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Jan 1 2015 onwards

CMC 6-7 Defences



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The definitive version of DFSA handbook text is the PDF version as that is the text of the instrument as made and published by the DFSA.

To view past versions of this module in PDF format, please visit the Archive.

1. Article 64(2) provides that a person does not contravene Article 58 (insider dealing) if:
(a) the person establishes that he reasonably believed that the Inside InformationG had been disclosed to the market in accordance with the Markets Law or the Rules;
(b) the dealing occurred in the legitimate performance of an underwriting agreement for the InvestmentsG or related investments in question;
(c) the dealing occurred in the legitimate performance of his functions as a liquidator or receiver;
(d) the dealing is undertaken solely in the course of the legitimate performance of his functions as a market maker;
(e) the person executes an unsolicited client order in InvestmentsG or related investments while in possession of Inside InformationG without contravening Article 59 (providing inside information) or otherwise advising or encouraging the client in relation to the transaction;
(f) the dealing is undertaken legitimately and solely in the context of that person's public takeover bid for the purpose of gaining control of that Reporting EntityG or proposing a merger with that Reporting EntityG ; or
(g) the sole purpose of the Reporting EntityG acquiring its own shares was to satisfy a legitimate reduction of share capital or to redeem shares in accordance with the Rules.
Further Guidance setting out the DFSA's views on some, but not all, of these defences is set out below.

Market making

2. Dealing undertaken by a person solely in the course of the legitimate performance of his functions as a market maker will not contravene Article 58 (insider dealing) (see Article 64(2)(d)).
3. In the DFSA's view, the following factors are likely to indicate that a person's dealing in an InvestmentG is in the course of the legitimate performance of his functions as a market maker:
(a) if the person holds himself out as willing and able to enter into transactions for the sale and purchase of InvestmentsG of that description at prices determined by him generally and continuously rather than in respect of a particular transaction;
(b) if the dealing is in the course of the provision of the services referred to in (a) or is in order to hedge a risk arising from such a dealing; and
(c) if Inside InformationG held by the person or persons who make the decision to deal is limited to Trading Information.
4. In the DFSA's view, if the person acted in contravention of a regulatory requirement or a requirement of the relevant market, that is a factor that indicates that the person's dealing is not in the legitimate performance of his functions as a market maker.

Underwriting

5. Dealing by a person that occurs in the legitimate performance of an underwriting agreement for the InvestmentsG or related investments in question will not contravene Article 58 (insider dealing) (see Article 64(2)(b)).
6. In the DFSA's view, an underwriting agreement is an agreement under which a party agrees to buy, before issue, a specific quantity of InvestmentsG in an issue of InvestmentsG on a given date at a given price, if no other party has purchased or acquired them.
7. In the DFSA's view, if the person acted in contravention of a relevant regulatory requirement or a requirement of the relevant market, that is a factor that indicates that, the person's dealing is not in the legitimate performance of his functions under an underwriting agreement.

Execution of client orders

8. The execution of an unsolicited client order in Investments or related investments while in possession of Inside InformationG will not contravene Article 58 (insider dealing) if the person executing the order has not:
(a) contravened Article 59 i.e. disclosed Inside InformationG to the client or procured the client to deal in the InvestmentsG or related investments for which the person executing the order has Inside InformationG (see CMC chapter 7); or
(b) otherwise advised or encouraged the client in relation to the transaction.
9. In the DFSA's view, the following factors are likely to indicate that the person's dealing is the execution of an unsolicited client order in accordance with Article 64(2)(e):
(a) if the dealing is initiated by the client;
(b) if the person's behaviour was with a view to facilitating or ensuring the effective carrying out of the order; and
(c) if the person has complied with any applicable conduct of business obligations relating to the execution of the order for the client.

Takeovers and mergers

10. Dealing by a person does not contravene Article 58 (insider dealing) if the dealing is undertaken legitimately and solely in the context of that person's public takeover bid for the purpose of gaining control of the Reporting EntityG or a proposed merger with the Reporting EntityG (see Article 64(2)(f)).
11. There are two categories of Inside InformationG potentially relevant to a takeover or merger:
(a) information that an offeror or potential offeror is going to make, or is considering making, an offer for the target; and
(b) information that an offeror or potential offeror may obtain through due diligence.
12. In determining whether or not the dealing is undertaken legitimately and solely in the context of a takeover bid or merger, the DFSAG is likely to take into account factors such as:
(a) whether the transactions concerned are in the target company's shares;
(b) whether the transactions concerned are for the sole purpose of gaining control or effecting the merger; and
(c) whether the person has complied with applicable regulatory requirements relating to the takeover or merger.

Chinese walls

13. Article 65 provides that a person does not contravene Article 58 (insider dealing) by dealing in InvestmentsG or related investments if:
(a) it had in operation at that time an effective information barrier which could reasonably be expected to ensure that the Inside InformationG was not communicated to the person or persons who made the decision to deal and that no advice with respect to the transaction or agreement was given to that person or any of those persons by an InsiderG ; and
(b) the information was not communicated and no such advice was given.

For example, if Inside InformationG is held behind an effective information barrier, from the individuals who make the decision to deal, the dealing by the person does not contravene Article 58.
14. In the DFSA's view, to rely on this defence, the person must not only have in place information barriers which could reasonably be expected to prevent the communication of the Inside InformationG , but must also be able to show that the information was not in fact communicated to the person who made the decision to deal.
Derived from GM9/2014 (Made 1st January 2015). [VER1/01-15]