Public Consultation on a Revision of the Market Abuse Directive (MAD)

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1 23 July 2010 EU Commission By to: IMA Registered Organisation ID: Dear Sir Public Consultation on a Revision of the Market Abuse Directive (MAD) The IMA represents the asset management industry operating in the UK. Our Members include independent fund managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of 3.4 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds under management in UK-authorised investment funds (i.e. unit trusts and open-ended investment companies). The IMA's authoritative Asset Management Survey recorded that IMA member firms were managing 40% of the UK equity market for clients and 1.2 trillion in fixed income instruments. We welcome the opportunity to comment on the proposals made in the paper. The IMA welcomes the proposals to move to a harmonised directive which will operate similarly across Europe. Please find our detailed comments attached. Investor protection and market confidence are essential to the correct functioning of financial markets. The IMA therefore strongly opposes all kinds of market abuses and manipulations and supports any initiative aiming at strengthening the integrity and efficiency of the markets. It is very difficult, at this stage, to comment on the role to be played by ESMA, given the lack of any clear detail on its final scope, powers or remit. I look forward to hearing from you if there is any clarification that you would find useful on the points we have raised. Yours sincerely Adrian Hood Regulatory Adviser 65 Kings way London W C2B 6TD Tel: +44(0) Fax: +44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 Public Consultation on a Revision of the Market Abuse Directive We provide below answers only to those questions from the consultation that fall within IMA s remit A. EXTENSION OF THE SCOPE OF THE DIRECTIVE Q1: Should the definition of inside information for commodity derivatives be expanded in order to be aligned with the general definition of inside information and thus better protect investors? While we see a superficial attraction in harmonisation, in practice the definition would be unworkable for many of the commodity markets, so we see no need for the definitions to be harmonised. While harmonisation would not have a direct effect on our members, it could have significant disruptive effect on markets in which our members are active. While it is recognised that there may be problems in the gas and electricity markets, imposing solutions to their problems on other commodity markets is not the answer. One possible solution may be to require the disclosure of information which the relevant markets proscribe should be disclosed. However we consider that more work would be required, with the involvement of all commodity markets, before this proposal should be advanced. Q2: Should MAD be extended to cover attempts to manipulate the market? If so why? Is the definition proposed in this consultation document based on efficient criteria to cover all cases of possible abuses that today are not covered by MAD? We note that MAD already defines (Art 1(2)) market manipulation as transactions or orders to trade, or dissemination of information through the media, which are likely to give false or misleading signals. This would seem to include attempts at market manipulation. However, we welcome the harmonisation of offences between market manipulation and insider dealing, by extension of the Market Abuse Directive scope to include attempts to manipulate the market. Extending the scope to attempted market manipulation will enable competent authorities to take action against unsuccessful market abusers, rather than having to wait for them to be successful. We would expect that ESMA, in determining conduct or practices by means of automated electronic trading that may constitute engaging in market manipulation would consult widely as a key part of that process.

3 Q3: Should the prohibition of market manipulation be expanded to cover manipulative actions committed through derivatives? Given the ongoing developments in the market this seems like a sensible extension of the Directive s scope. Q4: To what extent should MAD apply to financial instruments admitted to trading on MTFs? Given the ongoing developments in the financial markets it would seem sensible to extend the Directive s scope to include all financial instruments admitted to trading on MTFs. Q5: In particular should the obligation to disclose inside information not apply to issuers who only have instruments admitted to trading on an MTF? If so why? The requirement for issuers to disclose inside information is critical to fair markets. Any dilution of the requirements could lead to false markets, and reduce the level of trust. However, the rules may need to be amended for MTFs to take account of the fact that issuers, who are not listed on a primary market, may not be aware of their shares, or financial instruments, being traded on a particular MTF. Q6: Is there a need for an adapted regime for SMEs admitted to trading on regulated markets and/or MTFs? To what extent should the adapted regime apply to SMEs or to companies with reduced market capitalisation as defined in Prospectus Directive? To what extent can the criteria to be fulfilled by SMEs as proposed for such an adapted regime be further specified through delegated acts? While the IMA is supportive of SMEs listing on markets and improving the liquidity of their offerings, we recognise that SMEs are also vulnerable to market abuse in their issues, and can carry higher risk for investors. As such we are unsure that they would benefit from decreased regulation, which might not improve their access to the capital market or improve the liquidity of their shares.

