This article provides an overview of the most significant changes to the rules related to sanctions in sections 39 and 40d of the WpHG.

New administrative offences defined

While section 39 of the original version of the WpHG, dated 1994, defined twelve administrative offences, there are now 156 infringements of the German Securities Trading Act. An additional 14 administrative offences have been defined and will become effective with the implementation of the PRIIPs Regulation on 31 December 2016.

The provisions concerning administrative fines have been designed as blanket rules, that is, they make reference to other regulations and laws. What is new is that the rules regarding sanctions largely no longer refer to the relevant prohibitions and requirements contained in the WpHG, but rather refer directly to the respective European regulation. EU law itself cannot provide any provisions concerning administrative fines since law related to administrative offences is not covered in the EU treaty and is the preserve of national law. This is why, for example, section 39 (3d) of the WpHG, as a blanket rule, refers to the administrative requirements and prohibitions contained in the directly applicable Market Abuse Regulation. The WpHG does not, therefore, directly regulate prohibited actions. This is already the case in other provisions concerning administrative fines in section 39 of the WpHG, such as the prohibition on short selling.

Provision concerning administrative fines as a blanket rule section 39 of the WpHG

Graphic: Provision concerning administrative fines as a blanket rule section 39 of the WpHG Source: BaFin

As a whole, section 39 of the WpHG now refers directly to a number of EU regulations, some of which in turn make reference to Commission delegated acts or regulatory technical standards. Table 1 provides an overview of the individual references in section 39 of the WpHG to other WpHG provisions or EU regulations.

The administrative fines regime in section 39 of the WpHG has been aligned with the relevant provisions of the Market Abuse Regulation and the PRIIPs Regulation. Subsection 1 now defines those fines related to market abuse law that are not included amongst the requirements and prohibitions outlined in the Market Abuse Regulation but which relate to provisions contained in the WpHG. All provisions concerning administrative fines that were restricted to cases of market abuse have been removed from subsection 2. They are now set forth in subsection 3d. Subsection 3b now outlines fines for breaches of the Market Abuse Regulation’s prohibition against insider dealing with reference to section 38 (3) of the WpHG. Subsection 3c regulates the response to deliberate infringements related to goods, emissions allowances and foreign currencies outlined in section 12 of the WpHG (formerly section 20a (4) of the WpHG) in conjunction with Article 15 of the Market Abuse Regulation. Subsection 3d addresses additional infringements, whether deliberate or negligent, of the provisions set out in the Market Abuse Regulation for which European provisions require fines to be defined. Subsection 3e outlines fines for infringements of the PRIIPs Regulation.

New maximum fine amounts

A more detailed outline of the new provisions concerning administrative fines is presented here since the levels of these fines defined in the WpHG have been increased significantly in line with European provisions. For example, the fine for infringements of prohibitions against market manipulation by natural persons was previously limited to one million euros. BaFin is now empowered to impose fines of up to five million euros. The WpHG now also contains specific provisions for imposing administrative fines on legal entities. The newly added subsections 4a and 4b regulate the amounts of administrative fines for infringements of the requirements and prohibitions stemming from the EU regulations. Including subsections 4 and 6, a total of four subsections in section 39 of the WpHG now deal with the scope of administrative fines.

Section 39 (4a) of the WpHG sets two alternative maximum amounts for natural persons and three for legal entities. The largest of these amounts is applied in each case.

Legal entities may in future be subject to fines of up to 15 million euros for deliberate or negligent infringements of prohibitions against insider dealing and market manipulation. BaFin may alternatively impose a fine defined as a percentage of revenues in those cases where this would be greater. It may set a fine of up to 15 per cent of the total annual turnover of the legal entity according to the last available accounts approved by the management. Section 39 (5) of the WpHG outlines in detail how this is to be calculated. The key figure is the undertaking’s total turnover in the financial year prior to the authority’s decision. In the case of affiliated companies, the entire group’s sales are considered. This is because the entire group is economically more powerful and thus more capable of paying larger fines, as in accordance with legislators’ intentions. If the annual or consolidated financial statements for the prior financial year are not (yet) available, the statements for the year before that will be used. This provides a practical solution in those cases where BaFin must fine a party shortly after the end of a financial year and therefore during the period in which the annual or consolidated financial statements are being prepared or audited. If no annual or consolidated financial statements exist for the prior year, BaFin may estimate total annual turnover.

