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Status: You are viewing the version of the handbook as on 2005-06-30.

MAR 1.5 False or misleading impressions

INTRODUCTION

MAR 1.5.1UK

Statements in this section to the effect that behaviour amounts to market abuse assume that the test in MAR 1.1.3 G (1) has also been met.

MAR 1.5.2E

Section 118(2)(b) of the Act defines behaviour giving rise to a false or misleading impression as follows:"behaviour [which] is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question".

MAR 1.5.3G

Prescribed markets provide a mechanism by which the price or value of investments may be determined according to the market forces of supply and demand. When market users trade on prescribed markets they expect the price or value of investments and volumes of trading to reflect the proper operation of market forces rather than the outcome of improper conduct by other market users. Improper conduct which gives market users a false or misleading impression results in market users no longer being able to rely on the prices formed in markets or volumes of trading as a basis for their investment decisions. This will undermine confidence in the integrity of the prescribed market and overall market activity may decrease and transaction costs may rise, or both, to the detriment of market users, including investors.

ELEMENTS OF THE TEST

MAR 1.5.4E

In order to fall within the false or misleading impressions test:

  1. (1)

    the behaviour must be likely to give the regular user a false or misleading impression. Behaviour will amount to market abuse if the behaviour engaged in is likely to give rise to, or to give an impression of, a price or value or volume of trading which is materially false or misleading; and

  2. (2)

    in order to be likely, there must be a real and not fanciful likelihood that the behaviour will have such an effect, although the effect need not be more likely than not. The behaviour may, or may be likely to, give rise to more than one effect, including the effect in question.

GENERAL FACTORS

MAR 1.5.5E

Factors that are to be taken into account in determining whether or not behaviour is likely to give the regular user a false or misleading impression as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product include:

  1. (1)

    the experience and knowledge of the users of the market in question;

  2. (2)

    the structure of the market, including its reporting, notification and transparency requirements;

  3. (3)

    the legal and regulatory requirements of the market concerned and accepted market practices;

  4. (4)

    the identity and position of the person responsible for the behaviour which has been observed (if known); and

  5. (5)

    the extent and nature of the visibility or disclosure of the person's activity.

RELATIONSHIP WITH DISTORTION

MAR 1.5.6E

In some circumstances, behaviour which falls within these descriptions (see MAR 1.5.7 E) may also fall within the descriptions of behaviour giving rise to a market distortion (see MAR 1.6).

BEHAVIOUR WHICH AMOUNTS TO MARKET ABUSE

MAR 1.5.7E

MAR 1.5.8 E, MAR 1.5.15 E, MAR 1.5.18 E and MAR 1.5.21 E each set out descriptions of behaviour that amount to market abuse in that the behaviour gives rise, or is likely to give rise, to a false or misleading impression.

(A) ARTIFICIAL TRANSACTIONS

MAR 1.5.8G

Behaviour will constitute market abuse where:

  1. (1)

    a person enters into a transaction or series of transactions in a qualifying investment or relevant product; and

  2. (2)

    the principal effect of the transaction or transactions will be, or will be likely to be, to inflate, maintain or depress the apparent supply of, or the apparent demand for, or the apparent price or value of a qualifying investment or relevant product so that a false or misleading impression is likely to be given to the regular user; and

  3. (3)

    the person knows, or could reasonably be expected to know, that the principal effect of the transaction or transactions on the market will be, or will be likely to be, as set out at MAR 1.5.8 E (2);

unless the regular user would regard:

  1. (4)

    the principal rationale for the transaction in question as a legitimate commercial rationale; and

  2. (5)

    the way in which the transaction is to be executed as proper.

MAR 1.5.9C

A transaction which creates a false or misleading impression will not normally be considered to have a legitimate commercial rationale where the purpose behind the transaction was to induce others to trade in, or to position or move the price of, a qualifying investment or relevant product. This need not be the sole purpose for entering into the transaction or transactions, but must be an actuating purpose. Equally, transactions will not automatically be considered to have a legitimate commercial rationale simply because the purpose behind the transaction was to make a profit or avoid a loss (whether directly or indirectly).

MAR 1.5.10E

A transaction will be executed in a proper way where it is executed in a way which takes into account the need for the market as a whole to operate fairly and efficiently. The way in which a transaction was executed would be unlikely to be regarded as proper by the regular user where a transaction was executed in a particular way with the purpose of creating a false or misleading impression. In most cases the rules of prescribed markets include a requirement that transactions be executed in a proper way (for example, rules on reporting and executing cross-transactions). Transactions would not necessarily be considered to have been executed in an improper way simply because the way in which they were executed did not disclose the firm's intentions or positions to the market.

