Proposal for a Directive of the European Parliament and of the Council on insider dealing and market manipulation (market abuse)
Date: 2001-05-30
Institutions: European Commission
Subjects: approximation of laws, insider trading, securities

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Proposal for a Directive of the European Parliament and of the Council on insider dealing and
market manipulation (market abuse)

(2001/C 240 E/32)

COM(2001) 281 final (cid:151) 2001/0118(COD)

(Submitted by the Commission on 1 June 2001)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE
EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community, and in particular Article 95 thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of
Committee,

the Economic and Social

Having regard to the opinion of the Committee of the Regions,

Acting in accordance with the procedure laid down in Ar-
ticle 251,

Whereas:

(1) A genuine Single Market for financial services is crucial
for economic growth and job creation in the Community.

(2) An integrated and efficient

financial market

requires
integrity. The smooth functioning of securities
market
markets
are
prerequisites for economic growth and wealth. Market
abuse harms
financial markets and
the integrity of
public confidence in securities and derivatives.

in markets

confidence

public

and

(3) The Communication of 11 May 1999 from the
Commission (cid:145)Implementing the framework for financial
markets: action plan(cid:146) (1) identifies a series of actions that
are needed in order to complete the single market for
financial services. Heads of State and Government, at
the Lisbon Summit of April 2000, called for
the
implementation of that action plan by 2005. The action
plan stresses the need to draw-up a Directive against
market manipulation.

(4) At its meeting on 17 July 2000, the Council set up the
Committee of Wise Men on the Regulation of European
Securities Markets. In its final report the Committee of

(1) COM(1999) 232 final.

Wise Men proposed the introduction of new legislative
level approach, namely
techniques based on a four
framework principles,
coop-
eration and enforcement. Level 1, the Directive, should
(cid:145)framework(cid:146) principles
confine itself
implementing
while Level 2 should contain technical
measures to be adopted by the Commission with the
assistance of a committee.

implementing measures,

to broad general

(5) The Stockholm European Council Resolution endorsed the
final report of
the Committee of Wise Men and the
proposed four level approach to make the regulatory
legislation more
process
efficient and transparent.

for Community

securities

(6) According to the Stockholm European Council Level 2
implementing measures should be used more frequently,
to ensure that technical provisions can be kept up to date
with market and supervisory developments and deadlines
should be set for all stages of Level 2 work.

(7) New financial and technical developments enhance the
incentives, means and opportunities for market abuse:
through new products, new technologies, increasing cross-
border activities and the Internet.

(8) The existing Community legal

framework to protect
market integrity is incomplete. Legal requirements vary
between the jurisdictions of Member States,
leaving
economic actors often uncertain over concepts, definitions
and enforcement. In some Member States there is no legis-
lation addressing the issues of price manipulation and the
dissemination of misleading information.

(9) Market abuse consists of

insider dealing and market
manipulation. The objective of legislation against insider
dealing is the same as legislation against market manipu-
lation:
to ensure the integrity of Community financial
markets and to enhance investor confidence in those
markets.
is therefore advisable to adopt combined
rules to combat both insider dealing and market manipu-
lation. A single Directive
the
Community the same framework for allocation of respon-
sibilities, enforcement and co-operation.

throughout

ensures

It

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(10) Council Directive 89/592/EEC of 13 November 1989
dealing (1) was
coordinating
regulations on insider
adopted more than a decade ago. Given the changes in
financial markets and in Community legislation since its
adoption, that Directive should now be replaced, to ensure
consistency with legislation against market manipulation.
A new Directive is also needed to avoid loopholes in
Community
for
wrongful conduct and which would undermine public
confidence and therefore prejudice the smooth func-
tioning of the markets.

legislation which

could

used

be

(11) Insider dealing and market manipulation prevent full and
proper market transparency, which is a prerequisite for
trading for all economic actors in integrated financial
markets.

(12) Prompt and fair disclosure of information to the public
enhances market integrity, whereas selective disclosure by
issuers can lead to a loss of investor confidence in the
integrity of
financial markets. Professional economic
actors must contribute to market integrity.

(13) Member States and the European System of Central Banks
or national central banks should not be restricted in
carrying out monetary, exchange-rate or public debt
management policy.

(14) Stabilisation or trading in own shares can be legitimate, in
certain circumstances, for economic reasons and should
not, therefore, in themselves be regarded as market abuse.
Common standards
should be developed to provide
practical guidance.

