Under point (a) of Article 14 in conjunction with Article 8 of the MAR, engaging or attempting to engage in insider dealing is prohibited. The new rule is no longer limited to acquiring or disposing of a financial instrument, but now also covers cancelling or amending an order.

Article 8 of the MAR defines the concept of “insider dealing”. Under the first sentence of Article 8(1) of the MAR, insider dealing arises where a person possesses inside information and uses that information by acquiring or disposing of, for its own account or for the account of a third party, directly or indirectly, financial instruments to which that information relates.

Acquisition or disposal

As was the case under the old WpHG rules, it is irrelevant for acquisition or disposal whether the insiders buy or sell such securities for their own account, or for the account of or on behalf of a third party (i.e. as a direct or indirect agent, or as commission agent).

Acquisition and disposal arise as soon as an executory contract has been effectively entered into. There is no requirement for any actual transfer of title or legal position to have occurred. A condition for this, however, is that the contract that has been entered into is underpinned by a firm long or short position. An example of a firm position is the execution of an order.

In addition to a traditional buy order, acquisition and disposal also include repurchase agreements in which a security is sold with a simultaneous agreement to repurchase it in the future. Securities lending arrangements, which by their nature are loans in kind, also fall under the prohibitions for the borrower because ownership of the securities also passes to the borrower against an agreed payment in the case of securities lending. The borrower thus has unlimited power over the securities borrowed; it is merely obliged to return securities of the same type and quality to the lender.

By contrast, a legal acquisition that is not preceded by any decision by the acquirer, for example transfer by reason of death under section 1922 of the Civil Code (Bürgerliches Gesetzbuch – BGB) does not constitute insider dealing. Nor are giving or pledging securities insider dealing.

The same applies to merely conditional acquisition and disposal transactions relating to financial instruments. A condition for this, however, is that the condition precedent or subsequent (section 158 of the BGB) is linked to a declaration of intent by the contracting party. That is because, in this case, the transaction has not yet been completed for the insider in such a way that the insider would have contractually secured the profit. In the case of a condition precedent, this is only the case if the contracting party has issued a corresponding declaration of intent. By contrast, if there is a condition subsequent, the insider has only contractually secured the profit if the contracting party is no longer able to exercise the condition subsequent (for example due to the passage of time).

Cancellation and amendment of an order

The cancellation or amendment of an order concerning a financial instrument to which the information relates is also considered to be insider dealing if the order was placed before the person concerned possessed the inside information (see the second sentence of Article 8(1) of the MAR). Cancellation means the complete deletion of an order, and amendment means any other modification of the order. The criterion is not met until the amended order has been executed. Prior to this, however, a punishable attempt may come into question.

Auctions of emission allowances or other auctioned products based thereon

In relation to auctions of emission allowances or other auctioned products based thereon that are held pursuant to Regulation (EU) No. 1031/2010¹, the use of inside information under the third sentence of Article 8(1) of the MAR also comprises submitting, modifying or withdrawing a bid by a person for its own account or for the account of a third party.

Applicable timing of possession of inside information

The insider must be in possession of inside information at the time the order is placed. By contrast, if a market participant places a binding order without being in possession of inside information, he or she does not make use of inside information even if he or she comes into possession of the inside information before the order is executed. This represents no change compared with the previous legal position.

Exceptions to the prohibition of insider dealing are thus transactions to which somebody has made a commitment before being in possession of the inside information, even if those transactions are executed at a later date. This also applies when a standing order is issued where the insider does not come into possession of the inside information until after the standing order has been issued (see also section I.4.2.5.2.1.4). As in the case of issuing a single order, there is no obligation in this case to cancel execution of the (next) order. On the contrary: under the MAR, cancelling this order after coming into possession of inside information may be punishable (see section I.4.2.2).

Employee share plans must be also be assessed in a similar way (see section I.4.2.5.2.1.4).

Use of inside information

Acquisition or disposal of a financial instrument is only prohibited only if inside information is used. An insider uses inside information if he or she acts after coming into possession of the information and incorporates that information into his or her actions. The purpose of the prohibition of insider dealing is to prevent the insider from taking unfair advantage to the detriment of third parties who are unaware of such information.