MAR 1.5.11E

The following factors are to be taken into account when determining whether a person's behaviour amounts to market abuse as described in MAR 1.5.8 E, although the presence of one or more of these factors does not automatically mean the behaviour in question amounts to market abuse:

  1. (1)

    whether the transaction causes or contributes to an increase (or decrease) in the supply of, or the demand for, or the price or value of a qualifying investment or relevant product and the person has an interest in the level of the supply of, or the demand for, or the price or value of the qualifying investment or relevant product;

  2. (2)

    whether the transaction involves the placing of buy and sell orders at prices higher or lower than the market price, or the placing of buy and sell orders which increase the volume of trading;

  3. (3)

    whether the transaction coincides with a time at or around which the supply of, or the demand for, or the price or value of a qualifying investment or relevant product is relevant (whether for the market as a whole or the person in question) to the calculation of reference prices, settlement prices, and valuations (for example, close of trading, end of quarter);

  4. (4)

    whether those involved in the transaction are connected parties;

  5. (5)

    whether the transaction causes the market price of the investment in question to increase or decrease, following which the market price immediately returns to its previous level;

  6. (6)

    whether a person places a bid (or offer) which is higher (or lower) than the previous bid (or offer) only to remove the bid (or offer) from the market before it is executed.

MAR 1.5.12E

A further factor to be taken into account in determining whether the behaviour amounts to market abuse as described in MAR 1.5.8 E is the extent to which the transaction generally either opens a new position, so creating an exposure to market risk, or closes out a position and so removes market risk. This factor, if present, will tend to suggest that the transaction is likely to have a legitimate commercial rationale and the behaviour does not amount to market abuse as described in MAR 1.5.8 E, subject to the way in which the transaction is executed. Examples of transactions which typically have a legitimate commercial rationale are given at MAR 1.5.24 C.

MAR 1.5.13E

A person has an interest in a qualifying investment or relevant product where that person:

  1. (1)

    may directly (including by holding a short position) or indirectly benefit from alterations in its market price; or

  2. (2)

    may be rewarded by, or is otherwise in collusion with or connected with, persons who may benefit from alterations in the market price of the qualifying investment.

MAR 1.5.14E

Examples of behaviour which might give rise to a false or misleading impression and in respect of which the principal rationale may not be a legitimate commercial rationale include:

  1. (1)

    arrangements for the sale or purchase of a qualifying investment or relevant product (other than on repo or on stock lending or borrowing terms) whereby there is no change in beneficial interests or market risk, or the transfer of beneficial interest or market risk is only between persons who are acting in concert or collusion;

  2. (2)

    a transaction or series of transactions that are designed to conceal the ownership of a qualifying investment or relevant product, so that disclosure requirements are circumvented by the holding of the qualifying investment in the name of a colluding party, such that disclosures are misleading in respect of the true underlying holding of the security. These transactions are often structured so that market risk remains with the seller. This does not include nominee holdings;

  3. (3)

    a fictitious transaction.

(B) DISSEMINATING INFORMATION

MAR 1.5.15E

Behaviour will constitute market abuse where:

  1. (1)

    a person disseminates information which is, or if true would be, relevant information;

  2. (2)

    the person knows, or could reasonably be expected to know, that the information disseminated is false or misleading; and

  3. (3)

    the person disseminates the information in order to create a false or misleading impression (this need not be the sole purpose for disseminating the information, but must be an actuating purpose).

MAR 1.5.16E

A factor to be taken into account in determining the purpose of the person in question is whether that person has an interest in a qualifying investment or relevant product (see MAR 1.5.13 E) to which the information is relevant. This factor, if present, will tend to suggest that the person had disseminated the information in order to create a false or misleading impression. That said, the absence of any such interest does not conclusively demonstrate that the behaviour does not amount to market abuse.

EXAMPLES

MAR 1.5.17E

The following is an example of disseminating false or misleading information. A person posts information on an Internet bulletin board or chat room which contains false or misleading statements about the takeover of a company whose shares are qualifying investments. The person knows that the information is false or misleading and he has posted the information in order to create a false or misleading impression.

(C) DISSEMINATION OF INFORMATION THROUGH AN ACCEPTED CHANNEL

MAR 1.5.18E

Behaviour will constitute market abuse where:

  1. (1)

    a person responsible for the submission of the information to an accepted channel for the dissemination of information submits information which is, or if true would be, relevant information which is likely to give the regular user a false or misleading impression as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product; and

  2. (2)

    the person who submits the information has not taken reasonable care to ensure it is not false or misleading.

MAR 1.5.19G

There are a number of channels through which information relating to qualifying investments which are traded on prescribed markets is formally disseminated to other market users. Some information is required to be disseminated through one of these channels, for example, under the rules of the prescribed market or the Listing Rules. RIEs also use these channels to disseminate information about trades which have been executed on their markets.

MAR 1.5.20E

The FSA recognises the importance of information disseminated through accepted channels for the dissemination of information. Users of such information should be able to rely on the accuracy and integrity of information carried through these channels. It is, therefore, appropriate that those who disseminate information through them, for example, the company itself, its financial advisers or its public relations advisers, take reasonable care to ensure the information is not inaccurate or misleading. Where they do not, and the information is likely to give rise to a false or misleading impression, they will be regarded as engaging in behaviour which amounts to market abuse.