(15) The widening scope of financial markets, the rapid change
and the range of new products and developments require
to financial
a wide
instruments
to
guarantee the integrity of Community financial markets.

and techniques

application of

this Directive

in order

involved,

(19) In order to ensure that a Community framework against
market abuse is sufficient, any infringement of the prohib-
itions or requirements laid down by this Directive will
have to be promptly and effectively sanctioned.

(20) Increasing

cross-border

improved
co-operation and a comprehensive set of provisions for
the exchange of information between national competent
authorities.

activities

require

in Article 5 of

the objectives of

(21) In accordance with the principle of proportionality as set
out
the
the Treaty,
proposed measures, namely to prevent market abuse in
the form of
insider dealing and market manipulation,
cannot be sufficiently achieved by the Member States
and can therefore, by reason of the scale and effects of
the measures, be better achieved by the Community. This
Directive confines itself to the minimum required in order
to achieve those objectives and does not go beyond what
is necessary for that purpose.

(22) Technical guidance and modifications to the rules laid
down in this Directive may from time to time be
necessary to take account of new developments on
financial markets; the Commission should accordingly be
empowered to make such modifications as are necessary
after consulting the European Securities Committee estab-
lished by Commission Decision 2001/. . ./EC.

(23) Since the measures necessary for the implementation of
this Directive are measures of general scope within the
meaning of Article 2 of Council Decision 1999/468/EC of
28 June 1999 laying down the procedures for the exercise
of implementing powers conferred on the Commission (2),
they should be adopted by use of
regulatory
procedure provided for in Article 5 of that Decision.

the

(24) This Directive

and
the
observes the principles recognised in particular by the
Charter of Fundamental Rights of the European Union,

fundamental

respects

rights

(16) Establishing a level playing field in Community financial
markets requires wide geographical application of
the
provisions governed by this Directive.

HAVE ADOPTED THIS DIRECTIVE:

confusion among

(17) A variety of competent authorities in Member States,
having different responsibilities, creates unnecessary cost
and
actors. A single
competent authority, of an administrative nature guaran-
teeing its autonomy from economic actors and avoiding
conflicts of interest, should be designated in each Member
State to deal with market abuse.

economic

(18) A common minimum set of strong tools and powers for
the competent authorities will guarantee supervisory
effectiveness.

Article 1

For the purposes of this Directive:

1.

(cid:145)Inside information(cid:146) shall mean information which has not
been made public of a precise nature relating to one or
instruments or to one or more
more issuers of financial
financial
it were made public,
would be likely to have a significant effect on the price of
those financial
related
derivative financial instruments.

instruments or on the price of

instruments, which,

if

(1) OJ L 334, 18.11.1989, p. 30.

(2) OJ L 184, 17.7.1999, p. 23.

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2.

(cid:145)Market manipulation(cid:146) shall mean:

The prohibition laid down in paragraph 1 shall apply to

3.
any acquisition or disposal of financial instruments.

(a) Transactions or orders to trade, which give, or are likely
to give, false or misleading signals as to the supply,
instruments, or which
financial
demand or price of
secure, by one or more persons acting in collaboration,
the price of one or several financial instruments at an
abnormal or artificial level, or which employ fictitious
devices or any other form of deception or contrivance.

(b) Dissemination of

information through the media,
including the Internet, or by any other means, which
gives, or is likely to give, false or misleading signals as
to the supply, demand or price of financial instruments,
including the dissemination of rumours and false or
misleading news.

Article 3

Member States
prohibition laid down in Article 2 who possesses
information from:

shall prohibit any person subject

to the
inside

(a) disclosing that inside information to any third party unless
the
such disclosure is made in the normal course of
exercise of his employment, profession or duties;

3.

(cid:145)Financial
Section A of the Annex.

instrument(cid:146)

shall mean instruments

listed in

(b) recommending or procuring a third party, on the basis of
that inside information, to acquire or dispose of financial
instruments to which that information relates.

4.

(cid:145)Regulated market(cid:146) shall mean a market as defined by Ar-
ticle 1(13) of Directive 93/22/EEC (1).

Article 4

5. The definitions referred to in this Article and Section A of
the Annex shall in order to take account of technical devel-
opments on financial markets and to ensure uniform
application in the Community of this Directive be clarified
and adapted by the Commission in accordance with the
procedure referred to in Article 17(2).

Member States shall also impose the prohibitions provided for
in Articles 2 and 3 on any person other than those persons
referred to in those Articles who with full knowledge of the
facts possesses inside information.

Article 2

Member States shall prohibit any natural or legal person from
engaging in market manipulation.

