On 12 May 2011 the Regulation on Accepted Market Practices 1 (the "Regulation") was published and came into force the next day. The Regulation provides closed-end funds and other issuers with a further exemption to two of the most difficultly judged Netherlands market manipulation rules. This update gives a brief overview of the contents of the Regulation which applies to transactions executed on the basis of a liquidity agreement, in particular of the conditions which should be met in order to make use of this new exemption.
Market manipulation
Netherlands market abuse legislation prohibits, amongst others,
the performance of transactions in financial instruments:
a) that send or may send an incorrect or misleading signal with
regard to the supply, demand or price of the financial instruments,
or
b) in order to maintain the price of the financial instruments at
an artificial level.
Pursuant to the Regulation these two prohibitions do not apply to
transactions that are performed in the context of a liquidity
agreement (within the meaning of the Regulation), subject to
compliance with certain conditions set out in the Regulation.
Liquidity Agreement
In order for transactions to be exempt from the above mentioned
prohibitions under the Regulation they should be performed in the
context of a liquidity agreement between an issuer and an
investment firm for the purpose of enhancing regular trading
through purchase and sale of shares or participation rights in the
capital of the issuer. The liquidity agreement should provide for
both purchases and sales of the issuer's shares or
participation rights in order to qualify as a liquidity agreement
under the Regulation. Transactions performed under the liquidity
agreement must be for the risk and at the expense of the issuer and
the liquidity agreement must specify a maximum amount of securities
(expressed in absolute numbers or in currency) which may be bought
or sold by the investment firm.
The Regulation only applies to liquidity agreements concluded for
the purposes of enhancing regular trading in shares or
participation rights listed on a regulated market or multilateral
trading facility regulated by Netherlands law. The Regulation does
not apply to transactions conducted in participation rights in the
capital of open-end funds.
Further Conditions
Besides being performed under a liquidity agreement within the
meaning of the Regulation, the issuer, the investment firm and the
transactions executed on the basis of the liquidity agreement must
comply with specific conditions in order to successfully rely on
the exemption.
For instance, the issuer must publish a press release on the
undertaking of the liquidity agreement and any changes made to the
liquidity agreement. This press release should include specific
information such as the name of the investment firm which has been
engaged. Also, quarterly press releases should be published by the
issuer on the transactions performed (number of sale and purchase
transactions carried out and average volumes). The termination of
the liquidity agreement will also require the publication of a
press release in which specific information on transactions is
disclosed.
The investment firm engaged under the liquidity agreement must
ensure an adequate separation of assets and therefore perform all
transactions pursuant to the liquidity agreement via a specific
account designated especially for that purpose. Furthermore, the
investment firm must independently take decisions on the execution
of its obligations under the liquidity agreement and ensure that
its employees involved in the execution remain independent
vis-à-vis the issuer.
The investment firm must ensure that the difference between bid and
sale prices quoted by it do not exceed a bandwidth of five per cent
(or less if so provided by the rules of the market on which the
transactions are performed). Further rules apply to maximum bid and
sale prices quoted with respect to participation rights in
closed-end funds and certain articles of the Buy-back and
Stabilisation Regulation 2 must be complied with. In
particular, shares or participation rights may not be purchased at
a price higher than the higher of the price of the last independent
trade and the highest current independent bid on the trading venue
where the purchase is carried out.
What is new?
If all conditions under the Regulation are met the issuer may
rely on an exemption to two of the most difficultly judged
Netherlands market manipulation rules.
One might argue this is the first codification of a specific
exemption for liquidity enhancement mechanisms under the
Netherlands market manipulation rules. Although the conditions for
reliance on the exemption under the Regulation are similar to the
conditions set out under the Buy-Back and Stabilisation Regulation,
there are important differences. Firstly, the Regulation provides
that the provision of liquidity is sufficient purpose to rely on
the exemption it provides. The Buy-Back and Stabilisation
Regulation requires other purposes (such as reduction of the
issuer's share capital) to be met in order for parties to be
able to rely on the exemptions provided by it. Secondly, the
Regulation, in contrast to the Buy-Back and Stabilisation
Regulation, does not set out any volume restrictions for purchases
of the issuer's shares. Such volume restrictions have in the
past proved difficult for smaller and illiquid funds to meet when
trying to enhance their liquidity. Thirdly, although the issuer
should ensure that it complies with other Netherlands market abuse
legislation, the Regulation, unlike the Buy-Back and Stabilisation
Regulation, does not indicate any specific behaviour in which the
issuer may not engage during the life of the liquidity agreement,
such as sale or issuance of further shares.
Footnotes
1.Regulation of the Minister of Finance of May 4, 2011, No. FM/2011/8728M, designating categories, transactions or trade orders to which the prohibitions referred to in article 5:58, first paragraph, heading and sub a and b, of the Netherlands Financial Supervision Act do not apply (Regeling gebruikelijke marktpraktijken Wft).
2.Regulation (EC) No 2273/2003 of the European Commission of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and the Council as exemptions for buy-back programs and stabilization of financial instruments (PbEU L 336).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
