The New Market Abuse Directive

• Date: 01 September 2014
• Year: 2014
• Author: Magherita Cerizza
• Pages: 15

I. Directive 57/2014 and Regulation 596/2014: The New Legal Framework Against Market Abuse in the European Union

Traditionally, the protection of market integrity and of investors’ confidence has been mainly guaranteed through extra-penal measures, such as the infliction of administrative sanctions by independent regulators or the right for investors to raise civil lawsuits against intermediaries. In recent years, the strategic role assumed by financial markets in modern economic life, the frequent crises that originated from this system as well as their catastrophic effects on global economies have led to an increase in the use of criminal law. Criminal law is considered the only measure that can adequately prevent and punish the most serious and fraudulent behaviors on the market. I mainly refer to the so-called “market abuse” offenses, i.e., conduct based on an illegitimate exploitation of corporate information (insider dealing) or on a misleading manipulation of market information (market manipulation), which can seriously threaten free competition and “equality of arms” among investors.¹

As far as the EU legislation is concerned, Directive 592/1989/EEC on insider dealing² required Member States (MS) to “prohibit” the most serious insider dealing offenses, without specifying the kind of punishment to be applied,³ and Directive 6/2003/EU on market abuse⁴ required them “to ensure […] that the appropriate administrative measures can be taken or administrative sanctions be imposed against the persons responsible” of threatening the integrity of financial markets.⁵ Only in very recent times has the EU enacted legislative provisions aimed at promoting the adoption of criminal measures against market abuse: Directive 57/2014/EU⁶ – replacing, together with Regulation 596/2014/EU,⁷ the old Market Abuse Directive (MAD) – provides that, by 3 July 2016, all MS shall ensure that insider dealing and market manipulation “constitute criminal offences at least in serious cases and when committed intentionally.”⁸

The new European market abuse framework is based on two different instruments: Regulation 596/2014/EU updates the old MAD to include new market developments, such as over-the-counter trading platforms and high-frequency trading, and new market abuse techniques, such as manipulation on derivatives markets and manipulation of benchmarks; it also reinforces the investigative and administrative sanctioning powers of regulators and their power to cooperate with EU institutions and with other national regulators. Directive 2014/57/EU complements such regulation, by requiring MS to complement their national legislations with criminal laws.

II. Article 83.2 TFEU: The Legal Basis of Directive 57/2014 on Criminal Sanctions for Market Abuse

Such a change of perspective in the fight against market abuse has been determined by the combination of both legal and economic factors. The legal ground is the entry into force of the Lisbon Treaty: the new TFEU not only extends the “third pillar” area, increasing and broadening the “areas of particularly serious crime with a cross-border dimension” to which “minimum rules concerning the definition of criminal offences and sanctions” may be applied (Article 83.1 TFEU), but also enables the EU to adopt similar rules concerning “first pillar” matters, on condition that “the approximation of criminal laws and regulations of the Member States proves essential to ensure the effective implementation of a Union policy in an area which has been subject to harmonisation measures” (Article 83.2 TFEU).⁹ In its communication “Towards an EU Criminal Policy: Ensuring the effective implementation of EU policies through criminal law”,¹⁰ the EU Commission has clarified some issues relating to the new TFEU provision, concluding that “EU criminal law can be an important tool to better fight crime as a response to the concerns of citizens and to ensure the effective implementation of EU policies” and identifying the financial market as a privileged area of intervention for the new EU criminal policy.