Article 5

1. Member States shall prohibit any natural or legal person
who possesses inside information from taking advantage of
that information by acquiring or disposing of it for his own
account or for the account of a third party, either directly or
indirectly,
information
relates.

instruments to which that

financial

The first subparagraph shall apply regardless of whether such
person has obtained that information:

(a) by virtue of his membership of

the administrative,

management or supervisory bodies of the issuer, or

A non-exhaustive list of
typical methods used for market
manipulation is laid down in Section B of the Annex. The
Commission shall adopt,
in accordance with the procedure
referred to in Article 17(2), amendments of the examples of
these methods.

Member States may decide to introduce specific provisions to
cover persons acting for journalistic purposes in the normal
course of the exercise of their profession.

(b) by virtue of his holding in the capital of the issuer, or

Article 6

(c) by virtue of his having access to the information through
the exercise of his employment, profession or duties.

1. Member States
financial
shall ensure that
instruments inform the public as soon as possible of inside
information.

issuers of

2. Where the person referred to in paragraph 1 is a
company or other type of legal person, the prohibition laid
down in that paragraph shall also apply to the natural persons
who take part in the decision to carry out the transaction for
the account of the legal person concerned.

(1) OJ L 141, 11.6.1993, p. 27.

2. Member States shall require that whenever an issuer, or a
person acting on its behalf, discloses any inside information to
any third party in the normal exercise of his employment,
it must
profession or duties, as referred to in Article 3(a),
and effective public disclosure of
make
that
information,
simultaneously in the case of an intentional
disclosure, promptly in the case of a non-intentional disclosure.

complete

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The provisions of the first sub-paragraph shall not apply:

(a)

if the person receiving the information owes a duty of trust
or confidence to the issuer, or expressly agrees to maintain
the disclosed information in confidence; or

(b) if

the primary business of

the entity receiving the
information is the issuance of mandatory credit ratings,
provided the information is solely for the purpose of
developing a credit rating which will be publicly available.

body, or by any person acting on their behalf. Member States
may extend this exemption to their federated States in respect
of the management of their public debt.

Article 8

The prohibitions of

1.
this Directive shall not apply to
trading in own shares in (cid:145)buy back(cid:146) programmes nor to the
stabilisation of a financial instrument provided such trading is
carried out under agreed conditions.

Member States shall require that issuers, or entities acting on
their behalf, establish a regularly updated list of those persons
working for them and having access to inside information.

3.
An issuer may at its own risk delay the public disclosure
of particular information such as not to prejudice his legitimate
interests provided that such omission would not be likely to
mislead the public and that the issuer is able to ensure the
confidentiality of this information.

research or other

4. Member States shall require that natural and/or legal
persons being responsible for the production or dissemination
of
information to distribution
channels or to the public take reasonable care to ensure that
information is fairly presented and disclose their interests or
indicate conflicts of interest in the financial
instruments to
which that information relates.

relevant

arranging

5. Member States shall require that a natural person, or an
in financial
entity, professionally
instruments shall refrain from entering into transactions, and
reject orders on behalf of its clients, if it reasonably suspects
that a transaction would be based on inside information or
would constitute market manipulation.

transactions

The Commission shall adopt,

referred

to

in Article

in accordance with the
implementing

17(2),

6.
procedure
measures on

The Commission

technical
2.
conditions in accordance with the procedure referred to in
Article 17(2).

determine

these

shall

Article 9

The provisions of this Directive shall apply to any financial
instrument admitted, or going to be admitted, to trading on
a regulated market in at least one Member State, irrespective of
whether the transaction itself actually takes place on that
market or not.

Article 10

shall

State

apply

Every Member
and
requirements provided for in this Directive at least to actions
undertaken within its
financial
instruments concerned are admitted, or going to be admitted,
to trading in a Member State.

territory whenever

the prohibitions

the

Article 11

Every Member State shall designate a single administrative
this
authority competent
Directive are applied.

the provisions of

to ensure that

(cid:151) the technical modalities of appropriate public disclosure of
inside information as referred to in paragraphs 1 and 2,

(cid:151) the technical modalities of fair presentation of research and
other relevant information and the disclosure of particular
interests or conflicts of
interest as referred to in para-
graph 4.

Article 7

This Directive shall not apply to transactions carried out in
pursuit of monetary, exchange-rate or public debt-management
policy by a Member State, by the European System of Central
Banks, a national central bank or any other officially designated

Article 12

The competent authority shall be given all supervisory and
investigatory powers that are necessary for the exercise of its
functions. It shall exercise such powers either directly or, where
appropriate, in collaboration with other authorities, including
judicial authorities.

