The former Market Abuse Directive (MAD) imposed requirements designed to ensure the objective presentation of investment recommendations and the disclosure of interests and conflicts of interest on the part of producers or disseminators of such recommendations. However, the Market Abuse Regulation (MAR) has considerably expanded regulation of “investment recommendations” and other “information recommending or suggesting an investment strategy”:
- Recital 3 of the former Directive 2003/125/EC implementing MAD had carved out from these requirements “investment advice, through the provision of a personal recommendation to a client … (in particular informal short-term investment recommendations originating from inside the sales or trading departments of an investment firm or a credit institution expressed to their clients), which are not likely to become publicly available”. As the Directive has now been repealed, the carve out no longer applies. The investment recommendations requirements therefore now apply to, among other things, informal sales and trading recommendations (e.g. sales notes, shouts).
- In addition, under MAD, disclosures were focused on covering more traditional equity market ‘buy/hold/sell’ recommendations; MAR covers less standard sales recommendations, including opinions as to the present or future value or price of financial instruments.
- The European Securities and Markets Authority (ESMA), rather than the national regulator, is responsible for providing guidance on the detail of the regime. The requirements are more prescriptive than before.
- MAR applies the investment recommendations requirements to a broader range of financial instruments. A number of financial instruments are traded on one or more of the 149 multilateral trading facilities in the EU without the consent or request of the issuer.
- The territorial scope of the regime extends to actions or omissions outside the EU which affect or relate to financial instruments to which the regime applies.
The combined effect of these provisions means that strictly speaking, the MAR requirements would apply to non-EU persons making sales recommendations to non-EU investors in respect of the securities of non-EU issuers if those securities happen to be traded on a trading venue in the EU. ESMA has not made clear how it envisages this requirement should be supervised and enforced at the very outer-margins of EU-related business.
The regulatory technical standards
The regulatory technical standards (RTS) adopted by the European Commission covering “investment recommendations” and “information recommending or suggesting an investment strategy” contain detailed requirements in respect of:
- disclosure of the identity of the producers of recommendations;
- objective presentation of such recommendations;
- the disclosure of interests conflicts of interest on the part of producers of recommendations; and
- arrangements to ensure that disseminators of recommendations disclose conflicts of interest and that altered/summarised recommendations are clear fair and no misleading
The requirements which apply to persons whose main business is to produce investment recommendations are more extensive and granular than those that apply more generally. The requisite disclosures may be disproportionate to the length or form of the recommendation. This includes the case of “non-written recommendations” (e.g. those communicated via meetings, television, conference calls or website interviews). In that event the RTS allow the person who produces recommendations to fulfill some of these requirements (but not all) by explaining within the recommendation where the required information can be directly and easily accessed by the persons receiving the recommendation free of charge (i.e. on a website).
Joint trade associations representing the industry (amongst others, AFME, BBA, FIA and ISDA) consider the regime to be unduly onerous and comment that it:
“seems to create a largely unbounded requirement for extensive disclosures on sales and trading communications. Without further guidance, there is a material risk that the typical daily sales dialogue with professional clients will have to cease as implementation would be unworkable. This option is being seriously considered by some of our members. This would clearly have a very detrimental effect on proper and efficient information flows, market liquidity, market efficiencies and client outcomes generally.”