4 B. ENFORCEMENT POWERS AND SANCTIONS Q7: How can the powers of competent authorities to investigate market abuse be enhanced? Do you consider that the scope of suspicious transactions reports should be extended to suspicious orders and suspicious OTC transactions? Why? We have received no comments on the extension of STR scope from our members. Regulators in the UK already have the power to obtain telephone and data traffic records, where these are maintained, under certain conditions, primarily in the battle against market abuse. The competent authorities should be encouraged to make full use of the information that they already receive, and make full use of the powers that they already have. Q8: How can sanctions be made more deterrent? To what extent need the sanction regimes be harmonised at the EU level in order to prevent market abuse? Do you agree with the suggestions made on the scope of appropriate administrative measures and sanctions, on the amounts of fines and on the disclosure of measures and sanctions? Why? We support the levelling up of sanctions in national regimes as proposed, in order to punish and deter market abusers, and thus leading to cleaner, more efficient markets. We consider that it is important for the punishment to be proportionate to the seriousness of the breach. As no two cases of market abuse will be entirely alike we do not think that it is either appropriate or desirable to implement a prescribed regime, or apply minimum fines. We have no comments on how else sanctions can be made more deterrent. Q9: Do you agree with the narrowing of the reasons why a competent authority may refuse to cooperate with another one as described above? Why? What coordination role should ESMA play in the relations among EU competent authorities for enforcement purposes? Should ESMA be informed of every case of cooperation between competent authorities? Should ESMA act as a binding mediator when competent authorities disagree on the scope of information that the requested authority must communicate to the requesting authority? The competent authorities should be encouraged to cooperate as much as possible, and ESMA should act as necessary to mediate any disputes.

5 We see no reason why competent authorities should inform ESMA, where their cooperation is proceeding smoothly. Q10: How can the system of cooperation among national and third country competent authorities be enhanced? What should the role of ESMA be? We would encourage competent authorities to cooperate with regulatory authorities in third countries, and ESMA would seem to be best placed to facilitate this process. However, the exact role that ESMA will be able to play in this context will depend on its final scope and powers that are still under discussion. It is therefore difficult to comment on this at this stage. C: SINGLE RULE BOOK Q11: Do you consider that a competent authority should be granted the power to decide the delay of disclosure of inside information in the case where an issuer needs an emergency lending assistance under the conditions described above? Why? We agree that, in exceptional circumstances, an issuer should be able to be temporarily exempted from disclosing inside information in order to support market confidence and integrity, subject to strict oversight by the competent authority. Moreover, it may also be appropriate for regulators to make the decision as to whether inside information should be disclosed, as they may be able to better judge the balance of public interest. Additionally conflicts between listing authorities and competent authorities need to be addressed explicitly in such situations. Q12: Should there be greater coordination between regulators on accepted market practices? We would support the competent authorities coordinating their views on accepted market practices, to ensure understanding of the different approaches taken in different jurisdictions. This should represent the recognition of the existence of an AMP on specific markets, and acceptance of the legality of such practices, rather than a harmonisation of such practices to all markets. Q13: Do you consider that it is necessary to modify the threshold for the notification to regulators of transactions by managers of issuers? Do you consider that the threshold of 20,000 is appropriate? If so why? No comment

6 Q14: Do you consider that there are other areas where it is necessary to progress towards a single rulebook? Which ones? We support as much harmonisation of rules across Europe as possible in order to reduce costs of doing business. However we understand that different countries have imposed different super-equivalent requirements which are specific to their country and markets, and are valued as improving market conduct. If the EU is to move to a single rulebook in this area it should take these higher standards into account, if possible finding some way of incorporating them. As you will be aware the UK has several such higher standards, e.g. RINGA, behaviour and the lack of requirement for an insider. We consider that these are important additional aspects of the market abuse regime in the UK and we would not like to see a lowest common denominator approach to harmonisation. Q15: Do you consider that it is necessary to clarify the obligations of market operators to better prevent and detect market abuse? Why? Is the suggested approach sufficient? No comment