Capital Market Compliance

Insider law in focus: We explain how to set up a system.

Violations of insider law regulations can quickly result in significant fines. With comprehensive preparation and support from our experts, you can protect your company against the risks and manage potential serious cases.

Deviations from communicated figures, sudden personnel changes, large transactions, problems in production: Unexpected developments in the company pose operational challenges to the company's management. 

Often it is overlooked or realised too late that the disclosure of new internal developments could be insider information. This adds another risk to the operational problem.

Capital market compliance is highly relevant due to various factors: The range of fines is considerable, violations are regularly picked up. Persons in organisational management are also affected - whether in the case of their own violations due to forgotten reports after transactions or in the case of disputes with the company in the aftermath of an established violation due to allegedly violated organisational duties. In addition, BaFin can make certain violations and fines imposed public. Significant reputational damage for the company and the executives concerned is imminent.

A functioning capital market compliance system is the most effective precaution to minimise these risks. Risk prevention starts at two points: the preparation of a capital market compliance system tailored to the company and the reaction in case of an emergency.

Regardless of the size of the company, a capital market compliance system should map the following factors in order to minimise the risk of a breach:

• Awareness/awareness-raising among executives, including below board level: inside information can arise at any point in the company, but experience shows that it often concerns deviations from forecasts, M&A transactions, business interruptions and justiciable incidents such as cyber fraud and other types of cybercrime.
• Sound knowledge of board members about their own duties with regard to capital market compliance, but also with regard to the fundamental importance of the topic
• Clear assignment of responsibilities and creation of structures to be able to react in case of emergency ("ad hoc committee" or in any case clarity with regard to cooperation between relevant persons and departments)
• Guidelines and, in particular, procedural instructions tailored to the company and its circumstances, which provide assistance to employees in specific cases.
• Implementation of the system within the company, including technical training of responsible employees

It is important to react quickly in the event of an emergency, as BaFin only allows a short time for the internal audit and violations are prosecuted:

• Early identification of the relevant issues by staff members as well as responsiveness and accessibility of the responsible persons.
• Create capacity for a complex issue if the underlying incident is already operationally challenging
• Plan for emergency capacities: back-up and "workarounds" are necessary, because it is not enough for a single staff member to be familiar with the systems and procedures (failures due to illness, for example, should be taken into account).
• Careful documentation of all decisions and procedural steps

A good capital market compliance system does not stop at the reaction to an emergency, but learns continuously:

• After an ad hoc announcement, an analysis should be carried out to determine whether there were systematic reasons for the necessity of such an announcement.
• This becomes apparent, for example, in the case of deviations in forecast business figures.
• Examine the financial/accounting processes: For what reason did deviations in figures occur unexpectedly? Why were they not reflected in previous reports to management?
• Examination of IR work and connections with analysts: Would earlier communication have made an ad hoc announcement superfluous because the market was already expecting the new figures?
• Examine the planning processes: Why did the deviation from the guidance occur and should improvements be made to the planning process?

Bafin also investigates violations of reporting obligations in the case of directors' dealings and administrative obligations (focus on insider lists).

The susceptibility to errors in companies is high due to several factors: On the one hand, many companies are not confronted with issues relevant to capital market law on a daily basis. On the other hand, board members and employees are under considerable stress in most situations relevant to capital market law. Therefore, comprehensive preparation for the acute emergency is crucial for successful management. Our experienced experts help to avoid additional problems in challenging situations, which can arise due to complex detailed regulations and diversions in insider law. 

The following questions must be answered in principle: 

• Is the company planning an IPO in the near future? If so, the establishment of a capital market compliance system is essential.
• Is the company already listed on the stock exchange? Then systems should be regularly checked for their effectiveness and adapted to current legal developments.
• Insider law can also become relevant for non-listed companies in some case constructions, for example in transactions where business partners or target companies are listed. If there has been no previous contact with insider law issues, the risk of overlooking relevant topics is particularly high.

Insider law covers not only shares listed on the stock exchange, but in certain facets also corporate bonds listed on stock exchanges and other markets, as well as pure over-the-counter issuers. Companies should also be prepared for these cases.

We rely on a close-knit network of legal advice*, process knowledge (especially in connection with IPOs) and experience with the functioning of finance departments. This enables us to build systems that are effective and efficient.

At our cooperation partner KPMG Law Rechtsanwaltsgesellschaft mbH you will find further information on the topic of compliance.*

Dr. Lisa Kopp*

Partner
KPMG Law Rechtanwaltsgesellschaft mbH
T +49 89 5997606-1289

Email