There is also a third option: a fine in response to an administrative offence, whether imposed on a natural person or a legal entity, may be calculated at three times the amount of the profits gained or losses avoided because of the infringement, where those can be determined when this exceeds the legal and annual turnover-related maximum amount. For example, if a listed company with a total turnover of 100 billion euros engages in market manipulation and obtains an economic benefit of 10 million euros, then the fine to be applied would be 15 billion euros in accordance with the framework set out in section 39 (4a) sentence 1 no. 1 of the WpHG.

Threshold and rates for penalties

Furthermore, the threshold in the WpHG for punishing administrative offences relating to insider dealing or market manipulation has been reduced across the board from intent to negligence. This is in keeping with the European stance that even offences committed through negligence merit punitive action and all forms of market abuse ought to be subjected to the same penalty mechanism. However, the WpHG does not provide for sanctions for simple negligence, as opposed to the draft bill of the Act Amending Financial Markets Regulations from autumn 2015, which had included simple negligence.

An overview of the revisions to the administrative fine provisions seems appropriate not only because of the relative density of rules. The imposition of fines by governments in the wake of infringements of capital markets provisions has increased in importance over the past 20 years. This is evident not least in the fact that the amounts of these fines have continuously increased. Moreover, with the growing establishment of regulatory provisions, BaFin’s originally rather lenient stance towards addressees of these norms has been replaced by a higher rate of penalties. For example, at the start of 1996 – one year after the WpHG entered into force – 77 administrative offence proceedings were pending at BaFin. There were an additional 499 new proceedings by the end of 1998. Of the 451 total concluded proceedings, only 62 resulted in fines. The penalty rate was therefore 12.4 per cent.

Some 15 years later – between 1 January 2013 and 31 December 2015 – nearly 1,577 new administrative offence proceedings had been opened and 1,380 concluded. The penalty rate for this time period was around 37 per cent, which means fines were legally imposed in 511 proceedings. The largest total fine against a company was imposed in 2015 and amounted to 3.25 million euros (notification requirement); the largest individual fine was 215,000 euros (ad hoc disclosure obligation). Around 85 per cent of the proceedings were undertaken against legal entities in the period between 1 July 2012 and 30 June 2015 (so-called independent proceedings). The rate of settlements was over 50 per cent during this same time period.

Public notification of measures and sanctions

An additional goal of the new regulations is to provide greater transparency regarding measures and sanctions. Pursuant to section 40c of the WpHG, measures and sanctions resulting from infringements of transparency requirements had already been subject to publication. Section 40d of the WpHG now includes wide-ranging duties of disclosure related to violations of prohibitions and requirements specified the Market Abuse Regulation. These provisions are motivated by general preventative considerations. On the one hand, making the imposition of sanctions public is meant to serve as a deterrent. On the other hand, the relevant authorities can use these cases to better inform market participants about which actions are considered infringements.

European legislators have made a public announcement regarding the imposition of a fine mandatory. The announcement must be publicly available for a minimum of 5 years. It should follow immediately after notification of the party concerned irrespective of administrative finality or legal force. BaFin therefore need not wait until its administrative order imposing a fine is finalised to make the information public. Otherwise it would make the prompt provision of information about the imposition of administrative fines in many cases impossible, prevent consistent and comprehensive media coverage about the administrative fine and negatively influence the effect that disclosure has on the public. BaFin must in any case make public whether its decision is not yet administratively finalised or legally binding. If a party challenges a decision, BaFin must also make this information public in addition to any other information related to legal remedies.

There is no provision made for administrative discretion. Under certain narrowly defined conditions, it is possible to delay, anonymise or forego public notification if making public the identity of the party concerned would be excessive or if such publication would jeopardise stability or on-going investigations. The party concerned is not entitled to challenge the publication of true statements, even if they are disadvantageous, insofar as they do not infringe on that party’s intimate, private or confidential matters, but are related to the social sphere, particularly economic activities. The right to secrecy on the part of the party concerned must – with due consideration to the particular circumstances of each case – defer to the public’s rightful interest in this information.

Sentences or dismissals of proceedings in accordance with sections 153 and 153a of the German Code of Criminal Procedure (Strafprozessordnung – StPO) in response to a breach of the Market Abuse Regulation are not subject to publication in accordance with section 40d of the WpHG since these are not related to administrative measures or sanctions.

Outlook

A second Act Amending Financial Markets Regulations is soon to follow. German legislators have until 3 July 2017 to table an act implementing the Markets in Financial Instruments Directive II (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR). The rules contained in this second Act Amending Financial Markets Regulations will apply from 3 January 2018.

Around 50 additional definitions of administrative offences will be introduced. The administrative fines regime set out in section 39 of the WpHG will continue to be adapted.

Table 1: Organisation of the provisions concerning administrative fines

Table 2: Scope of administrative fines in section 39 of the WpHG