Explanatory Memorandum to COM(2011)654 - Criminal sanctions for insider dealing and market manipulation - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2011)654 - Criminal sanctions for insider dealing and market manipulation. |
|---|---|
| source | COM(2011)654  |
| date | 20-10-2011 |
Adopted in early 2003, the Market Abuse Directive (MAD) 2003/6/EC introduced a comprehensive framework to tackle insider dealing and market manipulation practices, jointly referred to as 'market abuse'. The Directive aims to increase investor confidence and market integrity by prohibiting those who possess inside information from trading in related financial instruments, and by prohibiting the manipulation of markets through practices such as spreading false information or rumours and conducting trades which secure prices at abnormal levels.
In order to ensure the enforcement of Directive 2003/6/EC, Member States are required to ensure, in conformity with national law, that the appropriate administrative measures can be taken or administrative sanctions be imposed against the persons responsible where the provisions adopted in implementation of the Directive have not been complied with. This requirement is without prejudice to the right of Member States to impose criminal sanctions.
The report by the High-Level Group on Financial Supervision in the EU[1] recommended that a 'sound prudential and conduct of business framework for the financial sector must rest on strong supervisory and sanctioning regimes'. To this end, the Group considers that supervisory authorities must be equipped with sufficient powers to act and should be able to rely on 'equal, strong and deterrent sanctions regimes against all financial crimes, sanctions which should be enforced effectively'.
Effective enforcement requires that, in accordance with article 14 of Directive 2003/6/EC, sanctions are available to the competent authorities that are 'effective, proportionate and dissuasive In addition, effective enforcement also relates to the resources of competent authorities, their powers and their willingness to detect and investigate abuses. However, the High-Level Group considers that 'none of these is currently in place" and Member States sanctioning regimes are regarded as in general weak and heterogeneous.
To this end, the Commission has published a Communication[2] with regard to sanction regimes in the financial sector. The Communication argues that criminal sanctions, in particular imprisonment, are generally considered to send a strong message of disapproval that could increase the dissuasiveness of sanctions, provided that they are appropriately applied by the criminal justice system. However, criminal sanctions may not be appropriate for all types of violations and in all cases. The Communication concludes that the Commission will assess whether and in which areas the introduction of criminal sanctions, and the establishment of minimum rules on the definition of criminal offences and sanctions may prove to be essential in order to ensure the effective implementation of EU financial services legislation.
The proposal follows the approach set out in the Communication of 20 September 2011 "Towards an EU criminal policy – Ensuring the effective implementation of EU policies through criminal law"[3]. This includes an assessment, based on clear factual evidence, an assessment of the national enforcement regimes in place and the added value of common EU minimum criminal law standards, taking into account the principles of necessity, proportionality and subsidiarity.
In line with the Stockholm Programme and the conclusions of the JHA Council of 22 April 2010 on economic crisis prevention and support for economic activity i, the European Commission has assessed the application of the national rules implementing the MAD and has identified a number of problems which have negative impacts in terms of market integrity and investor protection. One of the problems identified in the impact assessment is the fact that the sanctions currently in place to fight market abuse offences are lacking impact and are insufficiently dissuasive, which results in ineffective enforcement of the Directive. In addition, the definition of which insider dealing or market manipulation offences constitute criminal offences diverges considerably from Member State to Member State. For example, five Member States do not provide for criminal sanctions for disclosure of inside information by primary insiders and eight Member States do not do so for secondary insiders. In addition, one Member State does not currently impose criminal sanctions for insider dealing by a primary insider and four do not do so for market manipulation. Since market abuse can be carried out across borders, this divergence undermines the internal market and leaves a certain scope for perpetrators of market abuse to carry such abuse in jurisdictions which do not provide for criminal sanctions for a particular offence.
Minimum rules on criminal offences and on criminal sanctions for market abuse, which would be transposed into national criminal law and applied by the criminal justice systems of the Member States, can contribute to ensuring the effectiveness of this Union policy by demonstrating social disapproval of a qualitatively different nature compared to administrative sanctions or compensation mechanisms under civil law. Criminal convictions for market abuse offences, which often result in widespread media coverage, help to improve deterrence as as they demonstrate to potential offenders that the authorities take serious enforcement action which can result in imprisonment or other criminal sanctions and a criminal record. Common minimum rules on the definition of criminal offences for the most serious market abuse offences facilitate the cooperation of law enforcement authorities in the Union, especially considering that the offences are in many cases committed across borders.
