Directors' trading during a blackout period

By Mark Paganin and Matthew Johnson.

Key Points:
There are a number of things that companies can do to limit the potential fallout from trading policy breaches.

The release of ASX's latest figures on directors' trades during a blackout period is a good opportunity for companies and directors to do some housekeeping.

The blackout period is typically between the end of the financial year or half-year and the publication of the company's annual or half-yearly results. Some companies also have self-imposed additional blackout periods. There is no law against directors' trading during that time, but it causes serious problems for both the company and the involved director.

Directors' trading policies

ASX's corporate governance rules effectively require companies to publish a directors' trading policy. Typical policies will either prohibit trading during the blackout period or allow trading in limited circumstances with the written approval of the chairman or the Board.

The purpose and benefit of the trading policy is twofold:

• it helps to prevent insider trading by directors; and
• it therefore assures investors and potential investors that the company takes the threat of insider trading and market integrity seriously.

But trading during blackouts isn't illegal, is it?

Some companies and directors may take comfort in the fact that trading during blackouts doesn't necessarily mean that there has been insider trading.

When directors trade during a blackout period, the reputational benefit of the company's trading policy, and the integrity of the market, are put at risk. It's not the kind of risk that a rational person would want to take. It is also for this reason that ASX requests (though it is not mandatory) that blackout trading should be disclosed to the market and only be permitted in exceptional circumstances.

ASX has an ongoing program of reviewing share trades by directors during blackout periods. It publishes statistics about what it finds. ASX recently noted that one third of directors' sharemarket trades occur during blackout periods. In the first three months of 2009, it found 35 potential contraventions of trading policies. That was a very small percentage of all director trades, but the percentage is irrelevant: each of the companies involved received a detailed "please explain" letter from ASX. As well as being plain embarrassing, dealing with the ASX query chews up valuable management time and resources, and affects the credibility of the company among the market and shareholders.

Where it obtains evidence that insider trading has occurred, ASX passes it on to ASIC. This escalates the problems for both the director and the company (possible insider trading contraventions are not a good look).

Possible future changes to disclosure

ASX has called for compulsory disclosure of share trades by directors during blackout periods in order to prevent insider trading. In many cases where directors have obtained permission from the chairman or the Board to trade during the blackout period, that approval or its reasoning is not disclosed to the market.

The Corporations and Markets Advisory Committee has also recommended that the period for disclosing trades generally be reduced to two business days. Currently, the legislation and rules stipulate differing deadlines, from five business days to 14 calendar days.

What can be done?

There are a number of things that companies can do to limit the potential fallout from trading policy breaches. Many companies and directors last looked at their trading policy a few years ago, when ASX required them to publish them on their websites.

• Review the existing policy to determine if it is effective enough. For example, if trading during blackout periods is allowed, are there effective controls on it? Under what circumstances would trading be permitted? If the chairman's or the Board's approval is needed, is there an alternative procedure to cover the chairman's absence, or situation where a Board meeting cannot be convened within an appropriate timeframe? Are there policies to ensure transparency in the chairman's or Board's decision, internal transparency, and as and where appropriate, disclosure of the reasoning to allow trading during a blackout period?
• Ensure that directors know and understand the policy. Signing off or agreeing to follow the policy doesn't necessarily mean that it is understood.
• Don't "set & forget". Actively monitor compliance with the policy. ASX discovered eight trades that were contraventions of company trading policies. However, those trades only involved six directors - which means that at least one director breached the policy more than once.

More information

Clayton Utz advises listed companies on both trading policies and insider trading. We can help with drawing up new policies, reviewing existing policies and assisting with the handling of ASX queries.

For further information, please contact Mark Paganin and Matthew Johnson.