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Preventing market abuse

This brief article is an introduction to the newly passed Act on insider dealing and market abuse, which was approved by Parliament earlier this month. It was published in the Government Gazette last Wednesday, and will come into force on Friday as Act IV of 2005.

The Act will transpose into Maltese law a recent European Directive, 2003/6/EC, more commonly known as the Market Abuse Directive. As an EU member state, Malta was obliged to transpose this Directive, which forms an integral part of the EU acquis.

The brief paper is an exceedingly simplified overview (without footnotes or references) of some significant features of the new Act and should not be considered as anything more. It is limited to broad background issues and selected issues that should hopefully allow the reader to place the imminent transposition of this recent EU Directive within a recognisable context.

This is by no means the first Maltese law to tackle insider dealing or market abuse. The original insider dealing provisions in Maltese law were introduced in the Malta Stock Exchange Act of 1990. Later, in 1994, a new Insider Dealing Act was adopted. This was amended in 2002 and brought Maltese law fully in line pre-accession with the then applicable EU Directive on Insider Dealing of 1989. This Directive has now been replaced by the so-called Market Abuse Directive of 2003.

This development has forced more changes to Maltese law and to the way activity on our single stock exchange is to be carried out in future. These measures are intended to create a framework which provides more comfort and security to the investing public, to strengthen confidence in the financial markets and to punish wrongdoing.

The transposition

It was initially thought that full transposition could be achieved through a number of judicious amendments to the current Insider Dealing and Market Abuse Offences Act. However, it became clearer as work progressed that the current law did not offer an adequate platform for further substantial reforms. A complete transposition of the Directive required amendments to almost every single provision of the Act. Consequently, the current law will not be reviewed or amended, but instead repealed and replaced in its entirety by the new Act.

Nonetheless, our current Act already provides for at least three essential requirements: the application of sanctions against market abuse offences; the designation of one single regulatory agency for overseeing the legislation; and rules for the exchange of information with overseas regulators.

From insider dealing to market abuse

The new Act has extensive provisions defining the criminal offence of insider dealing and market manipulation. Together they are referred to as "market abuse".

By way of a very simple illustration, insider dealing occurs through the illegitimate use by an insider (e.g., a company official) of confidential company information for the purpose of trading for gain on the same company's securities listed on the stock exchange.

Market manipulation may be committed in various ways, one of which is the sending of false signals to deceive the investing public and thereby influence the market price of a listed security. One false signal could be the deliberate spreading of false rumours, or the creation of fictitious or simulated trades on a security between persons acting in collusion. These offences are quite heavily punished under the new Act, as is already the case under the current Act.

In 2002, market abuse offences were incorporated within the insider dealing legislation and became punishable in the same manner and to the same extent. Under current law, they are already ranked as criminal offences similar to more traditional crimes, such as fraud, misappropriation and forgery. In the new Act, administrative sanctions against market abuse offences shall now have to exist side by side with the criminal sanction.

The new Act states that the imposition of an administrative penalty shall not preclude the institution of criminal or civil proceedings. It also provides that where in respect of a specific act of default, which also amounts to a breach of a criminal provision, an administrative fine has been imposed by the competent authority, no other criminal measure can be imposed in respect of the same act or omission. This new Article attempts to resolve potential legal questions arising from the ne bis in idem or double jeopardy rule.

Transparency and early disclosure

A part of the new Directive aims at increasing transparency and early disclosure of price-sensitive information. Evidently, the chances of insider trading or market abuses are reduced if proper and timely disclosure is made by public issuers. This aims to place all investors on a level playing field and militates against the dangers of selective or abusive use of confidential information.

The new requirements of the Act complement the various rules already found in the Listing Rules, but are now more detailed and precise. The relevant article regulates the duty to inform the public of inside information as soon as possible. New rules have had to be added referring to reporting of transactions by managers and the new obligations governing "persons who produce or disseminate research".

Role of the competent authority

The requirement that one single competent authority will be responsible to administer the new rules as required by the Directive is already satisfied in the shape of the Malta Financial Services Authority (MFSA). Since 2002 the MFSA has been the single unified regulatory authority for all financial services, and shall oversee the workings of the rules governing insider dealing and market abuse.

Article 12 of the Directive requires member states to ensure that their respective competent authorities have a number of specified powers considered essential to detect and punish market abuse. These include such new extraordinary powers as the freezing of funds of suspects.

Member states which fail to implement these requirements might not be placing their national authorities in a position to adequately assist other EU regulators in combating cross-border cases of market manipulation and may be reported for bad implementation of EU law. The new Act deals adequately with all these matters.

Under the new Directive, regulatory agencies of the EU member states responsible for monitoring market abuse in member states must be properly equipped by their legislation and able to perform their functions within their own jurisdiction and to assist adequately regulators from other member states interested in pursuing cross-border investigations. Intensive cross-border collaboration between securities regulators from the member states is a major pillar supporting the EU financial services regulatory framework.

The new Act and the media

The media may have been used as an instrument of market abuse, particularly by the publication of false signals to deceive the investing public and disturb the market. Following the Directive, the new Act introduces interesting new obligations on persons who publish or broadcast information in the media on specific financial instruments.

The legal requirements are actually quite basic and should provoke no controversy or hardship. In simple terms, the law requires any such publication or broadcast to be fair and objective, supported by such verification and caution that proper journalists would be expected to take. It would have been interesting to dwell more extensively on the new position of journalists and similar media practitioners following this Act.

Maybe another time.

Dr Fabri is senior lecturer in the Faculty of Law, University of Malta, and Director of Legal and International Relations at the MFSA.

This article represents his personal opinions and not those of any institution.

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