There are reasonable grounds to believe that the legal regime for the responsibility of insiders, emphasising the objective elements of the factual circumstances, elaborated on the basis of the MAD Directive, will also be applied on the grounds of the Auctioning Regulation and the future REMIT Regulation.
The core concepts of the legal scheme laid down in the provisions on insider dealing and market manipulation (market abuse) as regulated in the Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) (OJ 2003 L 96, p. 16 as amended – further: “the MAD Directive”) principally designed for the financial markets are currently spreading into new areas. The newest examples are primary markets in emission allowances (see: Commission Regulation No 1031/2010 of 12 November 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances pursuant to Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the Community OJ L 302, 18.11.2010, p. 1 - referred to in the rest of the Article as the “Auctioning Regulation”) and physical commodity markets in electricity and gas, and contracts for the transportation thereof (see: „Proposal for a Regulation of the European Parliament and of the Council on energy market integrity and transparency {SEC(2010) 1510} {SEC(2010) 1511}”, referred to in the rest of the Article as the “REMIT Regulation”)”.
The legal framework for market abuse laid down in the MAD Directive has been slightly adapted to the specificities of the new, different products and markets but the core legislative concepts and principles remained unchanged. In this context it could be reasonable to bear in mind the judicatory line elaborated on the ground of interpretation of Article 2 of the MAD Directive, which, it seems, could be also applicable, by analogy, to the relevant provisions of the Auctioning Regulation (in particular, Chapter X articles 36-43 thereof) and the REMIT Regulation.
Of utmost importance is the clarification given by the Court of Justice of the European Union (Third Chamber) in the judgment of 23 December 2009 Spector Photo Group NV and Chris Van Raemdonck v Commissie voor het Bank-, Financie - en Assurantiewezen (CBFA) in Case C‑45/08 (reference for a preliminary ruling under Article 234 EC).
Reference for a preliminary ruling concerned the interpretation of, among others, Article 2 of MAD Directive.
Point 1 of the operative part of the said judgment reads:
“On a proper interpretation of Article 2(1) of Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), the fact that a person as referred to in the second subparagraph of that provision, in possession of inside information, acquires or disposes of, or tries to acquire or dispose of, for his own account or for the account of a third party, either directly or indirectly, the financial instruments to which that information relates implies that that person has ‘used that information’ within the meaning of that provision, but without prejudice to the rights of the defence and, in particular, to the right to be able to rebut that presumption. The question whether that person has infringed the prohibition on insider dealing must be analysed in the light of the purpose of that directive, which is to protect the integrity of the financial markets and to enhance investor confidence, which is based, in particular, on the assurance that investors will be placed on an equal footing and protected from the misuse of inside information”.
The operative part of the judgment may be voiced, to a certain extent, incomprehensibly to persons not having professional legal education but the implications of the interpretation are very strong. The range of its applicability is also very extensive, because this was done with a view to achieving uniform harmonisation of the law of the Member States.
So, what does this mean practically?
The referring court requested the Court of Justice to interpret the expression ‘use of inside information’ in Article 2(1) of MAD Directive. That provision provides that the Member States are to prohibit any person referred to in the second subparagraph thereof (a ‘primary insider’) who ‘possesses inside information from using that information by acquiring or disposing of, … for his own account or for the account of a third party, either directly or indirectly, the financial instruments to which that information relates’ or from trying to enter into such a transaction on the market.
The referring court sought to determine whether it is sufficient, for a transaction to be classed as prohibited insider dealing, that a primary insider in possession of inside information trades on the market in financial instruments to which that information relates or whether it is necessary, in addition, to establish that that person has ‘used’ that information ‘with full knowledge’.
In other words, the question was whether MAD Directive defines insider dealing objectively without the intention behind such dealing being referred to explicitly in its definition. It should be noted that the definition of insider dealing contained in the MAD Directive does not expressly provide for a mental element - which may give rise to the ambiguities, whether a fraudulent intention or deliberate or negligent actions should be implicitly inferred as constituent elements of the definition. A judgment renders these occurrences no longer questionable and decides for the benefit of the objective direction of interpretation of the said provision.
Giving grounds for its views, the Court observed that the Article 2(1) of the MAD Directive “does not stipulate that prohibited transactions must be carried out ‘with full knowledge of the facts’ but merely prohibits primary insiders from using inside information when entering into market transactions”
The constituent elements of such prohibited transactions are, pursuant to the judgment, the persons likely to fall within its scope and the material actions which constitute that transaction.
The definition does not expressly set out the subjective conditions in relation to the intention behind those material actions.
The Court further observed that the Article 2(1) of MAD Directive “does not state whether the primary insider must have been driven by a speculative intention, must have had a fraudulent intention or must have acted either deliberately or negligently. That article does not expressly state whether it is necessary to establish that the inside information was decisive in the decision to enter into the market transaction at issue, or whether the primary insider had to be aware that the information in his possession was inside information”.
The Court in order to further its views points out the historical evolution of the said provision and the amendments made in the MAD Directive in comparison to the analogous provisions of the Directive 89/592. According to the Court the fact that Article 2(1) of Directive 2003/6 does not expressly provide for a mental element can be explained, by the specific nature of insider dealing, which enables a presumption of that mental element once the constituent elements referred to in that provision are present.
Important reasons which justify this view are:
- the relationship of confidence which links the primary insiders referred to in Article 2(1)(a) to (c) to the issuer of the financial instruments to which the inside information relates,
- entering into a market transaction is necessarily the result of a series of decisions forming part of a complex context which, in principle, makes it possible to exclude the possibility that the author of that transaction could have acted without being aware of his actions,
- where such a market transaction is entered into while the author of that transaction is in possession of inside information, that information must, in principle, be deemed to have played a role in his decision-making.
The purpose of the MAD Directive should be also born in mind which, in the second and twelfth recitals in the preamble thereto, is to ensure the integrity of Community financial markets and to enhance investor confidence in those markets.
According to the Court views, the Community legislature “opted for a preventative mechanism and for administrative sanctions for insider dealing, the effectiveness of which would be weakened if made subject to a systematic analysis of the existence of a mental element. ...
The effective implementation of the prohibition on market transactions is thus based on a simple structure in which subjective grounds of defence are limited, not only to enable sanctions to be imposed but also to prevent effectively infringements of that prohibition. ...
Once the constituent elements of insider dealing laid down in Article 2(1) of Directive 2003/6 are satisfied, it is thus possible to assume an intention on the part of the author of that transaction”.
So, if everything is clear and explained, once more important issue will remain: in such a severe regime of insiders’ responsibility isn’t the principle of the presumption of innocence infringed?
The Court in the said judgment considered that the principle of the presumption of innocence does not preclude the presumption in Article 2(1) of the MAD Directive that the intention of the author of insider dealing can be inferred implicitly from the constituent material elements of that infringement, provided that that presumption is open to rebuttal and the rights of the defence are guaranteed.
The establishment of an effective and uniform system to prevent and sanction insider dealing with the legitimate aim of protecting the integrity of financial markets has thus led the Community legislature to adopt an objective definition of the constituent elements of prohibited insider dealing.
In my opinion, there are reasonable grounds (interpretation by analogy) to believe that the above described legal regime for the responsibility of insiders, elaborated on the basis of the MAD Directive, will also be applied on the ground of the Auctioning Regulation and the future REMIT Regulation. The specificities of the primary market in emission allowances and the commodities physical market in electricity and gas seem not to be so decisive to change the fundamental principles for responsibility of insiders.