Principle – Implied use

The first and second sentences of recital (24) of the MAR sets out that, where a legal or natural person in possession of inside information acquires or disposes of, or attempts to acquire or dispose of, financial instruments to which that information relates, it should be implied that that person has used that information. This establishes the presumption that, as a matter of principle, any person who is in possession of inside information and deals in a corresponding financial instrument, has also used that inside information. These considerations are based on the findings of the ECJ in the “Spector” judgment². In this case, the ECJ decided that the acquisition or disposal of financial instruments by a trading participant who is in possession of inside information establishes a presumption that the inside information was used (“Spector rule”).

Rebuttal of the statutory presumption

Whereas there is a general presumption that the information was used, and that insider dealing occurred when financial instruments were acquired or disposed of, or an order was cancelled or amended, Article 9 of the MAR lists exemptions that allow the presumption to be rebutted in those cases. If the conditions set out in Article 9 of the MAR are met, it can already be presumed that inside information has not been used. In addition to the exemptions stipulated in the MAR, other unnamed cases may continue to constitute legitimate behaviour (see section I.4.2.5.2.2).

It should be noted in these cases that an insider can always provide evidence that, in any specific case, there was no causal relationship between the possession of inside information and the decision relating to the transaction. What is helpful in this connection is for the insider to document the reasons for his or her behaviour.

Legitimate behaviour under Article 9 of the MAR

Adequate and effective internal arrangements and procedures

The first exemption applies to legal persons under Article 9(1) of the MAR that have established adequate and effective internal arrangements and procedures against insider dealing.

To do this, the legal person must install a system that ensures that neither the natural person who made the decision on behalf of the legal person to acquire or dispose of financial instruments to which the information relates, nor another natural person who may have had an influence on that decision, was in possession of the inside information.

Under the conditions set out in Article 9(1) of the MAR, employee knowledge of inside information is not attributed to the legal person if the legal person has made organisational arrangements to prevent access to inside information for persons who deal in financial instruments or who influence dealing.

The term “possession” here is not the same as the term used in the German legal system within the meaning of sections 854 et seq. of the BGB, but means knowledge of inside information. “Legal persons” in European market abuse legislation mean public and private corporations (i.e. above all the stock corporation (Aktiengesellschaft – AG), partnership limited by shares (Kommanditgesellschaft auf Aktien –KGaA), limited liability company (Gesellschaft mit beschränkter Haftung – GmbH), European company (SE), cooperative society (Genossenschaft) and registered association (eingetragener Verein)), institutions and foundations governed by public law, and partnerships to which rights and obligations can be attributed (above all the general (commercial) partnership (offene Handelsgesellschaft – OHG), a limited partnership (Kommanditgesellschaft – KG), a partnership for the professions (Partnerschaftsgesellschaft – PartG) and a civil law partnership whose members may act in relation to third parties in the name of the partnership (Außen-GbR). For legal persons governed by public law, however, the scope limitation under Article 6 of the MAR must be observed. Under these exemptions, the Regulation does not apply to the measures relating to monetary policy, public debt management and climate policy of the legal persons referred to there.

By requiring adequate and effective internal arrangements and procedures, the MAR reflects the need for legal persons to establish compliance structures that must then actively be “brought to life” and complied with. It is particularly important to deploy persons who ensure compliance with the arrangements so that they can be effective. The arrangements must manage the flow of information in such a way that the decisions of the persons engaged in dealing are not influenced by inside information. In addition, the compliance structure must be designed in such a way that the information flows can be traced after the event.

Article 9(1) of the MAR merely specifies the goal of adequate and effective arrangements and procedures, but leaves the concrete design of the system to the individual legal person. For the assessment of adequacy and effectiveness, it comes down to striking a balance between the risk or the scale of the threat of insider offences and the measures necessary to safeguard against them. The specific circumstances in each individual case are decisive. From BaFin’s perspective, the area of activity and the size and complexity of the company must be considered, together with other factors. The more extensively the company is involved in trading financial instruments, for example, and the larger and more complex its structure, the greater the abstract risk of insider dealing, meaning that a correspondingly higher cost and effort will be needed to comply with the requirements of Article 9(1) of the MAR.

As a minimum, BaFin considers the following measures to be adequate and effective internal arrangements:

• Chinese walls

  These can be established, for example, using physical separation, access restrictions or by the appropriate organisation of communication. Examples of potential measures include banning any contact with various employees, recording telephone calls and archiving emails. It should also be noted that inside information is not communicated when employees move from one department to another.

