The number of notifications of a reasonable suspicion of market abuse has dropped since 2007. This is evident from data of the Netherlands Authority for the Financial Markets (AFM). In order to reverse this trend, it has sent a questionnaire to a selection of investment firms to obtain more insight into the manner in which these investment firms apply the notification obligation. In addition, the AFM has consulted the European Securities and Markets Authority (ESMA) to establish whether fellow supervisors have observed a similar trend.
The AFM investigation shows that the AFM, when compared with other European supervisors, receives relatively few notifications of a suspicion of trading with inside information or possible market manipulation. It has also become clear that a limited number of investment firms has reported possible abuses, and that 80 percent of these notifications come from the larger investment firms. So far, the AFM has not (yet) received notifications from companies with fewer than 25 employees. When compared with the AFM, it appears that other European supervisors receive notifications from a relatively larger number of companies. The notifications they have received are also more widely distributed across companies of various sizes.
Although in the last three years the number of notifications - in particular those of smaller companies - was lower than the AFM had expected, the quality of the notifications received are of such high quality that these are very useful for supervising for market abuse. Moreover, the AFM had experienced the cooperation of the notifying companies who have made a notification as very constructive.
The high quality of the notifications could be related to the fact that a large majority of the respondents to the AFM questionnaire are bringing the notification obligation to the attention of its employees in a structured manner. 34 of the 79 participants in the questionnaire indicate that they specifically bring the notification obligation to the attention of their employees via training or educational courses. This group, which consists largely of medium-sized and large companies, often displays an active approach toward the notification obligation, which is expressed for example in the periodical training of their own employees. The survey also shows that these companies are more often supported by a separate compliance department that ensures compliance with inter alia the Financial Supervision Act that provides for the notification obligation. Smaller institutions often bring the notification obligation to the attention of their employees in a passive manner, for example by including it in internal regulations or in compliance rules.
The AFM investigation primarily shows that the knowledge and experience of the employees of the investment firms who have contact with the clients is decisive for identifying a reasonable suspicion of market abuse. Based on the results of the survey, the AFM has established that the combination of knowledge of the investment behaviour of the client and knowledge with respect to relevant legislation leads to more and qualitatively better notifications of irregularities. In order to be able to recognise cases of market abuse, the AFM recommends companies to ensure that their own employees’ knowledge concerning market abuse is maintained at an appropriate level by, for example, providing training and/ or making material contained on the AFM or ESMA website available (see Rules regarding Marketabuse).
The notification obligation is of great importance to the honesty of the financial markets. Nearly half of the AFM investigations, which, in the period between October 2005 and the end of 2010 led to a criminal referral in respect of market abuse, were based one or more notifications to the AFM.
In order to prevent any enforcement of measures due to a failure to notify the authorities regarding a reasonable suspicion of market abuse, the AFM recommends that investment firms should err on the side of caution and submit a notification or at the very least contact the AFM.
The AFM is committed to promoting fair and transparent financial markets.
As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.