29 May 2014

Where's that leak coming from?

by Geoff Hoffman, Karen Evans-Cullen

Pre-announcement soundings about capital raisings are an area of concern for ASIC.

ASIC has just published the results of last year's investigation of listed company briefings of analysts and pre-announcement handling of confidential deal information.

Since its methodology was to sit in on briefings, it is perhaps unsurprising that it found no evidence of selective disclosure at those briefings.

Nevertheless, a parallel study of the financial press found that leakage of confidential information is "significant".

Issues of concern

Despite the absence of a smoking gun, ASIC's report does identify a number of issues in present practices:

  • staff below board and officer level who have discussions with analysts (eg. during site visits to mines) may disclose confidential information because they are not "adequately aware of the obligations surrounding confidential, market sensitive information";
  • miners and explorers may feel obliged to keep analysts on side by giving them information that doesn't comply with JORC or listing rule requirements for reporting exploration results, mineral resources and ore reserves;
  • small- to mid-caps did not have policies and procedures for handling confidential information in relation to material transactions, making them reliant on the advice of their advisers;
  • no companies or advisers had a documented leak investigation policy;
  • few companies pre-prepare a draft ASX announcement to be used in the event of a leak (a situation that ASIC describes as concerning, given the listing rule requirement to disclose information immediately once the confidentiality carve-out falls away);
  • market soundings before a capital raising are a particular area of concern (see below).

Market soundings

The ASIC report raises a number of concerns about market soundings in advance of a capital raisings.

These seem to stem from ASIC's observation that there was a correlation between soundings and a fall in the company’s share price immediately before the raising was announced. Although it was at pains to emphasise that this did not necessarily imply a causal connection, the report lists a number of "concerning" practices:

  • soundings' taking place while the company's shares are still being traded;
  • relatively large numbers of investors being sounded out (in one instance, more than 50);
  • reports that, although they may give their consent to soundings, small- to mid-caps do not feel in a position to control the number and manner of the soundings;
  • companies' being reluctant to request trading halts because they fear the consequences of a failed capital raising.


The report concludes with a number of recommendations for companies, analysts and advisers.

For companies, ASIC repeats its long-held belief that information disclosed at briefings should be disseminated as widely as possible and as quickly as possible. It also recommends that they:

  • get assurances from third parties (eg. advisers) that market-sensitive information will be kept confidential;
  • record the names of advisers and investors who have been approached in relation to a transaction;
  • use a script about confidentiality at the start of initial discussions;
  • have "frank discussions" with advisors about how many investors will be sounded out (and when).

For their part, analysts should not attempt to elicit information that doesn't comply with industry codes.

Finally, advisers should establish and maintain effective Chinese Wall procedures, and have leak investigation policies.

ASIC will now conduct a targeted review of analysts' reports. That will attempt to identify instances where a changed recommendation is not attributable to publicly-available information.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.