2006 Butterworths Journal of International Banking and Financial Law, n.º 4
On 11 November this year, the Spanish government enacted Royal Law-Decree 1333/2005 (the ‘Decree’) to fully implement four important Directives on Market Abuse: Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003, on insider dealing and market manipulation; Directive 2003/124/EC of the Council of 22 December 2003 on the definition and public disclosure of inside information and the definition of market manipulation; Directive 2003/125/EC of the Council of 22 December 2003 on fair presentation of investment recommendations and the disclosure of conflicts of interest; and Directive 2004/72/EC of the Council on accepted market practices, the definition of the inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers’ transactions and the notification of suspicious transactions (the ‘Market Abuse Directives’).
DEFINITION OF INSIDE INFORMATION, MARKET MANIPULATION AND ACCEPTED MARKET PRACTICES
The concept of ‘inside information’ provided by Directive 2003/6/EC was already embodied in Spanish law (ie information of a precise nature which has not been made public, relating to securities or to their issuers which, if it were made public, would be likely to have a significant effect on the prices of those securities).
The Decree further clarifies this definition by defining two of its elements. ‘Information that is likely to have a significant effect on prices’ is defined as: the information a reasonable investor would be likely to use as part of the basis of its investment decisions. ‘Information of a precise nature’ is defined as: the information that includes a set of facts, existing or reasonably expected to come into existence, which are specific enough to draw a conclusion on their effect on the prices of securities.
Following the provisions of Directive 2003/6/EC, the Spanish Securities Act already contained a prohibition to engage in market manipulation and defined various kinds of behaviour that amount to manipulation (transactions that distort the real supply or demand of securities or that secure artificial prices, dissemination of misleading information through the media and other deceptive conducts and transactions related to securities).
The Decree completes the implementation of Directive 2003/6/EC by establishing some of the conduct that amounts to manipulation:
(a) actions intended to secure a dominant position over the supply or demand of securities and fix prices or create unfair trading conditions;
(b) transactions at the close of the market with the effect of misleading investors acting on the basis of closing prices;
(c) broadcasting opinions in the media concerning securities or their issuers while having previously taken positions on those securities without having simultaneously disclosed the conflict of interest.
The Decree also implements Directive 2003/124/EC by establishing the indicia that the Spanish Securities and Exchange Commission (‘CNMV’) shall take into account when determining whether any of the behaviour described above constitutes market manipulation (ie when it involved significant proportions of daily volumes of securities leading to a significant change in the price, position reversals in a short period of time, etc).
Accepted Market Practices
As provided in the Market Abuse Directives, the Decree carves certain transactions that are considered legitimate out of the concept of ‘market manipulation’. These ‘accepted market practices’ should be approved by the CNMV in consideration of certain factors that, following what is provided in Directive 2004/72/EC, are provided in the Decree (ie transparency of the market practice, effects on supply and demand of financial instruments, impact of the market practice on market liquidity and efficiency, consistency of the practice with trading mechanisms of the relevant market, ability of the market participants to effectively react to the new market situation created by the market practice, resulting market risks for EU markets concerning the relevant financial instrument, prior investigations by any competent authority and structural characteristics of the relevant market).
PUBLIC DISCLOSURE OF INSIDE INFORMATION
Disclosure of Relevant Information
The Spanish Securities Act already provided that issuers are obliged to disclose all price-sensitive information to the market immediately, by means of a communication to the CNMV, before the information is disclosed by any other means and as soon as the fact becomes known, the decision has been adopted or the relevant agreement or contract with third parties has been signed. The issuers of securities are also required to post this information on their web sites.
The Decree further implements Directive 2003/124/EC, by providing that an issuer shall not combine, in a manner that is likely to be misleading, the provision of inside information to the public with the marketing of its activities. Further, issuers are required to ensure that the disclosure of inside information to the public is synchronised as closely as possible between all categories of investors in all EU member states in which those issuers are listed.
Legitimate Interest For Delaying Disclosure
Spanish law already provided that the disclosure was not required during the study or negotiation phases of any legal or financial operation if it may have a significant influence on the price of the financial instruments. By implementing Directive 2003/124/EC, the Decree further clarifies that disclosure is not required in respect of:
(a) negotiations that are under way, or any circumstances concerning the negotiations, where the outcome or pattern of the negotiations would likely be affected by public disclosure. In particular, in the event that the financial viability of the issuer is in serious and imminent danger, the Decree allows the possibility of delaying the public disclosure of information when the disclosure could seriously jeopardise the negotiations to ensure the long-term financial recovery of the issuer;
(b) decisions or contracts prepared by the management of an issuer which need the approval of another body of the issuer in order to become effective, provided that a public disclosure indicating that such approval is still pending may jeopardise the correct assessment of the information by the public.
