11.3 Disclosure of price-sensitive information: the European approach

The European basis for the duty to disclose price-sensitive information is the subject matter of Chapter 3 and is to be found in the Market Abuse Directive. With the adoption of the Directive in January 2003, a choice was made for an integrated approach of the market abuse phenomenon within the European context. In the Market Abuse Directive `market abuse' means: insider trading and market manipulation. With the Market Abuse Directive, the European legislature wanted to create a single, common legal framework aimed at safeguarding the integrity of the securities markets in the European Union and enhancing the confidence of investors in those markets. Consequently, all the mandatory and prohibitory provisions of the Market Abuse Directive are directed against market abuse.

Part of the mandatory provisions incorporated in the Market Abuse Directive is an obligation for the "issuers of fmancial instruments to inform the public as soon as possible of inside information which directly concerns the said issuers". The Directive defines inside information as: "information of a precise nature which has not been made public, directly or indirectly relating to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments." This disclosure duty applies to all issuers (or issuing institutions) of financial instruments which have been admitted to trading on a regulated market situated or operating within the territory of a Member State.

In comparison with the U.S. approach, the European approach is characterised by the continuing (or. permanent) nature of the duty to disclose price-sensitive information. If and as soon as information can be characterised as inside information and that information is related directly to the issuer (in this study referred to below as: pricesensitive information), that information must, in principle, be disclosed without delay by the issuer. The issuer is allowed to delay the disclosure of price-sensitive information only if a number of strict requirements are satisfied. Those requirements are that: (i) the delay serves a legitimate interest of the issuer, (ii) the delay would not be likely to mislead the public and (iii) the issuer is able to ensure the confidentiality of such information. Remarkably, in addition to a general disclosure duty, the Market Abuse Directive also provides for a special duty to disclose price-sensitive information. For example, the Market Abuse Directive includes a framework for publication of price-sensitive information by an issuer in consequence of a selective disclosure of that information to one or more third parties.

Regrettably, the Market Abuse Directive fails to provide a (clear) explanation of the rules governing the duty to disclose price-sensitive information and of the key concepts used in that context. The rules therefore give rise to many obvious questions such as: what precisely are `issuers of fmancial instruments', why is the content of the disclosure duty linked to the concept of 'inside information', what is the precise meaning of legitimate interests' in the event of disclosure being delayed and why was it decided, in addition to the continuing disclosure duty, to adopt a framework for a special disclosure duty following a selective disclosure of pricesensitive information? A search for answers to all those questions in the European source documents will be in vain.

The duty to disclose price-sensitive information incorporated in the Market Abuse Directive has a prior history. Since the construction of a unified European securities market was commenced, we have seen the outlines of such a disclosure duty become more and more sharply defined in policy documents and directives of the former European Economic Community. Remarkably, the inclusion of the disclosure duty in the Market Abuse Directive has been accompanied by a directional change that has not or hardly been discussed in the explanatory documents of the European legislature. The disclosure duty for issuers of shares used to be linked to important new facts (in the English-language version of the relevant Directive: "any major new developments") within its sphere of activity that are not public knowledge and may lead to a substantial movement in the price of the listed securities by virtue of their effect on its assets and liabilities or fmancial position or on the general course of its business. The course currently embarked upon is radically different. The disclosure duty applies to: "inside information (...), to the extent that it is related directly to the relevant issuer". It is doubtful whether the European legislature has sufficiently reflected on the implications of that change in direction.

The duty of issuers to disclose price-sensitive information is aimed at different objectives. The objective to be mentioned first is to promote market efficiency and investor protection. This objective expressly follows from the wording of the preamble to the Transparency Directive. Although the disclosure duty as such is not a part of that Directive, it is closely related to the subject matter regulated in it. Secondly, the disclosure duty aims to safeguard market integrity. Compliance with the duty to disclose price-sensitive information could make a useful contribution to the prevention of market abuse.

For a proper understanding of the framework governing the duty to disclose price-sensitive information in the Market Abuse Directive, some knowledge of the Lamfalussy procedure is indispensable. The Market Abuse Directive incorporates only the core principles of the duty to disclose price-sensitive information (known as the first level of the Lamfalussy procedure). Where permitted by the Directive, these core principles can be elaborated by means of technical implementation measures of the European Commission whereby the comitology procedure should be applied (second level). Thus, at the second level, the European Commission clarified in the implementing directives what is meant by some of the components of the concept of 'inside information' such as 'information that is precise' and the `price-sensitivity requirement'. In addition, the Committee of European Securities Regulators (CESR), a partnership of national supervisors of Member States, has given additional guidance in a variety of fields by issuing non-binding common guidelines (third level). This special way in which the rules for the duty to disclose price-sensitive information have been promulgated is also a clear indication that the European framework for the disclosure duty was aimed at full harmonisation within the European Union.

It should be noted that the disclosure duty rules in the Market Abuse Directive are fragmented. The manner in which issuers must disclose price-sensitive information was not regulated properly until the adoption of the Transparency Directive in December 2004. In addition, reference should be made to the effect that the Markets in Financial Instruments Directive of April 2004 has had on the duty to disclose price-sensitive information. That Directive includes definitions of various concepts that are relevant to establish the scope of application of the disclosure duty. In this context, reference is made to the concepts `securities', 'financial instruments' and `regulated market'.

Institutional changes in the supervision of the financial sector are underway. The role of CESR will shortly be taken over by the European Securities and Markets Authority (ESMA). With a view to strengthening the financial supervision within the European Union, the Market Abuse Directive will be amended to provide for cooperation between the competent national authorities when conducting cross-border inquiry activities. In addition, an instruction will be provided to ESMA to develop technical standards, for example for submitting requests for enquiries or having investigative activities conducted by another competent national authority.