## **Learning Outcomes**

After reading this article, you will be able to explain the role of capital markets in corporate funding and governance, recognize the main regulatory requirements surrounding capital market disclosures, and identify the key regulations affecting capital market transactions. You will also be able to evaluate the impact of these requirements on financial strategy and advise on compliance, disclosure, and ethical conduct during major market transactions.

## **ACCA Advanced Financial Management (AFM) Syllabus**

For ACCA Advanced Financial Management (AFM), you are required to understand how regulatory and market frameworks impact financial decisions and corporate transparency. Focus your revision on:

- The objectives and scope of capital market regulation for listed and unlisted entities
- The legal and regulatory requirements for listing on major exchanges
- The scope and content of ongoing disclosure rules, including price-sensitive information and inside information
- The regulations governing major transactions, such as rights issues, takeovers, and delistings
- The prevention and detection of market abuse, insider trading, and information asymmetry
- The implications of non-compliance for company management and individual directors

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which one of the following is NOT a typical ongoing disclosure obligation for a listed company?
   a) Publishing annual financial statements
   b) Communicating price-sensitive information without delay
   c) Reviewing an audit committee report in private
   d) Disclosing director dealings

2. True or False? A company can delay the release of inside information if immediate disclosure would prejudice its legitimate interests, even if investors are likely to consider it important for their investment decisions.

3. List two primary objectives of capital market regulation.

4. Briefly explain the consequences for a company and its directors of breaching market abuse regulations.

## **Introduction**

The regulatory and market environment is a critical component of the advanced financial management role. Companies accessing the capital markets, whether through an initial public offering (IPO), secondary fundraising, or ongoing listing, must comply with strict regulations designed to protect investors, maintain fair trading, and uphold market integrity. These regulations cover listing requirements, continuous disclosure obligations, and controls over capital market transactions.

Failure to comply with these obligations can damage investor confidence, result in enforcement action, and negatively impact shareholder value. As a financial manager, you must ensure that financial strategy is aligned with regulatory requirements and ethical standards, both when advising on new market transactions and during day-to-day operations.

## **REGULATION OF CAPITAL MARKETS**

Sound regulation of capital markets is essential for transparency, investor protection, and efficient allocation of capital. Regulation is set at international, national, and exchange-specific levels, with requirements varying depending on the jurisdiction and type of market (main market, growth market, etc.).

> **Key Term: capital market regulation**
> The system of laws, standards, listing rules, and supervisory frameworks that govern how securities are issued, traded, and disclosed to protect investors and ensure market fairness.

## **LISTING REQUIREMENTS AND MARKET ENTRY**

Accessing public capital markets usually requires a company to 'list' its securities on a recognized exchange. Exchanges impose strict criteria on companies wishing to list their securities.

- **Eligibility & Application:** Applicants must meet minimum market capitalization, track record, and governance standards. For example, the London Stock Exchange requires three years’ audited financial statements and a minimum percentage of shares held by the public.
- **Prospectus Approval:** The initial prospectus or offering circular must contain full, true, and plain disclosure of all material facts regarding the issuer, its financial position, and the securities on offer.
- **Disclosure of Directors and Major Shareholders:** Companies must disclose the identity and interests of directors, significant shareholders, and related parties.

Failure to meet these criteria results in rejection or revocation of a listing.

> **Key Term: listing requirements**
> The prescribed criteria and standards that a company must satisfy to be admitted to, and remain on, a public securities exchange.

## **ONGOING DISCLOSURE OBLIGATIONS**

Listed companies are subject to rigorous ongoing disclosure requirements intended to keep the market fully informed.

- **Regular Reporting:** Companies must publish audited annual financial statements and interim results within specified periods.
- **Continuous Disclosure:** Price-sensitive information, such as profit warnings, changes in business strategy, or board changes, must be released to the market without delay.
- **Director Dealing and Insider Lists:** All dealings in company securities by directors and certain senior managers must be reported and published. Companies maintain lists of insiders to monitor potential misuse of sensitive information.

Non-compliance can lead to suspension or delisting and may trigger regulatory investigations.

> **Key Term: price-sensitive information**
> Any information which, if made public, would likely have a significant effect on the price of a company's securities.
>
> **Key Term: inside information**
> Non-public, precise information relating to an issuer or its securities which, if made public, would likely have a significant effect on securities prices.

