Trading on information that is out there, but not really well known

The European Court of Justice (‘ECJ’) is currently dealing with a request for a preliminary ruling that goes to the core nature of what constitutes ‘inside information’ under the EU Market Abuse Regulation (‘MAR’) (C-229/24 – Brännelius). This request will allow the Court to specify the conditions under which information can be deemed to be ‘made public’ under the MAR.

The MAR provides for two complementary concepts that both rely on the notion of inside information.

• On the one hand, issuers shall ensure that inside information directly concerning them is ‘made public’ in a prescribed manner, such that the information is simultaneously disseminated to as wide a public as possible (‘Issuer Disclosure’).
• On the other hand, to protect market integrity and enhance investor confidence, the offence of insider dealing applies where a person takes unfair advantage of inside information to the detriment of others by trading on that information (‘Insider Dealing’).

What both concepts have in common is the reference to inside information. Broadly speaking, MAR defines inside information as price-sensitive information of a precise nature that has not been ‘made public’. Of course, information that has been ‘made public’ through Issuer Disclosure no longer constitutes inside information. As put by recital 49 of MAR, Issuer Disclosure avoids Insider Dealing. 

However, in the absence of Issuer Disclosure, the ‘made public’ test has always been highly controversial, exposing outsiders who search for information ‘to beat the market’ (‘Information Searchers’) to the risk of Insider Dealing. Indeed, from the perspective of Information Searchers, the question is: can information obtained from sources that could have been accessed by any other diligent investor be deemed to be ‘made public’? 

The operative provisions of MAR are silent on this point. The only indication can be found in recital 28 of MAR, which sets out that ‘research and estimates prepared on the basis of publicly available data should not per se be regarded as inside information’. Hence, Information Searchers who collect and assess data in a mosaic-style manner, such that (only) the outcome of their assessment (but none of the individual data points) is at risk of being considered an inside information, can take comfort from this recital language. 

To this day, legal experts disagree on the design of the ‘made public’ test. According to some, it requires wide dissemination comparable to that prescribed for Issuer Disclosure. Others claim that it is only a test of accessibility. The first approach construes recital 28 as a significant yet limited exception to the ‘made public’ test, while under the second approach recital 28 and the ‘made public’ test are in line with each other.

The issue is best illustrated by comparing the supervisory guidance issued in Germany and the United Kingdom long before the latter's decision to leave the European Union. 

• According to Germany’s BaFin, information has been ‘made public’ if it has been made available simultaneously to a broad investing public, which is understood to include both professional and retail investors. Disclosures in social media or local newspapers are not sufficient. Disclosures in the commercial register or open court proceedings are not sufficient either. None of these cases offer sufficient assurance that the information is simultaneously made available to a broad investing public. Only when the information is subsequently picked up and shared by other adequate means, eg the national press, it is deemed to be ‘made public’.
• By contrast, the United Kingdom’s FCA takes the view that dissemination to the market is only one of several ways in which information can be ‘made public’. Other ways include information being generally available, eg in the press or on the internet, or information being observable by members of the public without infringement of any rights or obligations of privacy, property, or confidentiality. For example, if a passenger on a train passing a burning factory calls his broker and tells him to sell shares in the company that owns the factory, the passenger will be using information which has been ‘made public’, since it is information which has been obtained by legitimate means through observation of a public event.

The ECJ has not yet ruled on this issue. According to the provisional text of the opinion issued by Advocate General Kokott, for information to satisfy the ‘made public’ test, disclosure to a wider public, within the meaning of the Issuer Disclosure rule, is not required. Instead, the Advocate General concludes that: 

‘[i]nformation is deemed to be ‘made public’ where it is known by or accessible to a reasonable and normally diligent investor, taking into account the circumstances of the case and the relevant rules governing its disclosure (…).’

Although the Advocate General’s opinion is not a ruling of the court itself, it is worth noting that the court often follows the opinions of its Advocates General. As the case presents the opportunity to settle a long-standing controversy of EU law, the court's official decision is eagerly awaited.

Kolja Stehl is a Financial Regulatory Partner at GOERG.