List of Insiders
Spanish law already provided the obligation to draw up and keep updated a list of persons with inside information specifying the date on which such person became an insider.
In compliance with what is provided in Directive 2003/124/EC the Decree further clarifies that such register should include all persons working for the issuer, under a contract of employment or otherwise, who have access to inside information. Further, the Decree specifies the content of the lists of insiders and requires it to be kept up to date.
The Decree also requires the issuer to ensure that the insiders acknowledge the confidential nature of the information in their possession, as well as their legal and regulatory duties and sanctions.
The lists of insiders will be kept for at least five years after being drawn up or updated.
NOTIFICATION OF MANAGERS TRANSACTIONS
Under the Spanish Securities Act directors, managers, and those persons ‘closely associated’ with them, are required to inform the CNMV of the acquisition of securities issued by the company in which they hold such positions.
The Decree provides an indication of the concept of ‘persons closely associated’ with a manager or director in the general guidelines set forth in Directive 2004/72/EC (namely, a spouse, dependent children, other relatives sharing the same household, and any legal person, trust or partnership, managed or controlled by the director or manager or by any of the aforementioned persons or in which any of these persons have an economic interest).
The notification shall be made within five working days from the date of the transaction to the CNMV and shall include the information detailed in the Decree.
Definitions and Disclosure
Before the enactment of the Decree, the regulation of investment recommendations in Spain was relatively light. The only relevant legal provision established that any companies that draft, publish or disseminate reports or recommendations on listed issuers must act in a loyal and fair manner, prominently disclosing any significant links the company holds or will hold with the issuer.
The Decree fully implements Directive 2003/125/EC providing for a clear set of rules applicable to investment recommendations.
‘Recommendation’ is defined as any information related with securities or their issuers, including any report as to the present or future value of such securities that recommends or suggests an investment strategy and is intended for public use. In turn, ‘recommendation or suggestion of an investment strategy’ is defined as information that directly (or indirectly in the case of professional investment advisors) expresses a particular investment recommendation in respect of a financial instrument or an issuer of financial instruments.
A recommendation must disclose the identity of the person responsible for its production, the applicable self-regulatory standards or codes of conducts and, in case of investment firms and credit institutions, the identity of the relevant competent supervisory authority. In the case of oral recommendations, such requirements may be substituted by a reference to the place where such information can be accessed by the public, such as a web site. Further, these disclosure obligations shall not apply to journalists subject to equivalent appropriate regulation, including equivalent self-regulation, provided that such regulation achieves similar effects as those of the disclosure required by the Decree.
Fair Presentation of Recommendations
Any person making a recommendation must ensure that:
(a) facts are clearly distinguished from interpretations, estimates, opinions and other types of non-factual information;
(b) all sources are reliable or, where there is any doubt as to whether a source is reliable, this is clearly indicated;
(c) all projections, forecasts and price targets are clearly labelled as such and that the material assumptions made in producing or using them are indicated;
(d) any recommendation can be substantiated as reasonable, upon the CNMV’s request
Furthermore, the following additional requirements are applicable to recommendations made by independent analysts, investment firms, credit institutions, any related legal persons, and any other relevant person whose main business is to issue recommendations;
(e) indicate substantially material sources of the recommendation and whether or not the recommendation has been disclosed to the issuer and amended following this disclosure before its dissemination;
(f) summarise the valuation basis and methodology used to assess securities or their issuer, or to set a price target for securities;
(g) explain the meaning of any recommendation made, such as buy, sell or hold, and any appropriate risk warning, including a sensitivity analysis of the relevant assumptions;
(h) indicate the planned frequency of updates for the recommendation;
(i) express the date at which the recommendation was first released for distribution and the relevant date and time for any securities;
(j) indicate changes in the recommendation during the immediately preceding 12-month period.
In the case of oral recommendations, all of the above requirements may be substituted by a reference to the place where such information can be accessed by the public, such as a web site.
