First FCA fine under the Market Abuse Regulation for PDMR notification failures
The FCA has fined Kevin Gorman £45,000 (including early settlement discount) for breach of Article 19 of the Market Abuse Regulation (MAR). This important provision requires a person discharging managerial responsibility at an issuer (a PDMR) to notify the issuer and the FCA of any transactions in the stock no more than three business days after the transaction takes place. It is then for the issuer to notify the market. Whether or not a person is a PDMR for MAR purposes depends (in broad terms) on status, access to inside information and managerial power. This requirement to notify applies where the PDMR has transacted more than €5,000 in any given calendar year. Readers will know that when MAR came into force in July 2016 it replaced the existing UK market abuse regime (under FSMA) and trading notification requirements (under the DTR chapter of the FCA Handbook).
Mr Gorman was the managing director of the logistics division of Braemar Shipping Services plc (Braemar), which is listed on the London Stock Exchange. Whilst not on the board of Braemar, Mr Gorman was a member of its small Executive Committee along with other senior staff. In that capacity the FCA viewed it as likely that he had regular access to confidential and inside information about Braemar. Shortly after the implementation of MAR in July 2016 Braemar also wrote to Mr Gorman and told him that he was a PDMR. The FCA therefore had little difficulty in determining that Mr Gorman was a PDMR.
At the same time that he was informed by Braemar that he was a PDMR, Mr Gorman (along with other executives) was also sent a briefing pack in respect of MAR. This pack included details of Braemar’s share-dealing policies and a memorandum on inside information. Following a delay of some four months and a number of chasers from Braemar in late November 2016 Mr Gorman confirmed to Braemar that he had received and read these papers. However he later conceded to the FCA that he had in fact not read the documents and had consequently been unaware of his obligations as a PDMR. Unsurprisingly, whilst noting that he was not offered training, the FCA determined that particularly as a senior individual, he should have read and taken steps to understand such important documentation relating to his regulatory obligations. More significantly, the FCA viewed Mr Gorman’s decision to confirm that he had read the pack as being reckless as to his compliance with his legal responsibilities.
The FCA focussed on three instances of trading in Braemar; in August and November of 2016 (before he confirmed that he had received and read the pack) and in January of 2017 (afterwards). The first trade in 2016 and the trade in 2017 were both substantially in excess of the annual €5,000 threshold. Mr Gorman failed in respect of each of the three trades to give Braemar prior notice of his intention to trade (as required by Braemar’s internal policies) or to give Braemar and the FCA notice after the trading in compliance with Article 19(1) and (2) of MAR. Accordingly there were three clear breaches of Article 19.
The circumstances in which Mr Gorman’s trading came to light was also unusual. Mr Gorman did notify Braemar regarding the 2017 trade four/five business days after it had taken place. This was apparently prompted by a “reminder” email regarding Braemar’s share dealing policy. Unfortunately, Mr Gorman’s trading in 2016 seems only to have come to light during the FCA’s investigation into him and was only confirmed by Mr Gorman to the FCA during interview in May 2017. The FCA treated this confirmation during interview as the de facto notification in terms of Article 19. However, Mr Gorman failed to tell Braemar about the 2016 trades until several months after his FCA interview. He claimed that he had forgotten about the November 2016 trade and thought the August 2016 trade had been earlier in the year and before the implementation of MAR. The FCA appears not to have believed this explanation. 2
In setting penalty, the FCA viewed Mr Gorman’s conduct as being at level 2 (out of 5) in terms of severity. On the face of it this seems lenient. However, the FCA’s analysis was that the trades in August and November 2016 were merely negligent whereas only the trade in January 2017 (after Mr Gorman had confirmed that he had received and read the pack) was reckless. In line with its standard approach to penalty setting, the FCA also considered aggravating factors. This included the fact that Mr Gorman had not volunteered information about the 2016 trading to the FCA or to Braemar and that after the implementation of MAR, the FCA published a considerable volume of material regarding the obligations of PDMRs.
Whilst this case may be the first FCA Notice respect of Article 19, the sanction should not be surprising. It should operate as a timely reminder for individuals who are already designated as PDMRs. Individuals who are unclear as to the status of their employer with respect to MAR and the criteria for being a PDMR should also be prompted to check the position. Whilst issuers have obligations under MAR to identify PDMRs and inform them of their obligations in writing, the relevant individuals also need to actively engage with these requirements.
The FCA’s analysis of Mr Gorman’s trading and its distinction between the earlier (negligent) failures and the later (reckless) failure, does seem strained. Whilst the precise facts are unclear from the Notice, if Mr Gorman was sent papers regarding his PDMR status in July 2016 then his culpable failure to review and comprehend them presumably commenced at that point making any trading after that stage arguably reckless as to the contents of the pack.
EU Report on Accepted Market Practices Under the Market Abuse Regulation
The European Securities and Markets Authority has published an annual report to the European Commission on the application of accepted market practices under the Market Abuse Regulation. The Market Abuse Regulation provides certain prohibitions against market manipulation. Accepted market practices, which are established by national regulators and notified to ESMA, provide a defense against any allegations of market manipulation. In particular, a dealing on a financial market which was carried out for legitimate reasons and in line with an established AMP, will not be found to constitute market manipulation. In the report, ESMA identifies AMPs which were established before the Market Abuse Regulation came into force, or which became effective after that date for the period of July 2018 to June 2019 and describes the latest status of the AMPs. The latest status of the AMPs is the following:
The Spanish Comisión Nacional del Mercado de Valores (CNMV) AMP on liquidity contracts remains in force (ESMA approved in December 2016 on the basis that the AMP includes mechanisms to limit the threat to market confidence). In September 2019, ESMA issued a positive opinion on the proposed revisions to the AMP.
The Portuguese Comissão do mercado de valores mobiliários (CMVM) AMP on liquidity contracts remains in effect.
The French Autorité des marchés financiers (AMF) established an AMP on liquidity contracts for shares that came into effect on January 1, 2019. ESMA has not approved the AMP on liquidity contracts for shares. ESMA’s previous annual report noted that the AMP differs from the ESMA Points of Convergence for AMPs in respect of price, volume, transparency and resources.
The Italian Commissione Nazionale per le Società e la Borsa (CONSOB) established three AMPs under the earlier Market Abuse Directive regime, namely the AMP on liquidity contracts (CONSOB AMP No 1), the AMP on purchase of own shares to set up a shares warehouse position (CONSOB AMP No 2) and an AMP on buyback of bonds issued at predetermined conditions (CONSOB AMP No 3). CONSOB has consulted on revisions to the AMPs and has requested that ESMA issue an opinion of the revised AMP No 1, which ESMA is in the process of assessing. AMP No’s 2 and 3 were withdrawn by the CONSOB on June 30, 2019. However, due to industry concerns about the discontinuation of the AMPs, the CONSOB is analyzing whether to reinstate the AMPs or take other action, in particular to ensure that industry could undertake buy-back programs with a reduced risk of committing market manipulation.