These powers shall include at least the right to:

(a) have access to any document and to receive a copy of it;

(b) demand information from any person, and if needed, to

require the testimony of a person;

(c) carry out on-site inspections;

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(d) require telephone and data traffic records;

(e) request the freezing and/or the sequestration of assets;

(f)

request temporary prohibition of professional activity.

The first and second paragraphs shall be without prejudice to
national legal provisions on professional secrecy.

shall

requested

immediately

shall, on request,

Competent authorities

immediately
2.
supply any information required for the purpose referred to
in paragraph 1. Where necessary, the competent authorities
being
necessary
measures in order to gather the required information. If the
requested competent authority is not able to supply the
required information immediately it shall notify the requesting
Competent Authority of the reasons. Information thus supplied
shall be covered by the obligation of professional secrecy to
which the persons employed or formerly employed by the
competent authorities receiving the information are subject.

take

the

Article 13

Member States shall provide that all persons who work or who
have worked for the competent authority, as well as auditors
and experts instructed by the competent authority, shall be
bound by the obligation of professional secrecy. Information
covered by professional secrecy may not be divulged to any
person or authority except by virtue of provisions laid down by
law.

The competent authorities may refuse to act on a request for
information where communication might adversely affect the
sovereignty, security or public policy of the State addressed, or
where judicial proceedings have already been initiated in
respect of
the same persons
before the authorities of the State addressed or where final
judgment has already been passed on such persons for the
same actions by the competent authorities of
the State
addressed.

the same actions and against

Article 14

1. Member States shall ensure that the appropriate measures
be taken, including of administrative and criminal sanctions in
conformity with their national law, against the natural or legal
persons responsible where the provisions of this Directive have
not been complied with. Member States shall ensure that these
measures are effective, proportionate and dissuasive.

2. Member States
to be
applied for failure to co-operate in an investigation subject to
Article 12.

shall determine the sanctions

law,

Without prejudice to the obligations to which they are subject
in judicial proceedings under criminal
the authorities
which receive information pursuant to paragraph 1 may use
it only for the exercise of their functions within the scope of
this Directive and in the context of administrative or judicial
proceedings
those
functions. However, where the competent authority communi-
cating information consents thereto, the authority receiving the
information may use it for other purposes or forward it to
other States’ competent authorities.

specifically related to the exercise of

infringement of

3. Member States shall provide that the competent authority
may disclose to the public every sanction that will be imposed
for
to this
Directive, unless the disclosure would jeopardise the financial
markets or cause disproportionate damage to the parties
involved.

taken pursuant

the measures

3. Where a competent authority is convinced that activities
contrary to the provisions of this Directive are being or have
been carried out on the territory of another Member State, it
shall notify this in as specific a manner as possible to the
State. The
competent
competent authority of
take
inform the notifying competent
It shall
appropriate action.
authority of
to the extent possible, of
the outcome and,
significant interim developments.

the other Member State shall

the other Member

authority of

Article 15

Member States shall ensure that the decisions taken by the
competent authority may be subject to the right to apply to
the courts.

4.
A competent authority of one Member State may request
that an investigation be carried out by the competent authority
of another Member State, on the latter’s territory.

Article 16

Competent authorities of Member States shall co-operate
1.
the purpose of
with each other whenever necessary for
their powers,
their duties, making use of
carrying out
whether
law.
in this Directive or
Competent authorities shall render assistance to competent
authorities of other Member States.
In particular, they shall
exchange information and co-operate in investigation activities.

in national

set out

its own personnel be
It may further request that some of
allowed to accompany the personnel of
the competent
authority of that other Member State during the course of
the investigation.

The investigation shall, however, throughout be subject to the
overall control of the Member State on whose territory it is
conducted.

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for

The competent authorities may refuse to act on a request for
carrying out an investigation as provided for in the first
subparagraph of
its
this paragraph, or on a request
personnel
to be accompanied by another Member State
competent authority personnel as provided for in the second
subparagraph of this paragraph, where such an investigation
might adversely affect the sovereignty, security or public policy
the State addressed, or where judicial proceedings have
of
already been initiated in respect of
the same actions and
against the same persons before the authorities of the State
addressed or where final
judgment has already been passed
on such persons for the same actions by the competent auth-
orities of the State addressed.

