CitySolicitor Regulatory Law Committee


The Regulatory Law Committee (the “Committee”) meets monthly and has, since April, responded to several EU and Government consultations. The key responses included:


1. LETTER TO THE EUROPEAN PARLIAMENT COMMENTING ON ARTICLE 11(2) OF THE PROPOSED REGULATION ON CRIMINAL SANCTIONS FOR INSIDER DEALING AND MARKET MANIPULATION (MAR)


Further to its earlier work on the revised draft Market Abuse Directive, the Committee wrote a letter to the European Parliament in order to raise its concerns over the potential application of MAR to lawyers and other professionals who may “arrange” transactions in investments in a manner that is incidental to the provision of their professional services. In particular, that it would be disproportionate (and may give rise to issues of legal privilege and defences) for lawyers and other professionals potentially caught by such provision to have to develop and maintain systems and controls for detecting and reporting suspicious trading activity.


The Committee’s comments concern Article 11(2) and the reference in it to the concept of “arranging” transactions, which carries no particular meaning in European law. The Committee recommended that the reference to arranging should instead be to the MiFID regulated activity of reception and transmission of orders. The Committee also recommended that the proposed reporting obligation should apply only to persons whose main business is to perform regulated investment activities (that is, investment firms and credit institutions that are subject to the provisions of MiFID).


Particular thanks to Karen Anderson, Ben Kingsley and Robert Finney for their work on this submission.


2. LETTER TO THE FSA RELATING TO “CLEANSING STATEMENT” FOLLOWING THE EINHORN CASE


6 • City Solicitor • Issue 80


On 12 January 2012, the FSA issued its decision notice imposing a £3.64 million fine on David Einhorn, the owner and president of US hedge fund Greenlight Capital Inc, for engaging in market abuse. The decision notice included a statement by the FSA that there should, in all cases, be a “cleansing statement” in cases where a transaction does not proceed but where a third party has been wall crossed and provided with inside information. Such cleansing statement would be an announcement to the market stating that a transaction was contemplated, but did not proceed.


The Committee considered it necessary to write to the FSA to express its concern with the proposition that there should in all cases be a cleansing statement when information is provided about a possible transaction. The Committee expressed its view that it has become an integral part of most capital raisings that pre-marketing or soft soundings should take place on a wall-crossed basis and without this ability it would be much more difficult for companies to raise finance in the capital markets. Moreover, while the Committee agrees that a party who receives inside information will remain unable to trade for so long as it remains inside information, it does not believe that it will always necessarily be the case that the fact that a capital raising is not going ahead remains inside information. In particular, the Committee noted that information imparted may cease to be inside information for a number of reasons, such as because it has become stale due to the lapse of time as well as change of circumstances.


The FSA responded to the Committee’s letter, agreeing that, in some circumstances, the fact that a previously proposed capital raising is no longer proceeding will not necessarily constitute inside information. However, the FSA also noted that it depends on the facts and circumstances of each case and that it may be appropriate for parties to seek legal advice.


The FSA clarified that in situations where information is no longer inside


information, a cleansing statement will not be necessary. However, the FSA does expect advisers to consider carefully whether that is in fact the case. The FSA also noted that the statement about cleansing statements in the decision notice must be read in the context of the decision notice as a whole and the individual facts of that case.


Particular thanks to Peter Bevan (Linklaters LLP) for his work on this submission.


3. RESPONSE TO FSA CONSULTATION PAPER (CP12/1) ON THE LARGE EXPOSURES REGIME


The Committee welcomed the elements of the FSA’s proposals that will conform the UK rules to those in the Capital Requirements Directive (2006/48/EC and 2006/49/ EC) (CRD) and the Committee of European Banking Supervisors’ (CEBS) large exposures guidelines.


However, the Committee noted that some of the proposals go beyond, or do not adequately reflect, the CRD and the CEBS guidelines. As the FSA is an active participant in the European Banking Authority (EBA), the Committee considered that the correct way to deal with perceived deficiencies is through amending the guidelines, rather than by creating additional and inconsistent requirements.


Moreover, the Committee took the opportunity to express its concern that there seems little justification for introducing new UK rules and guidance before CRD IV is finalised. The Committee encouraged the FSA to take proper account of the harmonised regime that is intended to apply under CRD IV and avoid pushing ahead with independent rule changes, rather than run the risk of confusion or the need for further conforming changes in due course. As such, the Committee requested that, to the extent that changes to the large exposures regime are considered necessary and appropriate, then they should be made through harmonised action as part of the current and ongoing EU process.


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