Legal Alerts / 12 Feb 2013

Legal Alert – The New Securities Markets Act – Supervision, Damages and Administrative Sanctions

Chapter 1, section 6 of the new Finnish Securities Markets Act (746/2012, hereinafter the “SMA”) states that the Financial Supervisory Authority (“FIN-FSA”) supervises the compliance of provisions issued by and under the Securities Markets Act. The key issues to be raised are:

The right to impose and order to pay a conditional fine is included to the Securities Markets Act from the Act on the Financial Supervisory Authority.
The reform of the provisions regarding damages aims at improving legal certainty by presenting and defining negligence and intention clearly in the act.

  • Liability for damages may also arise from a breach of the SMA’s general principles.
  • Currently, the Act on the Financial Supervisory Authority stipulates that administrative sanctions include an administrative fine, public warning and penalty payment.
  • The amount of the administrative fine payable by a legal person is EUR 5,000–100,000 and by a natural person EUR 500–10,000. The maximum amount of the penalty payment is 10% of the legal person’s turnover in the financial year preceding the imposition of the penalty payment, however, not more than EUR 10 million.
  • The FIN-FSA imposes penalty payments not exceeding EUR 1 million. Otherwise the penalty payment is imposed by the Finnish Market Court based on the proposal of the FIN-FSA. 

SUPERVISORY POWERS

Provisions on the FIN-FSA’s supervisory powers are for the most part laid down in the Act on the Financial Supervisory Authority (878/2008, the “FSA Act”). In the FSA Act, the most important supervisory powers for the securities market concern the right to obtain and inspect information, which includes, inter alia, the right to obtain information from the board of directors of a listed company notwithstanding confidentiality provisions.

In addition to the powers stipulated in the FSA Act, the SMA includes two special supervisory powers which were not amended in the new SMA. In accordance with chapter 17 of the SMA, the supervisory powers of the FIN-FSA comprise the postponement of offers, prohibition to continue or repeat marketing, and the imposition of a conditional a fine, the purpose of which is to reinforce the above-mentioned measures. The postponement of an offer refers to a situation where the FIN-FSA has reasonable grounds to suspect that an offering to the public violates the SMA or provisions issued under it. An offering may be postponed by at most 10 consecutive banking days at a time. In addition to a specific offering, it is stated in legislative preparatory documents that the postponement decision may also concern the advertising of securities and other marketing.

Slightly stronger supervisory measure is that the FIN-FSA may prohibit the continuation or repetition of a procedure in a situation where the actions relating to the offering, marketing and exchange of securities and other financial instruments or to the fulfilment of the duty to disclose are in violation of the SMA.

If evident harm has been caused to investors, the FIN-FSA may order the entity on which it has imposed the prohibition to amend or remedy its actions.

During the validity of the previous SMA, in a situation where the statutory information had not been provided in connection with the marketing of the offering, the FIN-FSA’s has, for instance, prohibited the continuation of the marketing and required that the statutory information and the option to cancel previous commitments be provided to the investors.  Additionally, the FIN-FSA has imposed a conditional fine to reinforce its decisions regarding prohibition and rectification.  In accordance with the SMA, the FIN-FSA may reinforce both a postponement order and a decision regarding prohibition and rectification by imposing a conditional fine, which it also orders to be paid. The inclusion of the right to impose and order to pay a conditional fine to the SMA clarifies the situation compared to the situation during the validity of the previous act when the provisions regarding the possibility to impose a conditional fine were issued in the FSA Act.

PROVISIONS REGARDING DAMAGES

The provisions of the new SMA on liability for damages are, as in the old act, mainly built on the principles of the Finnish Tort Liability Act (412/1974), which state that liability arises only from action that causes damage and is negligent or intentional and in violation of the SMA and provisions issued under it as well as of the EU regulations falling within the SMA’s scope of application. The goal of the reform of the act was indeed to improve legal certainty by presenting and defining negligence and intention clearly in the act. The issuer of the security has the primary liability for damages, and the liability of the company management is based on the regulations of corporate law, i.e. on the Limited Liability Companies Act. 
In addition to the individual liability provisions contained in the act, the liability for damages may also arise from a violation of the general principles of the SMA, such as good securities market practice. The SMA also contains provisions on the limitation of liability regarding, for instance, the summary note of the prospectus, in which case liability may only arise when the information provided in the summary note is misleading, inaccurate or contradictory to the other parts of the prospectus or when the summary note lacks crucial information in relation to the other parts of the prospectus. Another specific provision on the limitation of liability has to do with the investment service provider’s obligation to report suspicious securities transactions carried out by its client. The liability to compensate damage caused to the client by the report arises only if the investment service provider has not taken the necessary precautions that may reasonably be required from it taking into account the circumstances. The adjustment of the damages and allocation of the liability for damages to two or more persons are still governed by the Tort Liability Act.

ADMINISTRATIVE SANCTIONS

Provisions on the FIN-FSA’s powers to impose administrative sanctions are issued in chapter 4 of the FSA Act. According to the FSA Act, administrative sanctions include an administrative fine, public warning and penalty payment. The public reprimand issued in accordance with the previous act is deleted and, in practice, replaced with the public warning. A public warning may be issued if an entity operating on the financial market intentionally or through negligence violates provisions other than those for which an administrative fine or penalty payment may be imposed. Chapter 15 of the SMA includes a list of those provisions on the basis of which the FIN-FSA shall impose an administrative fine or a penalty payment on market actors for a failure to comply with or violation against the provisions of the SMA. The issuance of a public warning for a violation of the SMA is governed by the FSA Act.

An administrative fine is imposed for a failure to comply with or violation of the following provisions of the SMA: (i) failure to provide marketing materials, (ii) failure to notify of transactions on own shares, (iii) violation of the disclosure requirements, (iv) failure to perform the obligation to disclose holdings or to publish the target company’s disclosure notification, or (v) failure to maintain available statutory information.  In practice, failure means a delay in the performance of the above-mentioned obligations. The administrative fine payable by a legal person is EUR 5,000–100,000 and by a natural person EUR 500–10,000. The FIN-FSA has published a table of administrative fines that functions as a guide on the amount of payments.

According to the SMA, a penalty payment is imposed for the violation of the prohibition to provide untrue or misleading information or for the breach of the obligation to maintain sufficient information available equally for all parties.  In addition, a penalty payment is imposed for the breach of provisions regarding the publication of certain prospectuses and other information, public takeover bids and the obligation to launch a bid, and the company-specific insider register and market abuse. The condition for imposing a penalty payment is that the matter, assessed as a whole, does not warrant more severe action.

The amount of the penalty payment is based on the comprehensive assessment. When assessing the amount of the penalty, the type, extent and duration of the actions and the financial situation of the entity being fined must be taken into consideration. The maximum amount of the payment shall be 10% of the legal person’s turnover in the financial year preceding the imposition of the penalty payment, however, not more than EUR 10 million. If the financial statement has not been completed at the time of imposing the penalty payment, the payment shall be imposed on the basis of the turnover stated in the previous year’s financial statement.

If a legal person has only recently begun business operations and no financial statements are available, the turnover may be estimated on the basis of another account. The maximum penalty payment payable by a natural person shall be 10% of the natural person’s income as per the latest tax assessment; however, not more than EUR 100,000.

The FIN-FSA imposes penalty payments not exceeding EUR 1 million. Otherwise the penalty payment is imposed by the Finnish Market Court based on the proposal of the FIN-FSA. Administrative fines and penalty payments shall be ordered payable to the State.

For additional information

Ari-Pekka Saanio

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