The Commission shall adopt,

in accordance with the
5.
procedure
implementing
measures on the procedures of exchange of information and
cross-border inspections as referred to in this Article.

in Article

referred

17(2),

to

The period provided for in Article 5(6) of Decision

3.
1999/468/EC shall be three months.

Article 18

Member States shall bring into force the laws, regulations and
administrative provisions necessary to comply with this
Directive the (year, month, day: not later than one year after
the entry into force of this Directive). They shall forthwith
inform the Commission thereof.

When Member States adopt those provisions, they shall contain
a reference to this Directive or be accompanied by such a
their official publication.
reference on the occasion of
Member States shall determine how such reference is to be
made.

Article 17

Directive 89/592/EEC is repealed with effect from the date
shown in Article 20.

Article 19

The Commission shall be assisted by the European
instituted by Commission Decision

1.
Securities Committee
(2001/. . ./EC) (1).

2. Where reference is made to this paragraph, the regulatory
procedure laid down in Article 5 of Decision 1999/468/EC
shall apply in compliance with Article 7 and Article 8 thereof.

Article 20

This Directive shall enter into force on the twentieth day
following that of its publication in the Official Journal of the
European Communities.

(1) Commission Decision

establishing

the

European

Securities

Committee, not yet adopted.

Article 21

This Directive is addressed to the Member States.

ANNEX

SECTION A

Financial Instruments

(cid:145)Financial Instrument(cid:146) shall mean:

(cid:151) Transferable securities as defined in Directive 93/22/EEC

(cid:151) Units in collective investment undertakings

(cid:151) Money-market instruments

(cid:151) Financial-futures contracts, including equivalent cash-settled instruments

(cid:151) Forward interest-rate agreements

(cid:151) Interest-rate, currency and equity swaps

(cid:151) Options to acquire or dispose of any instrument falling in these categories,

including equivalent cash-settled

instruments. This category includes in particular options on currency and on interest rates

(cid:151) Derivatives on commodities.

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SECTION B

The following illustrative examples of methods being used for market manipulation are not exhaustive, but
shall serve the interpretation of the general definition provided by Article 1(2):

(cid:151) Trade-based actions intended to create a false impression of activity:

(cid:151) Transactions in which there is no genuine change in actual ownership of the financial instruments ((cid:145)Wash sales(cid:146));

(cid:151) Transactions where both buy and sell orders are entered at the same time, with the same price and quantity by

different, but colluding parties ((cid:145)improper Matched orders(cid:146));

(cid:151) Engaging in a series of transactions that are reported on a public display facility to give the impression of

activity or price movement in a financial instrument ((cid:145)Painting the tape(cid:146));

(cid:151) Engaging in an activity designed by a person or persons acting in collaboration to push the price of a financial
instrument to an artificially high level (pumping the financial instruments on the market) and then to sell its or
their own financial instruments massively ((cid:145)Pumping and dumping(cid:146));

(cid:151) Increasing the bid for a financial instrument to increase its price (creating the impression of strength or the

illusion that stock activity was causing the increase). ((cid:145)Advancing the bid(cid:146));

(cid:151) Trade-based actions intended to create a shortage:

(cid:151) Securing such a control of the bid or demand-side of the derivative and/or the underlying asset that the
the derivative

manipulator has a dominant position which can be exploited to manipulate the price of
and/or the underlying asset ((cid:145)Cornering(cid:146));

(cid:151) Like (cid:145)cornering(cid:146) taking advantage of a shortage in an asset by controlling the demand-side and exploiting market
congestion during such shortages in such a way as to create artificial prices. Having significant influence over
supply or delivery, having the right to require delivery and using that to dictate arbitrary and abnormal prices
((cid:145)Abusive squeezes(cid:146));

(cid:151) Time-specific trade-based actions:

(cid:151) Buying or selling financial instruments at the close of the market in an effort to alter the closing price of the
financial instrument and therefore misleading those acting on the basis of closing prices ((cid:145)Marking the close(cid:146));

(cid:151) Trading specifically to interfere with the spot or settlement price of derivative contracts;

(cid:151) Trading to influence the particular spot price for a financial instrument that had been agreed as determining the

value of a transaction;

(cid:151) Information-related actions:

(cid:151) Purchasing a financial instrument for one’s own account before recommending it to others and then selling it at

a profit on the rise in the price following the recommendation ((cid:145)Scalping(cid:146));

(cid:151) Spreading false rumours to induce buying or selling by others;

(cid:151) Making untrue statements of material facts;

(cid:151) Non-disclosure of material facts or material interests.