BaFin publishes revised sanctioning guidelines

Background

In simpler times, the German Securities Trading Law (Wertpapierhandelsgesetz) prescribed fixed amounts for breaches of the law, allowing market participants to take comfort in a certain predictability of the regulators sanction. The German Federal Financial Supervisory Authority (BaFin) has further supported this climate by providing clear guidance for a number of common offences with the sanctioning guidelines of November 2013 (Sanctioning Guidelines 2013). Recent European developments have introduced significantly higher fines based amongst other, on revenues that rendered the Sanctioning Guidelines 2013 redundant. As the revised European frameworks for market abuse and transparency, as well as their national transposition, both allow for sanctions of up to five per cent of annual turnover of the group of the offender, market participants faced uncertainty - would the regulator impose sanctions that could, at least theoretically, threaten the existence of a company?

On 22 February 2017, the BaFin published revised sanctioning guidelines (Sanctioning Guidelines 2017), addressing such concerns and uncertainty - at least for certain areas. BaFin has not only described how they intend to determine appropriate monetary sanctions but has also developed tables setting out base amounts for breaches in the most pressing legal areas, namely for the areas of ad-hoc publications, voting right disclosures, and financial reporting. Ominously absent from the Sanctioning Guidelines 2017 are clear indications for breaches of the Market Abuse Regulation - which can also be punished by revenue-based sanctions.

Although BaFin does still not provide a precise view as to how they intent to apply revenue-based sanctions, they have indicated that they are willing to deviate strongly from the revenue-based calculations in cases of “less material” breaches. The threat of revenue based sanctions still looms. Insofar, the Sanctioning Guidelines 2017 have failed to provide comfort.

Methodology

Overall, BaFin continues to apply a three-level approach to determining sanctions:

1. Determining the base amount
2. Adjusting the base amount
3. Considering the economic circumstances

While continuing the practice of the Sanction Guidelines 2013, the new Sanctioning Guidelines 2017 feature significantly higher base amounts - and can therefore constitute an enormous threat for entities breaching the rules - even in case of mere negligence.

The increased base amounts

To the extent that the WpHG prescribes fixed maximum amounts for sanctions, the Sanctioning Guidelines 2017 allows market participants to estimate possible sanctions. However, such fixed maximum amounts only directly apply in cases where either natural persons have committed an offense (that could be attributed to a company) or in cases where the fixed maximum amount (eg €10m for breaches of the voting rights disclosure obligations) exceeds the revenue-based figures.

The starting point for determining the sanction amount is still the issuer size. However, the Sanctioning Guidelines 2017 are much more granular. BaFin has introduced additional issuer categories, offering a more granular picture of issuer size:

BaFin then determines “base amounts” for six categories of offences, ranging from “most severe” to “easy”. For voting right disclosures, BaFin has published the following base amounts for offences committed by legal entities or natural persons:

Again, it is unclear whether BaFin will apply similar figures to revenue-based sanctions where applicable. In certain cases, breaches by managerial employees can be attributed to the company. It appears that BaFin would apply the sanctions for natural persons to such a case.

BaFin further underlines that it continues to treat breaches of voting rights disclosure obligations as two breaches (both vis-a-vis the issuer and the regulator), and will impose two sanctions. It further notes that there is no longer an “automatic discount” of 50% for unintentional breaches, although it will consider a lack of intent as a mitigating factor.

Adjusting the base amount

The base amount determined in accordance with the above tables will then be adjusted, considering the circumstances of the offender and the offense. Adjustment can lead to lower or higher sanctions. BaFin will consider general circumstances such as a confession of the offender and breach-specific circumstances to adjust the base amount. In case of voting right disclosures, BaFin will in particular consider issues such as:

• length of delay
• scope of errors, effect of breach on statutory information requirements
• scope of change in disclosed holdings
• triggering event
• group structures
• effects on capital markets, and
• whether administrative measures were required to remediate the issue.

What to expect

In consideration of the Sanctioning Guidelines 2017 it can be expected that in the course of the next months, BaFin will finalise several pending cases. Furthermore, market participants should also be aware that the unofficial transition period since the coming into force of the Transparency Directive II will now come to an end. We therefore expect an uptick of sanctioning proceedings in the near future. It is essential that market participants properly monitor their disclosure and reporting obligation in order to avoid becoming part of a sanction procedure.