• Watch lists and restricted lists

  A watch list can be used to collect potential inside information, while restricted lists are used to collect financial instruments whose trading could infringe the prohibition of insider dealing.

• Prohibitions of dealing for persons who come into possession of inside information despite all the measures.

  Additionally, the natural persons engaged in dealing in financial instruments for the legal person may not be influenced by the legal person to buy or sell financial instruments to which inside information relates. Such influence may only be exercised by natural persons who are part of the organisation of the legal person, because a legal person acts via its governing bodies or employees. The actions of all natural persons in its organisation cannot be attributed to the legal person. However, such an attribution is generally made if a person referred to in Article 8(2) of the MAR has influenced the natural persons engaged in dealing in financial instruments.

Market makers or authorised counterparties

The presumption rule for the use of inside information additionally does not apply to market makers and persons authorised to act as counterparties for financial instruments (point (a) of Article 9(2) of the MAR). Market makers mean persons who hold themselves out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against that person’s proprietary capital at prices defined by that person (point (30) of Article 3(1) of the MAR in conjunction with point (7) of Article 4(1) of Directive 2014/65/EU (MiFiD II)).

The term “counterparty” is not defined in the MAR. What is meant here are central counterparties within the meaning of point (1) of Article 2 of Regulation (EU) No. 648/2012 (EMIR)³. These are legal persons who interpose themselves between the parties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. Because they have no freedom of action, inside information cannot be causal for the transactions they carry out.

If market makers were to be prevented from dealing because they are in possession of trade-related inside information, they could no longer reasonably perform their function because, as market makers, they are obliged to provide quotes or estimated prices during trading hours. Nevertheless, in order to safeguard their function as liquidity providers in the capital markets, point (a) of Article 9(2) of the MAR contains an exclusion from the prohibition of insider dealing.

However, the acquisition or disposal of financial instruments to which this information relates must have happened legally in the course of the normal exercise of their function as market makers or counterparties for the financial instrument concerned. The question of whether the transaction in question is still executed in the course of the normal exercise of the market making function will be determined above all by the stock exchange rules and regulations and the additional rules in place for the trading venue in question. In any event, transactions in which the market makers have become unusually active because of inside information and their own profit interest outweighs their role to safeguard the proper functioning of the market are no longer covered by the exemption. It may be necessary to assess the trading volume in particular in individual cases. Activities that are clearly prohibited under the MAR, such as front-running, i.e. the practice of engaging in proprietary trading when in the knowledge of client orders, are not covered by the exclusion (see the second sentence of recital (30) of the MAR).

Persons authorised to execute orders

Under point (b) of Article 9(2) of the MAR, there is also no presumption that inside information is being used if the transaction is executed by a person who is authorised to execute orders on behalf of third parties, and the acquisition or disposal of financial instruments is made to carry out an order legitimately in the normal course of the exercise of that person’s employment, profession or duties. The exemption is relevant in particular for credit institutions. In this case, the transaction is not executed on the basis of inside information, but merely because an order was issued.

The person executing the transaction is only covered by the exemption if the transaction arose in the course of the normal course of that person’s duties. That is the case if the inside information is not reflected in the execution of the order, in other words the transaction would have been carried out in this way if no inside information had been available to the person.

However, this condition is only met if the financial market actor has no discretion because the client already specified the terms when issuing the order.

The exchange trader has discretion in this example. Its instructions are limited purely to an industry, and not to an individual issuer. Point (b) of Article 9(2) of the MAR does not apply in this case, so the use of inside information must be presumed.

Discharge of an obligation

If a transaction is carried out in which the obligation concerned is based on an order that was placed or an agreement that was concluded before the possession of inside information, or which serves to satisfy a legal or regulatory obligation that arose before the possession of inside information, there is also no presumption under Article 9(3) of the MAR that the inside information was used. In this case, there is no causal link between the possession of inside information and the decision to place the order, because the obligation arise before the possession of inside information. Additionally, the obligation must have become due at the time of the transaction in question. The question of whether the obligation is due depends on the legal system underlying the transaction. As a restrictive criterion, however, the transaction must still have been carried out in good faith and not to circumvent the prohibition of insider dealing. There may not therefore be any other reasons than discharging the obligation in question. Article 9(3) of the MAR also does not apply if the person subject to the obligation has scope for discretion.