## **TRANSACTION REGULATIONS**

Major transactions—such as rights issues, public offers, mergers, and takeovers—are subject to additional, event-driven regulatory requirements.

- **Rights Issues & Placings:** Further issues of shares must be pre-approved by shareholders and comply with prospectus and transparency requirements. Material terms must be disclosed in advance to all affected parties.
- **Takeovers & Mergers:** Takeover regulations (such as the UK Takeover Code) require bidders to make formal offers, treat shareholders equally, disclose offer terms, and avoid market manipulation. Defensive measures by boards are strictly regulated to protect shareholder choice.
- **Delisting & Buybacks:** Delisting requires advance notice, board and shareholder approval, and must be implemented in a way that protects minority investors.

### **Worked Example 1.1**

A listed company is about to announce a potential acquisition but is still negotiating terms. The company’s advisers believe news of the negotiations would impact the share price if released immediately.

**Question:** What are the company’s disclosure obligations, and can it lawfully delay disclosure?

> **Answer:**
> The company has a duty to disclose inside information as soon as possible. However, it may delay disclosure if: (i) immediate disclosure would prejudice its legitimate interests, (ii) delay would not mislead the public, and (iii) confidentiality can be maintained. If confidentiality is lost, disclosure must be made immediately. The company should accurately record the decision to delay and inform the relevant regulator, as required.

## **MARKET ABUSE AND INSIDER DEALING**

Capital market regulation specifically targets market abuse, such as insider dealing, unlawful disclosure of inside information, and market manipulation. Directors, employees, and professional advisers are all subject to strict criminal, civil, and disciplinary sanctions for breaches.

> **Key Term: market abuse**
> Engaging in practices such as insider dealing or manipulating securities prices that compromise the integrity and fairness of capital markets.
>
> **Key Term: insider dealing**
> The illegal use, or disclosure, of non-public price-sensitive information to trade on securities or to help another party to trade.

Directors have additional responsibilities to put in place policies and training to prevent, detect, and report instances of potential abuse. Company policies must ensure restricted persons do not trade during 'closed periods' (such as before results announcements).

### **Worked Example 1.2**

A director is aware of unpublished quarterly results showing a significant downturn and sells shares prior to the results being released.

**Question:** What are the legal implications?

> **Answer:**
> The director has traded on the basis of inside information. This constitutes insider dealing, which is illegal and subject to criminal prosecution, personal fines, or even imprisonment. The company could also face regulatory sanctions for failing to prevent the breach.

### **Exam Warning**

> Disclosure obligations are strict and apply even if repeated disclosures might be viewed as commercially harmful or inconvenient. Delaying or making incomplete disclosures without legal justification may result in significant financial and reputational penalties.

## **CONSEQUENCES OF NON-COMPLIANCE**

Failure to comply with capital market regulations can lead to:

- Regulatory fines
- Litigation by investors
- Director disqualification or removal
- Reputational harm and loss of shareholder value
- Possible criminal prosecution in severe market abuse cases

Good corporate governance requires establishing effective systems to manage disclosure, maintain accurate records, and provide timely training to relevant staff.

### **Revision Tip**

> Regularly review examples of recent enforcement actions by capital markets regulators to keep your understanding of disclosure failures and their consequences up to date for the exam.

## **Summary**

Companies accessing the capital markets must meet strict admissions and ongoing disclosure requirements and comply with event-driven transaction rules. Failure to do so risks enforcement action, fines, reputational harm, and loss of investor confidence. All financial managers have a duty to ensure their organization’s strategies and communications align with regulatory requirements for transparency and fairness.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The objectives and role of regulation in capital markets
- Key listing requirements for securities on major exchanges
- Ongoing reporting and disclosure rules for listed companies
- The definition and handling of price-sensitive and inside information
- Main regulations affecting capital market transactions (issues, takeovers, delistings)
- The meaning of market abuse and insider dealing, and consequences of breaches
- Practical responsibilities for compliance and governance within the financial management role

## **Key Terms and Concepts**

- capital market regulation
- listing requirements
- price-sensitive information
- inside information
- market abuse
- insider dealing

Regulatory and market environment - Capital market disclosures and transaction regulations