Regulating the EU Capital Markets Union—Unbundling Ad Hoc Disclosure and Insider Trading

In our recent blog article, we reported on the ‘EU Listing Act’ as the next major legislative step in European capital markets law. Although we don’t know for sure yet, the ‘Targeted Consultation on the Listing Act’ indicates that the European Commission has an appetite for putting ad hoc disclosure back on the reform agenda. While our recent article ‘Disclosure and Enforcement under the EU Listing Act’ in the ECFR offers some general considerations on the available regulatory strategies, we would like to share here some more specific thoughts on how to reform ad hoc disclosure. As explained in our article, ad hoc disclosure currently faces two problems: 1) high costs of disclosure and 2) legal uncertainty in the interpretation of the notion of ‘inside information’ (Art 7 MAR) and the possibility of delay (Art 17 (4) MAR), which increase the costs of compliance. These problems are the result of the one-step system of the MAR, which links ad hoc disclosure and the regulation of insider trading via the notion of inside information.

How can these problems be solved or at least mitigated? We have taken on the challenging task to develop a ‘Proposal for a Reform of Ad hoc Disclosure’ that is easy to implement, improves legal certainty, reduces costs for issuers, and ensures market efficiency at the same time. In our proposal, which was also presented at the recent ECFR conference in Leuven, Belgium, we argue for a principle-based, two-step approach dedicated to the idea of mandating disclosure of price-relevant information. In particular, this proposal would still entail disclosure obligations at least for some future and uncertain events. Key elements of our proposal are the following:

• Keeping the current approach, but recalibrating ad hoc disclosure: Our proposal mandates disclosure of price-relevant information as defined in Art. 7 (4) MAR. However, issuers would only be required to disclose information about events that have occurred or are likely to occur (probability of 50% or more). This can be done by amending Art. 17(1) MAR so that ad hoc disclosure does not mandate disclosure of ‘intermediate steps’ in ‘protracted processes’ (see Art. 7 (3) MAR).
• The possibility of delay pursuant to Art. 17 (4) MAR will continue to exist in order to safeguard the interests of issuers, but the mechanism will not incur the same compliance costs as today.
• Expanding ESMA’s mandate to issue guidelines on when issuers typically have to disclose will improve legal certainty. Legal certainty is particularly necessary when dealing with protracted processes and information about future events. Our proposal calls for specifying and operationalizing the concept of ‘final events’, which has thus far been little discussed. However, we do not believe that this will present us with any major problems, especially since the need to define certain sequences of events is not alien to the law, but is a familiar challenge both in civil as well as criminal procedural law.
• Keeping the regulation of insider trading (Art 8, 10 MAR) in essence unchanged, will ensure market integrity and an adequate level of investor protection.

While we agree that it is worthwhile to explore the merits and avenues of a ‘European 8-K reporting regime’, we nevertheless believe that the proposal outlined above provides a quick and easy to implement solution capable of solving the most pressing problems with Art 17 MAR, and at the same time meets the spirit of European market abuse law. In particular, our unbundling solution is a more nuanced approach to the crucial question of when to disclose. It is based on three considerations: First, keeping the market informed with ‘soft information’ (ie information about future and uncertain events) is essential for market efficiency; on the other hand mandatory disclosure must also take into account the interests of issuers. Rather than favouring a solution at either end of the spectrum of possible solutions (disclosure of every price-relevant information vs. disclosure of events that have occurred), our proposal represents a more balanced approach. Second, shifting the current system to a probability-based approach will make it easier for issuers to assess when disclosure is required than under the current system, in which even intermediate steps may be subject to ad hoc disclosure. This will further reduce costs for issuers while providing investors with information that is relevant to the valuation of the issuer and easier to process. Third, and perhaps most importantly, modeling ad hoc disclosure on Form 8-K reporting under US law, as some have suggested, risks regulatory failure if implemented as a ‘quick fix’ without further in-depth analysis of the US disclosure system from a holistic perspective. In particular, regulators should bear in mind that unlike in the EU courts’ guidance as well as an effective system of private enforcement play a pivotal role in shaping the US disclosure environment.

The components of the proposal advanced in our draft deserve further analysis. We hope to provide for it in another article to be published in the wake of the publication of the Commission’s proposal. Until then, our draft may help to stimulate the discussion on sensible choices for reforming ad hoc disclosure.

Rüdiger Veil is a Professor at LMU Munich and the Executive Director of the Munich Center for Capital Markets Law.

Marc Wiesner is a PhD Candidate at Prof Veil’s chair.

Moritz Reichert is a PhD Candidate at Prof Veil’s chair.