(D) COURSE OF CONDUCT

MAR 1.5.21E

Behaviour will constitute market abuse where:

  1. (1)

    a person engages in a course of conduct, the principal effect of which will be, or is likely to be, to give a false or misleading impression to the regular user as to the supply of, or the demand for, or the price or value of a qualifying investment or relevant product; and

  2. (2)

    the person knows, or could reasonably be expected to know, that the principal effect of the conduct on the market will be, or is likely to be as set out in MAR 1.5.21 E (1);

unless the regular user would regard:

  1. (3)

    the principal rationale for the conduct in question as a legitimate commercial rationale (see MAR 1.5.9 E) and

  2. (4)

    the way in which the conduct is engaged in as proper (see MAR 1.5.10 E)

EXAMPLES

MAR 1.5.22E

The exact nature of conduct that might give a false or misleading impression will vary according to the characteristics of the market. The following are examples of behaviour which might give a false or misleading impression to the regular user:

  1. (1)

    the movement of physical commodity stocks, which might create a misleading impression as to the supply of, or demand for, or price or value of, a commodity or the deliverable into a commodity futures contract; and

  2. (2)

    the movement of an empty cargo ship, which might create a false or misleading impression as to the supply of, or the demand for, or the price or value of a commodity or the deliverable into a commodity futures contract.

SAFE HARBOURS

MAR 1.5.23E

MAR 1.5.24C, MAR 1.5.25C, MAR 1.5.27C and MAR 1.5.28C each set out descriptions of behaviour that does not amount to market abuse in that the behaviour does not give rise to a false or misleading impression (see MAR 1.5.4E).

(A) PERMITTED TRANSACTIONS

MAR 1.5.24C

The following examples of behaviour will not give rise to a false or misleading impression even though the conditions described in MAR 1.5.8E(1), MAR 1.5.8E(2) and MAR 1.5.8E(3) are satisfied, provided that the conditions in MAR 1.5.8E(4) and MAR 1.5.8E(5) are also satisfied:

  1. (1)

    transactions which effect the taking of a position, or the unwinding of a position taken, so as to take legitimate advantage of:

    1. (a)

      differences in the taxation of income or capital returns generated by investments or commodities (whether such differences arise solely because of the identity of the person entitled to receive such income or capital or otherwise); or

    2. (b)

      differences in the prices of investments or commodities as traded in different locations; or

  2. (2)

    transactions which effect the lending or borrowing of qualifying investments or commodities so as to meet an underlying commercial demand for the investment or commodity.

(B) REQUIRED REPORTING OR DISCLOSURE OF TRANSACTIONS

MAR 1.5.25C

Making a report or disclosure will not, of itself, give rise to a false or misleading impression if:

  1. (1)

    the report or disclosure was made in accordance with the way specified by any applicable legal or regulatory requirement; and

  2. (2)

    the report or disclosure was expressly required or expressly permitted by the rules or the rules of a prescribed market or the rules of the Takeover Code or SARs or by any other applicable statute or regulation or the rules of any competent statutory, governmental or regulatory authority.

MAR 1.5.26G

Examples of disclosure that is expressly required or expressly permitted include rule 9.10(j) of the listing rules, which permits a company to delay certain announcements at its discretion, and section 198 of the Companies Act 1985 which requires disclosure of certain interests in shares. See also MAR 1.7.7 C concerning rules of the Takeover Code which relate, among other things, to the timing of announcements and MAR 1.7.3 E (3) - MAR 1.7.3 E (4) concerning the listing rules.

(C) CHINESE WALLS

MAR 1.5.27C

Where a person is an organisation, that person may be aware of information that is not known to all of the individuals within the organisation. If an individual within the organisation disseminates information which he would know, or could reasonably be expected to know, is false or misleading if he was aware of information held by other individuals within the organisation, then that person will be taken not to know, or to be reasonably expected to know, that the information disseminated was false or misleading if:

  1. (1)

    the other information in question is held behind an effective Chinese wall or is restricted using other similarly effective arrangements; and

  2. (2)

    there was nothing which was known, or ought reasonably to have been known, to the individual who disseminated the information which should have led him to conclude it was false or misleading.

MAR 1.5.28C

For the purposes of MAR 1.5.27 C, the fact that the person did not know, or could not be reasonably expected to know, that the information was false or misleading can be demonstrated by showing that the requirements identified in MAR 1.4.22 E have been satisfied. Where it can be demonstrated that the individual disseminating the information did not know, or could not be reasonably expected to know, that the information was false or misleading, behaviour will not fall within the description of market abuse set out in MAR 1.5.15 E.

MAR 1.5.29E

The circumstances described in MAR 1.4.23 E (1) to MAR 1.4.23 E (3) are capable of giving rise to a presumption that the other information in question is held behind an effective Chinese wall or is restricted using other similarly effective arrangements.