11.9 Supervision and enforcement

Chapter 9 is concerned with the fmal piece of the statutory framework for the disclosure duty for price-sensitive information: the theme of `supervision and enforcement'.

Supervision of the compliance with the duty to disclose price-sensitive information forms part of the market conduct supervision and has as such been entrusted to the AFM. It goes without saying that the AFM's supervision does not detract from the issuers' own responsibility for compliance with the disclosure duty. Although the AFM is a private law institution and has the legal form of a foundation, it qualifies as an administrative body within the meaning of the (Dutch) General Administrative Law Act (Algemene wet bestuursrecht). As a result, various provisions of the General Administrative Law Act have an effect on areas such as the preparation of decisions, the available set of supervision and enforcement instruments and the judicial protection. It is for this reason that this study also gave some attention to a number of core concepts of the General Administrative Law Act, to wit the concepts of `decision' and `interested party'.

The most characteristic feature of this supervision of compliance of issuers with the disclosure duty is that the supervision can often be exercised afterwards only. Generally, the AFM will not undertake any action until a breach of the disclosure duty has occurred and has been brought to the AFM's attention, for example through an issuer's press release that is surprising to the market or by persistent rumours on the market on a certain imminent development involving an issuer, whether or not in combination with conspicuous price and volume developments. In all those cases, the breach of the issuer's disclosure duty may already be a fact. This makes the AFM's supervision of the compliance with the duty to disclose price-sensitive information incident driven and reactive in nature.

The AFM is generally only able to exercise supervision of the compliance with the disclosure duty afterwards as a logical consequence of the fact that the issuer's compliance with the duty to disclose price-sensitive information is largely hidden from the AFM's view. While the AFM can establish that price-sensitive information has been disclosed, it can determine afterwards only whether the issuer did so in a timely fashion and often only if the press release has caught the attention in some way or another. If the issuer fails to disclose the relevant information altogether, the non-compliance with the disclosure duty will usually be entirely hidden from the AFM's observation. In this respect, it is not unimportant that the statutory regime currently in force does not even afford the AFM adequate instruments to exercise prior supervision on the use made by issuers of the opportunity to delay the disclosure of price-sensitive information. It was therefore submitted that the Dutch legislature should use the Member State option of the Market Abuse Directive so that issuers will be obliged in the future to inform the AFM of any proposed delay in the disclosure of price-sensitive information (also see § 10.5).

In exercising supervision, the AFM should in my view give more publicity to current investigations, provided there are serious indications that an issuer has breached its disclosure duty of price-sensitive information. The AFM's statutory duty of confidentiality should not be a barrier to this, because it may be argued that publication is required in order to execute this essential element of the AFM's market conduct supervision. Such a communication by the AFM may be neutral by stating that it involves an enquiry of which the results are not yet known.

For the purpose of this supervision, the AFM and the supervision officers it has designated are able to exercise all supervisory authorities that are available to them under the Financial Supervision Act and the General Administrative Law Act. Those authorities include: the authority to make enquiries, the authority to require business data and records for inspection and fmally the authority to enter, in principle, any and all premises. Set against these supervisory authorities, is the obligation of every party to cooperate within a reasonable term with the exercise of these authorities. It has been found that in most cases there is no judicial protection against the exercise of those supervisory authorities by the AFM and the supervision officers it had designated.

In addition, the AFM has been granted a number of enforcement authorities. In order to enforce the disclosure duty for price-sensitive information, the AFM can use the following enforcement instruments: an instruction, an order on pain of a fme, an administrative fme and publication of an administrative fme or an order on pain of a fme. It has been found that the instructive authority affords the AFM a flexible enforcement instrument of which the effectiveness is even greater if it is combined with the adoption of a trade measure, i.e. the interruption or suspension of the trade if the issuer fails to comply with the instruction. For that reason, it may be assumed that the AFM will not or scarcely make use of its authority to impose an order on pain of a fme to enforce the disclosure duty. Breach of the disclosure duty of price-sensitive information carries a substantial administrative fme of in principle up to EUR 4 million. The administrative fme may also be imposed on the persons actually in charge in respect of the breach. The explanatory notes to the Decree on financial sector administrative fmes seem to indicate that the size of administrative fmes should be detemiined with due regard for the fmancial situation of an issuer, causing that a larger issuer will be given a higher administrative fme than a smaller one. An indispensable part of the set of enforcement instruments is the possibility to publish an administrative fme imposed on the grounds of a breach of the disclosure duty. This provides the AFM with an effective instrument to inform investors of the breach of the disclosure duty, allowing them to draw their own conclusions. When these administrative measures and sanctions are considered collectively, they can, in my view, easily pass the standard of the Market Abuse Directive, which standard provides that the measures and sanctions to be imposed must be "effective, proportionate and dissuasive".

A hitherto insufficiently known opportunity exists under the General Administrative Law Act, which allows an interested party to make an 'application' to an administrative body. The interested party may request the AFM to adopt enforcement measures in response to an alleged breach of the disclosure duty by an issuer. If the AFM subsequently indicates that it will not proceed to enforcement or if a reasonable term for taking a decision has expired, action can also be taken before an administrative court, including by seeking injunctive relief.

It is the legislature's intention that there is also a possibility of criminal law enforcement in the event of breach of the disclosure duty. Due to sloppiness of the legislature, infringement of the disclosure duty has ceased to be punishable since 1 August 2009. However, legislative proposals pending before the Second Chamber of Parliament pursuant to the Act on the Financial Markets 2010 (Wijzigingswet financiële markten 2010) aims to make it once again punishable to commit a breach of the second and fifth paragraph of Article 5:25i of the Wfi and this will again be effected by including those provisions in the list of economie offences of Article 1 division 2° of the (Dutch) Economie Offences Act (Wet op de economische delicten). Chapter 9 was based on the fiction that such punishability is already enacted.

Breach of the disclosure duty is an economie offence and the investigation, prosecution and adjudication are conducted in accordance with the system of the Economie Offences Act. Non-compliance with the disclosure duty by an issuer constitutes a crime insofar as the breach was committed intentionally. Intent is found to exist if the issuer at a minimum knowingly and willingly accepted the significant chance of the disclosure duty being breached. If intent cannot be assumed, the breach constitutes a minor offence. The District Court of Amsterdam has exclusive jurisdiction to adjudicate such offence or crime in first instance. It is further worth noting that criminal prosecution can also be instituted against the persons actually in charge of the breach. As the disclosure duty of price-sensitive information belongs to the core duties of the executive board of the issuer, it is my view that all executives should be regarded as persons who are actually in charge, unless there is an agreed division of duties and except in special cases, for example when an officer has withheld relevant information from his fellow officers, or an officer was not involved in the relevant decision-making process on the compliance with the disclosure duty or insisted on disclosure. In the event of a crime, a prison sentence of up to two years, a community punishment order or fme may be imposed which, in combination with various measures increasing the sentence may add up to EUR 760,000.

Within the European Union, the Netherlands belongs to a minority of countries that have chosen to make breach of the disclosure duty a criminal act. This choice of the Dutch legislature is in my view well understandable, given the importance that attaches to compliance with the disclosure duty. However, it should be admitted that the increase of the administrative fme to EUR 4 million and the possibility to also impose an administrative fme on the persons actually in charge of the breach have added significantly to the dissuasive effect of the administrative fine. However, the conclusion that for this reason the threat of a prison sentence in the event of a breach of the disclosure duty can now be dispensed with seems to me undesirable. The disclosure duty is among the most important information requirements of issuers, and failure to comply with that obligation altogether or failure to comply in a timely manner is associated with highly damaging effects.