Although the rules of preventing and fighting market abuse offences are in place at EU level since 2003, experience shows that the desired effect, i.e. contributing effectively to the protection of the financial markets, has not been achieved by the current system. While proposals to strengthen and ensure the coherence of administrative sanctions are included in the proposal for a Regulation (EU) No…of the European Parliament and the Council on insider dealing and market manipulation that also intends to remedy other major problems in the existing system, this proposal lays down a requirement for Member States to provide for minimum rules on the definition of the most serious market abuse offences and on minimum levels of criminal sanctions attached to them.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- BUDGETARY IMPLICATIONS
- 3. LEGAL ELEMENTS OF THE PROPOSAL 3.1. Legal basis
- 3.2. Subsidiarity and proportionality
- 3.3. Detailed explanation of the proposal 3.3.1. Criminal offences
- 3.3.2. Inciting, aiding and abetting and attempt
- 3.3.3. Criminal sanctions
- 3.3.4. Liability of legal persons
The initiative is the result of consultations with all major stakeholders, including public authorities (governments and securities regulators), issuers, intermediaries and investors.
It takes into consideration the report published by the Committee of European Securities Regulators (CESR) on administrative measures and sanctions as well as criminal sanctions available in Member States under the market abuse directive (MAD)[5]. It also takes into account the results of the consultation launched by the Commission in its Communication on reinforcing sanctioning regimes in the financial sector.
On 12 November 2008 the European Commission held a public conference on the review of the market abuse regime[6]. On 20 April 2009, the European Commission launched a call for evidence on the review of the Market Abuse Directive. The Commission services received 85 contributions. The non-confidential contributions can be consulted in the Commission website[7].
On 28 June 2010 the Commission launched a public consultation on the revision of the Directive which closed on 23 July 2010[8]. The Commission services received 96 contributions. The non-confidential contributions can be consulted in the Commission website[9]. A summary is found in Annex 2 to the impact assessment report[10]. On 2 July 2010, the Commission held a further public conference on the review of the Directive[11].
In line with its 'Better Regulation' policy, the Commission conducted an impact assessment of policy alternatives. Policy options related to criminal sanctions were considered as part of this preparatory work. The impact assessment concluded on this point that requiring Member States to introduce criminal sanctions for the most serious market abuse offences was essential to ensure the effective implementation of the Union policy on market abuse. In combination with the preferred policy options addressed in the proposal for a Regulation (EU) No…of the European Parliament and the Council on insider dealing and market manipulation, this will have a positive impact on investors' confidence and will further contribute to the financial stability of financial markets.
The proposal is based on Article 83.2 of the TFEU.
According to the principle of subsidiarity (Article 5.3 of the TEU), action at EU level should be taken only when the aims envisaged cannot be achieved sufficiently by Member States alone and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the EU.
Market abuse can occur across borders and harms the integrity of financial markets which are increasingly integrated in the Union. The divergent approaches to the imposition of criminal sanctions for market abuse offences by Member States leave a certain scope for perpetrators who can often make use of the most lenient sanction systems. This undermines both the deterrent effect of each national sanction regime and the effectiveness of enforcement of the Union's legislative framework on market abuse. EU-wide minimum rules on the forms of market abuse that are considered to be a criminal conduct contribute to addressing this problem.
Against this background EU action appears appropriate in terms of the principle of subsidiarity.
The principle of proportionality requires that any intervention is targeted and does not go beyond what is necessary to achieve the objectives. This principle has guided the process from the identification and evaluation of alternative policy options to the drafting of this proposal.
Article 3 in conjunction with Article 2 of the proposal defines the market abuse offences which should be regarded as criminal offences by Member States and therefore be subject to criminal sanctions.
Two forms of market abuse conduct, namely insider dealing and market manipulation, should be regarded as criminal offences if committed intentionally. The attempt to commit insider dealing and market manipulation should also be punishable as a criminal offence.
The offence relating to inside information should apply to persons who possess inside information of which they know that it is inside information. The offence relating to market manipulation is applicable to anybody.
Article 4 ensures that inciting as well as aiding and abetting the defined criminal offences are also punishable in Member States. The attempt to commit one of the offences defined in Articles 3 and 4 is also covered by the Directive with the exception of improper disclosure of inside information and dissemination of information which gives false or misleading signals, as it does not seem appropriate to define attempts to commit these offences as criminal offences.
Article 5 requires Member States to take the necessary measures to ensure that the criminal offences identified in Articles 3 and 4 are subject to criminal sanctions. These sanctions should be effective, proportionate and dissuasive.
Article 6 requires Member States to ensure that legal persons can be held liable for the criminal offences defined in Articles 3 and 4.
The proposal has no implications for the Union budget.