S had to discharge its obligation to return the securities and acquire the securities for this purpose, and can therefore invoke Article 9(3) of the MAR.

The wording of this section alone: “where that person conducts a transaction to acquire or dispose of financial instruments” indicates that the obligation to be discharged must consist of the acquisition or disposal of a financial instrument. A person also acts in order to “discharge” a liability that has become due if the acquisition of a financial instrument as a cover transaction precedes the subsequent transfer of the financial instrument to satisfy the obligation. By contrast, discharging indirect obligations, such as settlement of a monetary debt, is not covered by the exemption.

Standing orders are also exempted. This relates, for example, to a case where someone – without being in possession of inside information – decides to regularly buy a financial instrument, places a corresponding standing order with his or her bank and then comes into possession of the inside information only after the order has been placed.

Employee share plans must also be assessed in a similar way. Where the shares or options are credited to the employee’s securities account “automatically” upon expiry of the plan, or profits from a virtual option programme are transferred, the employee is not deemed to have acted within the meaning of Article 8(1) of the MAR at the moment when the credit was made. Even if the employee were to be in possession of inside information at that point in time, this would not be relevant for the prohibition of insider dealing. However, the situation is different when it comes to assessing the date when an employee participates in an employee share plan: If an employee has possession of inside information at the time when he or she declares their participation, and if this is at least part of their motivation for participating, the employee uses inside information within the meaning of Article 8(1) of the MAR.

However, the vast majority of a company’s workforce normally never comes into contract with inside information in the first place. For this reason, it appears to be unnecessary to draw employees’ attention to the prohibition of insider dealing, for example in a guidance notice, when they subscribe to their employee share ownership plan. The situation is different for members of governing bodies and decision-makers within the company who usually have access to inside information because of their activities. In this case, it may be appropriate to include a reference to Article 14 of the MAR in the subscription offer.

Mergers and acquisitions

Under Article 9(4) of the MAR, the use of inside information is also not presumed if it was used in the course of a public takeover of a company or a business combination on the basis of a public bid, and the inside information was used solely for the purpose of proceeding with that merger or public takeover.

“Acquisition” here means the acquisition of shares or other securities that carry voting rights in the target company (see (point (a) of Article 2(1) of Directive 2004/25/EC on takeover bids of 21 April 2004 and section 29 of the WpÜG). This includes both voluntary takeover bids and mandatory bids under section 35(2) of the WpÜG. “Merger” here means any form of business combination in which two or more companies combine to form a single economic entity.

The question of whether possession of inside information occurs before or after the takeover bid is irrelevant if the inside information was obtained “in the course of” the transaction, where it is sufficient if the inside information was obtained before preparations for the transaction began. However, the inside information obtained in this way may only be used to proceed with the merger or acquisition. “Alongside purchases” are therefore not covered by this exemption.

By way of derogation from the principles established in the ECJ Spector decision, the MAR additionally requires all inside information at the date of approval of the merger or acceptance of the offer to have been made public by the shareholders of the relevant company in each case or otherwise to have ceased to constitute inside information. This also corresponds to BaFin’s interpretation of the old legal position, where making a public takeover bid should only be possible once all relevant inside information had been made public by an ad hoc disclosure. This ensures that the information asymmetry between the bidder and the shareholders is eliminated and all inside information can flow into the price of the financial instrument. The bidder may not take any unfair advantage because of possession of inside information.

Article 9(4) of the MAR does not cover the case where an acquirer comes into possession of inside information in the course of due diligence that is negative for the acquirer, and the takeover still proceeds. In this case, there is no direct link between possession of inside information and the takeover, with the result that it is therefore not used.

Implementation of a person’s own decision

Equally, it is legitimate if merely a decision to acquire or dispose of financial instruments is implemented (Article 9(5) of the MAR). This exemption is due to the fact that a person’s own decision to acquire or dispose of financial instruments may constitute inside information. Application of the presumption rule would therefore lead to the unintended outcome that it would have to be presumed that any person acting in the knowledge of his or her own decision to acquire financial instruments used the inside information about their own decision. To stop that person from being prevented in this case by the prohibition of insider trading from implementing this decision, Article 9(5) of the MAR sets out a statutory exemption from the presumption rule for this case.

