Issuers’ counterparties under close scrutiny

The government's draft bill amending certain acts in connection with ensuring the development of the financial market and the protection of investors in that market (the “Draft”) radicalises the supervisory powers of the FSA by adding paragraph 1c to Article 68 of the Act on Public Offering and the Conditions for Introducing Financial Instruments to an Organised Trading System and on Public Companies of 29 July 2005 (the “Act on Public Offering”).

Pursuant to Article 68(1) of the Act on Public Offering, at the request of the FSA, among others. persons who are members of the management or supervisory bodies of an issuer of securities admitted to trading on the regulated market or which are the subject of an application for such admission, or whose securities have been introduced to the alternative trading system or are the subject of an application for such introduction, shall be obliged to promptly provide written or oral information and explanations, as well as to prepare and submit, at the issuer’s expense, copies of documents and other information carriers, in order to enable the performance of the statutory tasks of the FSA in the field of, inter alia:

1) supervising the manner in which these entities perform their disclosure obligations, including the obligation referred to in Article 17 of Regulation 596/2014;

2) disclosing and preventing market manipulation as referred to in Article 12 of Regulation 596/2014;

3) disclosure and prevention of disclosure or use of inside information.

The Draft provides for the addition of a new paragraph in Article 68, designated as 1c of the Act on Public Offering. Pursuant to its content, the obligation referred to in Article 68(1)(1), (2) and (3) of this act also applies to entities other than supervised entities, which are parties to a contract, transaction or agreement with the issuer of securities admitted to trading on the regulated market or which are the subject of application for such admission, or whose securities have been introduced to the alternative trading system or are the subject of application for such introduction.

The practical consequences of the planned regulation are:

1) a drastic strengthening of the FSA’s control and repressive powers over entities outside the organised market; and

2) further criminalisation of acts committed in the market.

I can answer this question as follows: the goal is noble and understandable, but the means are inadequate and disproportionate to the assumptions.

According to the wording of the explanatory memorandum to the Draft, the idea of the amendment was to increase the effectiveness of conducted supervision with regard to market manipulation and disclosure of confidential information, following the possibility of double verification of information presented by the supervised entity.

What, then, am I faulting the regulation for, if the concept itself is laudable?

Firstly, the logic of the system is limping along. Pursuant to Article 1 of the Act on Public Offering, the object scope of this act includes, inter alia, the terms and conditions of public offerings of securities, the obligations of issuers of securities and the effects of becoming a public company.

Meanwhile, the significant expansion of the competence of the FSA with respect to entities that were raptly a party to: “a contract, transaction or agreement with a supervised entity”, does not fall within this framework.

Moreover, MAR (the EU act constituting the normative basis for the issue of manipulation and inside information) essentially refers to issuers and entities acting on their behalf and for their benefit. This applies both to the definition of the circle of obliged entities and the addressees of possible sanctions, framed at EU level and further specified in national law. As a general rule, the obligations and sanctions set out in the pan-European regulations apply to issuers together with their affiliates (i.e. entities acting in their name and on their behalf) and not to counterparties of organised market entities.

Secondly, the labile nature of the concepts in the amendment is discouraging. After all, how to find the relevant difference between a contract and an agreement, and how to define a transaction in an unambiguous manner? Moreover, will only the specific counterparty that has entered into the contract/agreement with the issuer be a party to the transaction, or also the counterparty’s advisers (e.g. lawyers or auditors subject to professional secrecy)?

Since the constituent parts of the provision may be questionable, necessarily the amendment may open a Pandora's box of excessive discretion and arbitrariness on the part of the authority.

Thirdly, in the case of non-performance of the obligation referred to in the proposed paragraph 1c of Article 68 of the Act on Public Offering, the provision of Article 102(1) of this act will be applied. According to its content, anyone who fails to perform the obligation referred to in Article 68, or performs it improperly, is subject to a fine of up to PLN 500,000, the penalty of restriction of liberty or deprivation of liberty for up to 2 years.

The introduction of this type of regulation is at odds with the basic assumption of current jurisprudence, according to which criminal liability should be a measure of last resort (ultima ratio) in the system.

In my opinion, the proposed amendment does not meet the criteria that are set for criminal law provisions. It is not clear to me whether criminal liability is imposed directly on non-supervised entities that are party to a contract, transaction or agreement with the issuer of securities (although not likely in the form of imprisonment or restriction of liberty), or perhaps on the members of the management or supervisory board of such entities, and perhaps also on the employees of such entity, liquidators, etc.

Furthermore, the circle of addressees defined as parties to a contract, transaction or agreement with the issuer of securities is not obvious to me.

In addition, I am particularly doubtful about the possible extension of the powers of the FSA to entities obliged to maintain professional or other statutorily protected secrecy.