Locations
Market reCap
- Inside the wall
- FSA consultation on PDMR transactions – issues for brokers
- Significant changes to the listing regime
- The end of "no names" calls to the UKLA? And the first edition of Primary Market Bulletin
- AIM Regulation and directors participating in a secondary fundraising
- QCA remuneration committee guide for smaller quoted companies
- Kay Review of UK equity markets – interim report published
1. Background
As part of its quarterly consultation in December 2011 (CP11/27) (the "Consultation") the Financial Services Authority ("FSA") included the topic "PDMR Transactions: guidance on the role of brokers". The Consultation was open until 6 February 2012 and we await the publication of a response paper by the FSA and further guidance but, given the significance of the subject matter, we have covered it in Market reCap.
"PDMR" stands for "person discharging managerial responsibilities" (as defined in section 96B of the Financial Services and Markets Act 2000 ("FSMA")). It basically refers to a director or senior executive of an issuer who: (i) has regular access to inside information relating, directly or indirectly, to the issuer; and (ii) has power to make managerial decisions affecting the future development and business prospects of the issuer.
The Consultation was a follow-up to an issue raised in Market Watch 35 in June 2010, which drew the market’s attention to provisions of the Code of Market Conduct ("CoMC") that are relevant when a broker is acting on behalf of a PDMR selling shares in his own company – in particular, as to whether it would be permissible to disclose to a potential counterparty the PDMR’s identity or the fact that an unnamed PDMR is selling.
In Market Watch 35, the FSA said that under the CoMC, where information about a planned disposal of shares by a PDMR would constitute inside information (for the purposes of section 118 of FSMA), disclosing this information will constitute market abuse in the form of improper disclosure, unless it is in the proper course of the broker's exercise of his employment, profession or duties. If, on the facts, information about the disposal is not deemed to be inside information then a broker has the option, but not an obligation, to disclose it (subject to confidentiality, or any other requirements). The FSA also said that onus is on the broker to decide whether, in the circumstances at hand, a PDMR’s identity, or the fact that an unnamed PDMR is selling, constitutes inside information.
2. Current practice
Notwithstanding the publication of Market Watch 35, the FSA felt the market generally considered passing inside information about the fact that a PDMR was selling stock, and/or the identity of that PDMR, to potential buyers prior to the sale was acceptable. The FSA was told that potential buyers would expect brokers to disclose such information to them.
Market participants were reported to be interpreting MAR 1.4.5E (factors to be taken into account in determining whether or not behaviour amounts to market abuse), specifically paragraphs 1.4.5E(2)(c) ("purpose of facilitating any commercial, financial or investment transaction") and 1.4.5E(3) ("the proper functions of his employment, profession or duties"), as providing justification for such disclosure.
3. Consultation
In the light of the current market practice, especially after the publication of Market Watch 35, the FSA decided to consult on changes to the guidance in the CoMC.
The approach proposed in the Consultation is to reiterate that passing such inside information is prima facie market abuse in the form of improper disclosure, but to set out one instance (discussed below) where the FSA believes the ‘proper exercise’ exemption could be available.
4. The one exception
The FSA believes the disclosure issue is of most concern when PDMRs in smaller issuers are seeking to sell, and it is an issue for smaller brokers providing these services to these PDMRs.
In the Consultation the FSA said "The information that such a holder wishes to sell stock is more likely to be inside information as [PDMRs] are likely to be significant stock holders. Also, any sale will be taken as a commentary on the company and will therefore have more of an impact on the share price. Smaller issuers may have less dispersed stock that will consequently be less liquid, exacerbating the price sensitivity of the disposal and increasing the difficulties in selling the stock. In such limited circumstances, involving particularly illiquid stock in a smaller issuer, a broker may be unable to complete the deal without first passing the inside information (that it is a PDMR selling) to selected clients". Accordingly, an exception would be provided for these limited circumstances.
5. Responses and comments to the Consultation
As of the date of this publication, the FSA has not published a response paper following the close of the Consultation in February, but various interested parties have published their comments online. We summarise some of the key responses below.
The Association of Private Client Investment Managers and Stockbrokers commented on 2 February 2012 that it was broadly supportive of the proposals but wanted it to be clarified that when the FSA said that "potential buyers would need to demonstrate that they had not used this information as the basis of any trading decision" that this referred to further trading the buyer might do and not the original deal with the PDMR seller.
The City of London Law Society commented on 6 February 2012 that although it supported the rationale underpinning the proposed exemption, it was concerned there was no corresponding buy-side exemption. In its view, any well-advised buy-side institution would be reluctant to acquire such stock. It urged that a corresponding safe harbour should be added in MAR 1.3 (Market Abuse - insider dealing). It also suggested there be guidance on the situation where a buyer realised the seller was a PDMR (e.g. due to the number of shares on sale).
The Association of British Insurers was of the opinion that the FSA was largely right in its analysis of the market practice but wrong in its regulatory response. It thought the proposed exemption was likely to be unworkable in practice, relying on essentially arbitrary judgment. It suggested that the question of disclosure needs to be left to the proper judgment of the broker concerned in the knowledge of the obligations and restrictions that would need to be imposed on the use of that information by those who receive it.
6. Conclusion
If the proposed changes are implemented, it will be very important for brokers to consider whether the information relating to the proposed disposal of stock by a PDMR constitutes inside information. In many cases, it will not.
If the information does constitute inside information, it will be important to check whether the proposed exemption is available. The response paper, when issued, may be able to shed more light on the avenues available if the exemption is not available. One option that has been mentioned is a pre-announcement of the disposal, which would be very unappealing.
7. Useful links
FSA consultation (and response when published), and Market Watch 35
Shash Dayal is an associate in the Corporate Group of Field Fisher Waterhouse LLP in London.