All other internally created facts, such as a decision to make a recommendation to other trading participants to buy certain financial instruments, are not covered by the exemption.

Additionally, only dealing on the basis of a person’s own decisions falls with the scope of the exemption. Dealing in the knowledge of third-party decisions to acquire or disposal of financial instruments may therefore fall under the prohibition of insider dealing.

However, if a person uses a third party to implement his or her own decision and if the third party acts exclusively for the account of the person who made the decision, Article 9(5) of the MAR applies.

Because B would be covered by the exemption in Article 9(5) of the MAR if he or she implemented his or her decision him-or herself, it appears to be appropriate to presume that the exemption also applies if B outsources implementation to a third person.

No exemption in the case of an illegitimate reason

Article 9(6) of the MAR sets out that, notwithstanding any of the exemptions governed by Article 9(1) to (5) of the MAR, the competent authority can establish an infringement of the prohibition of insider dealing if there was an illegitimate reason for the related orders to trade, transactions or behaviours.

The term “illegitimate reason” is not defined in greater detail. It follows from the purpose of the provision, however, that such an illegitimate reason exists if the person concerned has gained an undue advantage from the transaction compared with the investing public because of privileged access to information, and the transaction thus infringes the assessment underlying the insider dealing rules. This is then the case at least if insider dealing is systematically and willingly concealed under the aforementioned exemptions.

Other exemptions

Inside information can also be used under the principles elaborated in the ECJ Spector judgment if the cases governed by Article 9 of the MAR do not apply. Use of inside information can therefore generally be answered in the negative if the action does not compromise the integrity of the financial markets and does not undermine investor confidence. As a minimum, BaFin recognises the following cases:

No causality between possession of the information and the decision

There is no causality if the transaction would also have been carried out without possession of the inside information at the same time, on the same scale and at the same terms. In this case, the inside information is not reflected in the price movement following the transaction, so the integrity of the capital markets is not compromised.

There is also no causality if the decision to carry out the transaction was already made before the person came into possession of the inside information, and these transactions were therefore only carried out to implement this master plan (“master plan” theory). If the insider does not draw back from the previously made decision, he or she acts while in possession of inside information, but does not use it. What matters here is that the investor’s master plan already in existence does not leave the investor any discretion as regards the essentials of the transactions to be carried out.

To avoid difficulties in gathering evidence in any subsequent criminal or administrative proceedings, it is advisable to document both the master plan and the implementation in line with that plan as accurately as possible.

The master plan theory is relevant, for instance, in stake-building, meaning the successive increase or decrease in an equity investment that is expressly not covered by Article 9(4) of the MAR (see the final sentence of Article 9(4) of the MAR).

If the investor comes into negative inside information after preparing the plan and therefore decides not to go ahead with the planned transactions, it is still not prohibited insider dealing because only executing transactions and cancelling or amending orders are covered by the prohibition of insider dealing, and not deciding against placing an order.

No effects of possession of inside information on the price

The integrity of the capital markets is also not compromised if the information was causal for the decision to carry out the transaction, but it did not ultimately have any effects on the price. This will always be the case at least if there are state price controls, for example in the compensation cases prescribed by law (e.g. sections 305 and 320b of the AktG and section 207 of the Transformation Act (Umwandlungsgesetz – UmwG)). Because the requirement for an appropriate compensation payment demands the incorporation of inside information in it, the insider cannot gain any unfair advantage from it.

A major shareholder who is in possession of inside information does not infringe the prohibition of insider dealing if it implements a squeeze-out on the basis of that information. The reason is that it is required to ensure appropriate compensation in the course of the squeeze-out, which can and commonly will be reviewed in court award proceedings. Because the requirement for an appropriate compensation payment demands the incorporation of inside information in the amount of the compensation payment, the insider cannot gain any unfair advantage from it. The same applies to other compensation cases prescribed by law (e.g. sections 305 and 320b of the AktG, sections 29 and 207 of the UmwG).

No impact of privileged knowledge on the terms of the insider dealing

Inside information has no impact on the executed transaction if both parties to the transaction are in possession of the inside information. This is often the case with face-to-face transactions that do not take place on an exchange. Because both parties are in possession of inside information in this case, there is a level playing field among the parties as far as information is concerned. In such a case, any unfair advantages conferred by the inside information cannot be unilaterally reflected in the terms of the transaction.

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