III. The Globalization of Financial Crime and the New European Criminal Policies

The economic ground for the adoption of the new MAD is the increased integration of financial markets and the transnational character of financial crime. Financial markets belong to the economic sector that has been most affected by the processes of globalization of the last decades, determined by the fall of many trade barriers and the development of new communication technologies:¹¹ as a consequence, financial crime has followed the paths of globalized economic life and has acquired a transnational dimension. Sovereign states often fail at orientating globalized financial markets towards their economic and social goals; moreover, their democratic processes are widely influenced and conditioned by internationalized global economies. The EU – as well as other international organizations – has been trying to regulate the markets, preventing informative asymmetries and negative externalities, removing obstacles to free competition, and fighting against financial misconduct. In comparison with sovereign states, international organizations have more adequate resources to cope with international financial crime; nevertheless, their action presents serious dangers: firstly, economic and social goals of the weaker states risk being systematically sacrificed to the (often conflicting) interests of the stronger ones; secondly (and particularly relevant as far as criminal matters are concerned), measures adopted risk a lack of democratic legitimation, especially if the international organization concerned applies the “majority rule” in its legislative process – as the EU now does, even in criminal matters.¹²

IV. Fighting Against Insider Dealing and Market Manipulation on a Transnational Level: The Story So Far

Insider dealing and market manipulation constitute a crime in many national legislations. Some countries, like the US, have a “corporate-oriented” perspective: market abuse is punished as far as it constitutes a misappropriation of corporate information and a breach of the duties of loyalty and confidentiality towards a company.¹³ Some other countries, like EU countries, adopt a “market-oriented” approach: market abuse is punished, since it harms the integrity of financial markets and public confidence in financial investments.¹⁴ Despite these differences, the fraudulent nature of market abuse has been clearly identified in many countries,¹⁵ and therefore many national legislations have adopted criminal sanctions to prevent and punish it. In contrast, international organizations have followed a totally different path: no criminalization treaties have been signed so far in this field,¹⁶ and economic organizations addressing this issue have only required their members to fight market abuse through “adequate,” “effective,” “proportionate,” and/or “dissuasive” measures: as long as the goal of market protection is achieved, the nature of the sanctions applied is left to the choice of any single state.¹⁷ In this respect, Directive 57/2014/EU is a complete novelty in this scenario.

The EU choice to impose penal measures in the field of market abuse is based on the consideration that “criminal sanctions […] demonstrate a stronger form of social disapproval compared to administrative penalties. Establishing criminal offences for at least serious forms of market abuse sets clear boundaries for types of behavior that are considered to be particularly unacceptable and sends a message to the public and to potential offenders that competent authorities take such behavior very seriously”.¹⁸ As already pointed out in the communication of the Commission “Strengthening sanctions for violations of EU financial services rules: the way forward,”¹⁹ inadequate sanctioning regimes in the field of financial services can seriously harm market trust, consumer protection, and fair competition within the EU internal market; in creating a sanctioning system that proves to be proportionate, effective, and dissuasive, criminal measures must also be taken into account, since such “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.”

Before Directive 2014/57/EU, MS had no obligation to punish market abuse with penal measures; nonetheless, in the last three decades, the EU has informally encouraged MS to adopt criminal laws in this field. First of all, only criminal sanctions have proved to be sufficiently effective, proportionate, and dissuasive in the sense of the old MAD;²⁰ Secondly, several national criminal courts have interpreted their market abuse criminal laws by referring to instructions provided by the ECJ.²¹ As evidenced by two CESR reports published in 2007 and in 2008, almost all MS have their own market abuse legislation,²² and the majority of them have adopted criminal sanctions against offenders.²³ Even if EU measures have only operated on an extra-penal level, in most cases they also had an indirect impact on national criminal provisions: for this reason, national legislations adopted in MS show several similarities, especially with regard to the description of illicit market conduct.²⁴ Nonetheless, such regulations still diverge with regard to other aspects, such as the mental element of crime, the type and level of applicable sanctions, and the regime of liability for legal persons. Notwithstanding the increasing interest in market abuse issues in the EU area, these laws, especially the criminal provisions, have been applied in very few cases.²⁵

V. Criminal Law Issues Arising from the Entry into Force of Directive 57/2014

After the entry into force of Directive 2014/57/EU, MS shall ensure that the most important forms of insider dealing (trading...