Disclosure of Interests and Conflicts of Interest
Persons making recommendations must disclose circumstances that may reasonably be expected to impair the objectivity of the recommendation, in particular, any significant financial interest in the securities which are the subject of the recommendation, or a significant conflict of interest with respect to an issuer to which the recommendation relates.
Where the person issuing the recommendation is a legal person:
(a) the obligation stated in the preceding paragraph shall apply also to any legal or natural person working for the legal person, under a contract of employment or otherwise, who was involved in preparing the recommendation;
(b) the disclosure shall include (i) any interests or conflicts of interest of the person making the recommendation or of related legal persons that have access to the persons involved in the preparation of the recommendation; and (ii) any interests or conflicts of interest of the person making the recommendation or of related legal persons known to persons who, although not involved in the preparation of the recommendation, could reasonably be expected to have access to the recommendation prior to its dissemination to customers or the public.
When the recommendations are made by independent analysts, investment firms, credit institutions, any related legal persons, and any other relevant person whose main business is to produce recommendations, the recommendation shall also disclose:
(c) major shareholdings that exist between the person making the recommendation or any related legal person on the one hand, and the issuer on the other hand;
(d) other significant financial interests held by the person making the recommendation or any related legal person in relation to the issuer;
(e) where applicable, a statement that the person making the recommendation or any related legal person is (i) a market maker or liquidity provider in the financial instruments of the issuer; or (ii) has been lead manager or co-lead manager over the previous 12 months of any publicly offered securities of the issuer; or (iii) is party to any other agreement with the issuer relating to the provision of investment banking services, provided that this would not entail the disclosure of any confidential commercial information and that the agreement has been in effect over the previous 12 months or has given rise during the same period to a compensation; (iv) is a party to an agreement with the issuer relating to the production of the recommendation.
Lastly, investment firms and credit institutions issuing recommendations should also disclose:
(f) organisational and administrative arrangements for the prevention and avoidance of conflicts of interest with respect to recommendations, including information barriers.
(g) proportion of all recommendations that are ‘buy’, ‘hold’, ‘sell’ or equivalent terms, as well as the proportion of issuers corresponding to each of these categories to which the investment firm or the credit institution has supplied material investment banking services over the previous 12 months.
(h) whether the remuneration of the persons working for an investment firm or a credit institution, under a contract of employment or otherwise, and of other persons involved in preparing the recommendation, is tied to investment banking transactions performed by the investment firm or credit institution or any related legal person. Furthermore, where those natural persons receive or purchase the shares of the issuers prior to a public offering of such shares, the price at which the shares were acquired and the date of acquisition must also be disclosed.
All of the above requirements may be substituted by a reference to the place where such information can be accessed by the public, such as a web site, in case of oral recommendations or when the fulfilment of these requirements prove to be disproportionate with the length of the recommendation.
Recommendations Prepared by Third Parties
The dissemination of recommendations produced by a third party is subject to the fulfilment of the following requirements:
(a) the identity of the person that disseminates such recommendation shall be clearly and prominently indicated;
(b) whenever a recommendation produced by a third party is substantially altered within disseminated information, the alteration should be clearly indicated, provided that when the alteration consists of a change of the direction of the recommendation (such as changing a ‘buy’ recommendation into a ‘hold’ or ‘sell’ recommendation or vice versa), the disseminator shall fulfil the requirements provided in the Decree to ensure the fair presentation of recommendations and the disclosure of any conflict of interest.
(c) the disseminator shall have in place a policy providing how the persons receiving the information may be directed to where they can have access to the identity of the producer of the recommendation, the recommendation itself and the disclosure of the producer's interests or conflicts of interest.
(d) in case of dissemination of a summary of a recommendation produced by a third party, the summary shall be clear and not misleading and mention the source document and where the disclosures related to the source document can be directly and easily accessed by the public.
Finally, investment firms and credit institutions disseminating recommendations produced by a third party shall comply with the following additional requirements:
(e) the name of their competent supervisory authority shall be clearly disclosed;
(f) if the recommendation is disseminated prior to its dissemination by the producer of the recommendation, the investment firm or credit institution shall comply with the conflict of interest disclosure requirements set-forth in the Decree for any kind of recommendations;
(g) in the event of a substantial alteration of the recommendation, the credit institution or investment firm shall fulfil the requirements set-forth in the Decree to ensure a fair presentation of recommendations and the disclosure of any conflict of interest.