Article The Supreme Administrative Court lowers the penalty fee for an insider’s late transaction reporting – but insiders still risk paying millions

A board member in a listed company made a late notification following a sale of the listed company’s shares. The transaction amounted to approx. SEK 48 million and the Financial Supervisory Authority (FSA) determined the penalty fee to approx. SEK 8,2 million based on its standardized penalty-fee guidelines for delayed reports. The Supreme Administrative Court, however, questioned the strict use of the penalty-fee guidelines and reduced the fee to SEK 2 million.

Takeaways

• The penalty fees for incorrect or late transaction reports by insiders are still extremely high. This is true also in situations where the report would hardly provide any new information to the market. The penalty fees may still amount to millions – even in situations where the delay may seem like a minor administrative offence.
• Management and others who must report their transactions still have an almost strict liability for making a correct report within the prescribed time in accordance with MAR.
• The Financial Supervisory Authority’s standardized penalty-fee guidelines, which specify fees on the basis of the size of the transaction and the length of the delay, may still apply in general but cannot be copy-pasted without thought, at least not when there is a longer delay in reporting a larger transaction and the model results in disproportionate amounts.

The case in short

According to the market abuse regulation (MAR), board members and other persons in the management of a listed company must report transactions in the company (these persons are often referred to as ‘insiders’). The report must be made to the FSA without delay and not later than three business days after the transaction. The same applies to individuals closely associated to management as well as their companies.

The reporting requirement aims to prevent market abuse, particularly insider dealings, and to increase market trust.

An insider (or a closely associated person) who fails to make a correct report in due time, risks having to pay a penalty fee. MAR and the supplementary Swedish legislation state the maximum amount of the fee that can be imposed in case of a breach. Somewhat simplified, the maximum fee is EUR 500,000 for individuals and EUR 1,000,000 for legal persons (or, if higher, an amount corresponding to three percent of the turnover). However, the law does not state the standard amount for a “typical” breach of the reporting requirement. In practice, though, the FSA has applied a method which in principle determines the size of the fee based on the size (value) of the transaction and the length of the delay, a method that may lead to very high amounts in larger transactions.

In this case, a board member in a listed company and the board member’s own company (the holding company) had sold the listed company’s shares worth approx. SEK 48 million. The sale, which took place in November 2017, was made public via a press release on the same day, and a so-called flagging notification was made on the following day. About a week after the sale (i.e., too late), the board member reported the whole sale to the FSA. In February 2018, he corrected the report by stating that, in fact, he had only sold half of the shares while the other half had been sold by his holding company. The holding company reported its sale on the same day as the filing of the corrected report by the board member. Based on the FSA’s own guidance and standard amounts for determining the penalty fee, the FSA imposed a penalty fee of SEK 2,837,000 and SEK 5,400,000 respectively, given that the reports were not made in time.

The board member and holding company argued that the fee was disproportionate as, among other things, the market already had information about the sale and there had been no intent to hide the fact that the sale had taken place. Furthermore, no profit had been made as result of the delay. But in the FSA’s view, none of this mattered.

The Administrative Court of Appeal agreed with the FSA to a large extent. However, even though the Supreme Administrative Court determined that the breach was not minor or excusable (ignorance about a reporting duty is not an excuse), the Court significantly reduced the amount of the penalty.

When determining the size of the fee, the Court stated that it must strike a balance between imperatives that the fees act as a deterrent (i.e., be high) and the fees be proportionate in relation to the sanctions that apply to criminal market abuse. Further, while the intention is not for the FSA to make any in-depth analysis of subjective circumstances, it must consider whether the particular breach is more or less reprehensible. Also, while it must be possible to impose a penalty fee in case of long delays, where there is hardly any value in the information in the report, there may be reasons not to take into account the full length of the delay. In addition, the size of the transaction must be considered. However, the Court stated that the FSA’s use of standardized penalty-fee guidelines raised concerns as the guidelines result in considerable amounts in situations where there is a longer delay in reporting larger transactions and since the use of the guidelines means that other circumstances are not taken into consideration. In this case, the breaches were serious given the size of the transaction and the length of the delay. And though there was no risk of any actual damage, there was indeed a risk for reduced market trust, according to the Court. But, given that there was no intent to hide the transaction and that no profit resulted from the delay, the Court determined that the FSA’s penalty fees were disproportionate (they corresponded to almost half of the maximum amounts). Thus, the Court significantly reduced the amounts of the penalty fees to SEK 500,000 and SEK 1,500,000 respectively (Supreme Administrative Court 6143-20).

This information does not, and is not intended to, constitute legal advice.