and grey lists. The regulatory requirements regarding insider lists have increased the administrative burden and therefore many issuers have chosen to buy an IT solution from a service provider.

“Even though many issuers have invested in a new IT solution to handle the practical tasks, we have experienced how a large proportion of insider lists are still incorrect. In the autumn of 2017, we checked 20 insider lists and only two of these complied fully with the regulatory demands. We plan to perform a new spot check soon and we hope that this will show a considerable increase in the number of correct insider lists,” says Anne Bruun and continues:

“We are fully aware that MAR has required significant changes to the issuers’ internal procedures. At the Danish FSA, our aim is to guide issuers on the most relevant and challenging aspects of the new regulation – and to assist them in building a well-functioning best practice. The next initiative from our side is expected to be guidelines on how to handle the disclosure obligation in the event of management changes. This is not necessarily a simple matter, as the disclosure obligation will differ according to whether a CEO chooses to resign, the CEO is considering resigning, or the management change is part of a management reshuffle.”