Section 123(1)(b) of the Act (Power to impose penalties) gives the FSA the power to impose a penalty on a person, "A", if it is satisfied that A, "by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, if engaged in by A, would amount to market abuse".2
For the purposes of section 123(1)(b), it must be shown:
that the behaviour would have amounted to market abuse if carried out by the person who requires or encourages (to which hypothetical situation the principles set out in this Code will be applied); and
There are many ways in which a person, A, may, by taking or refraining from taking any action, require or encourage another person, B, to engage in behaviour which, if engaged in by A, would amount to market abuse. Some examples of behaviour that might fall within the scope of 123(1)(b) are as follows:
where a director of a company, while in possession of information which is both relevant information and disclosable information (other than trading information) and which is not generally available to market users, instructs an employee of that company to deal in qualifying investments or relevant products in respect of which the information is relevant and disclosable information;
Whether a person's taking or refraining from taking action might be regarded as requiring or encouraging others will depend on circumstances such as acceptable market practices, the experience, level of skill and standard of knowledge of the person concerned, and the control or influence the person has in relation to the person who engages in the behaviour in question.
However, early or selective disclosure of information which a regular user would expect market users to have will generally be presumed to constitute requiring or encouraging unless there is a legitimate purpose for making the disclosure, for example, as permitted or required by the rules of a prescribed market, the rules of the FSA, or the rules of the Takeover Code. Any such disclosure should be accompanied by a statement at or before the time the information is passed that the information is given in confidence and that the recipient should not base any behaviour in relation to the qualifying investment or relevant product which would amount to marketabuse on the information until after the information is made generally available. Such a statement may be incorporated in the express or implied terms of any contract governing the relationship between the persons making and receiving the disclosure. Some examples of disclosure for a legitimate purpose are set out in MAR 1.8.6 G.
his employees (or, where appropriate, his fellow employees or employees of a group or associated company) for the purpose of enabling them to perform their functions in circumstances where the possession of the information in question is necessary for the proper performance of those functions; or
his professional advisers, and or the professional advisers of any persons involved or who may be involved in any transaction or takeover bid with or involving him, for the purpose of obtaining advice; or
any person with whom he is negotiating, or intends to negotiate, any commercial, financial or investment transaction (including prospective underwriters or placees of securities) for the purpose of facilitating the proposed transaction; or
any person from whom he is seeking or intends to seek an irrevocable commitment or expression of support in relation to an offer which is subject to the Takeover Code, for the purpose of obtaining that commitment or expression of support; or
representatives of his employees or trade unions acting on their behalf in fulfilment of a legal obligation; or
any government department, the Bank of England, the Competition Commission, the Takeover Panel or any other statutory or regulatory body or authority for the purposes of fulfilling a legal or regulatory obligation or otherwise in connection with the performance of the functions of the body to which the information has been passed.
In the context of a takeover bid (see MAR 1.4.28 C - MAR 1.4.30 E), a person, A, will not be regarded as having required or encouraged another person, B, to engage in behaviour amounting to market abuse in circumstances where:
Where the originator of the transaction appears to have engaged in market abuse and, in the course of doing so, has acted through an intermediary, the intermediary's behaviour will not amount to either requiring or encouraging or market abuse unless the intermediary knew or ought reasonably to have known that the originator was engaging in market abuse. (See MAR 1 Annex 4 (Frequently asked questions))2
There are circumstances where the FSA will regard a person as requiring or encouraging: for example, where a person who has relevant and disclosable information about a company which is not yet generally available to other market users, advises or encourages another to acquire shares in that company, unless guidance suggests that this is acceptable (see for example, MAR 1.8.7 G).
A director of a company or relevant employee (as defined in the ModelCode) will not be regarded as having required or encouraged another person to engage in behaviour amounting to market abuse where the director or relevant employee acts in compliance with provisions of the company's code of dealing implemented in accordance with paragraph 16.18 of the listing rules equivalent to the requirements in paragraphs 11 and 12 (Dealings by connected parties and investment managers) of the Model Code.