In the past few years people turned to capital markets instruments because of the low interest rates attainable on savings accounts held by banks.
Several brokers offered interest rates three or four times higher than savings accounts, and some established fraudulent schemes to pay the early bird interest. Some brokerage houses falsified reports sent to their clients and to the Hungarian National Bank, which is responsible for the supervision of capital markets. After the brokerage scandals of 2015, which revealed that some local brokerage houses had manipulated their information systems, making their reports on securities an inaccurate reflection of reality, retail investors lost trust in capital markets instruments and investment service providers. And no wonder why: hundreds of billions of Hungarian forints went missing, tens of thousands of depositors and investors were aggrieved, and many brokers were arrested.
2016 was meant to be the year that investor trust was restored. The new EU Market Abuse Regulation took direct effect across EU member states on July 3, 2016, and it has not only extended the market abuse regime to issuers of securities traded on multilateral and organized trading facilities but has also had an impact on disclosure and record keeping obligations of issuers of securities currently listed on EU regulated markets, as well as bringing about significant changes to the reporting of directors’ and senior managers’ dealings.
Under the new EU Market Abuse Regulation, issuers are obliged to inform the public as soon as possible of inside information that directly concerns the issuer. Further, ad hoc notices need to be posted in an easily identifiable section of an issuer’s website for at least five years, and the inside information disclosed needs to clearly indicate date and time of disclosure and must be organized in chronological order. The Issuers are still permitted, though, to delay disclosure of inside information to protect their legitimate interests, as long as the public is not misled and confidentiality can be maintained. Furthermore, although issuers were already obliged to maintain insider lists documenting details of persons with access to inside information, such lists are now required to be more elaborate, with more detailed personal information of insiders included.
As to the reporting of directors’ and senior managers’ dealings, the new EU Market Abuse Regulation continues to oblige persons discharging managerial responsibilities and other persons closely associated with them to publicly disclose any transactions conducted on their own account above an annual threshold. The new rules also extend this disclosure obligation to persons discharging managerial responsibilities of an emission allowance market participant or of an auction platform, auctioneer, and auction monitor involved in the auctions held under Regulation (EU) No 1031/2010, in so far as their transactions involve emission allowances, derivatives thereof, or auctioned products based thereon. The reporting timeframe has been tightened, and the reporting has been standardized. Also, the new EU Market Abuse Regulation introduces a general trading prohibition for persons discharging managerial responsibilities in closed periods (for instance, for 30 calendar days before the announcement of an interim or year-end report).
Beside the regulation of the European Union, which is directly applicable in Hungary, the government introduced a new checking scheme for investors on January 1, 2016, to further strengthen capital markets activities and to restore investors’ trust. The new scheme allows investors to check whether the information received from a broker is the same as that submitted by that broker to the Hungarian National Bank. Brokers must send their reports to investors and to the Hungarian National Bank on a monthly basis. The information sent to the Hungarian National Bank is anonymous, and contains only the account number and the list of securities deposited into the account; therefore, the Hungarian National Bank cannot identify the owner of the account. If the monthly balance sent to the investor is not identical to the one submitted to the HNB, the investor may initiate an HNB investigation against the broker. The investigation can be initiated anonymously as well.
The measures seem promising so far, though not perfect. The low interest rates attainable on savings accounts are pushing retail investors towards capital market instruments, and such reporting and monitoring measures may in the future prevent systematic falsification of the reports and harm to investors.
By Gergely Szaloki, Partner, Schoenherr Hungary
This Article was originally published in Issue 4.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.