In the wake of the David Jones directorial share trading "incident", ASX has revised its Guidance Note on company trading policies.
The two most important aspects of the new policy are a major emphasis on the reputational risks of director share trading and a more prescriptive set of suggested guidelines.
In 2013, two directors of David Jones traded in the company's shares shortly before the announcement of favourable sales figures.
This gave rise to considerable comment in the media and among the company's shareholders. An investigation by ASIC cleared the two of any wrongdoing.
However, ASIC subsequently convened a roundtable to discuss the issue of company share trading policies. The upshot has been a greatly expanded ASX Guidance Note on trading policies.
The Listing Rules require listed companies to have trading policies, but are not prescriptive as to how and when trading should be restricted. Strictly speaking, the revised guidance note does not change this, and is only intended to "assist" companies in complying with that requirement. However, as with ASX's "if not, why not" corporate governance principles, experience has shown that such guidance quickly becomes a de facto industry standard.
What would the neighbours think?
While the end result that market regulators are aiming to achieve is the protection of the integrity and reputation of the market as a whole, the guidance highlights personal reputational risk (which is more likely to capture the attention of a director or executive) as a means to achieve that end.
As mentioned above, the new guidance note comes out of a roundtable convened by ASIC. Although ASIC has not released the results of those discussions, it did, in the wake of the roundtable, flag the need for companies to adopt what it called "the ‘front page’ test":
"Trading will pass the front page test if the director, their company and the market would be comfortable for news of it to be published on the front page of a major newspaper."
This is also a major new theme of ASX's revised guidance note. Share trading policies may have started life as a means of minimising the risk of insider trading, but reputational risk – and its knock-on effects on a company's share price – is now an equally important consideration:
"If it becomes known that a director or senior executive of an entity has traded in its securities shortly prior to the publication of the release to the market, there is a risk that some will speculate that the trade was motivated by inside knowledge of the impending release. This speculation is likely to increase if the market price of the entity’s securities moves in response to the release in a way that favours the trade. This may attract criticism from market commentators (including investors, investment advisers, proxy advisers, research analysts and the financial press), as well as the scrutiny of market regulators.
Good governance therefore demands that an entity has in place a fit-for-purpose trading policy, tailored to its particular circumstances, that regulates when and how its directors and senior executives may trade in its securities. The purpose of such a policy is not only to minimise the risk of insider trading but also to avoid the appearance of insider trading and the significant reputational damage that may cause."
The nitty gritty
As well as widening the policy focus of share trading policies, the new guidance note is considerably more detailed than its predecessor. All listed companies should review their existing policies in light of these new suggestions:
Who should be covered by the trading policy? The previous guidance note suggested that the policy might extend beyond key management personnel (KMPs). This has been replaced by a suggested list of targets, which includes:
- executive assistants to KMPs;
- finance staff;
- managers immediately below KMP level;
- IT staff (on the basis that they may have access to KMPs' emails and stored documents); and
- all employees of finance industry companies.
Ad hoc closed periods. The concept of predetermined closed periods around the release of financial results is well-established. The former guidance note briefly canvassed the possible need for additional, closed periods when the company is relying on LR 3.1A to obviate the need to make a market announcement.
The new guidance says that ASX "strongly encourages" companies to include the ability to impose such ad hoc closed periods in their trading policies. It then goes on to flag the importance of ensuring that the market doesn't find out that a company has imposed an ad hoc closed period (which could tip off the market that a major announcement was on the cards). It suggests two possible ways of achieving this:
- a blanket ban on all share trading by KMPs and relevant employees, subject to the granting of individual permissions (thus ensuring that the company doesn't have to communicate the imposition of an ad hoc ban); and
- ensuring that the imposition of a closed period is communicated only to those affected by it, and in strict confidence.
Which activities are affected? Previously, ASX's guidance merely stated that companies could choose to extend their trading policy to cover financial products other than just its securities.
The revised guidance ramps up that statement: it now strongly recommends that the trading policy cover derivatives, and that companies should also "consider carefully" whether to rope in short-term trading in and out of the company's securities, short-selling and margin lending.
Clearance procedures. This is one of the areas in which the new guidance is considerably more prescriptive than its predecessor. Among other things, it suggests that:
- because of the heightened importance of reputational risk, there should be no clearances if the company is likely to be about to release a financial surprise or make a continuous disclosure announcement;
- although the general recommendation is still that a clearance should run for no more than a week, the revised guidance indicates that this period could vary depending upon the liquidity of trading in the company's securities (ie. longer for small companies and shorter for large); and
- if its trading policy extends to employees other than KMPs, the company secretary or compliance head could be delegated to handle clearance applications by those employees.
Compliance. There are detailed suggested checklists for ensuring that KMPs understand the trading policy and that the company can effectively monitor their compliance with it. Significantly, these include requiring KMPs:
- to notify the company of all their trades in the company's securities, and ensuring that this information is forwarded to the board;
- to disclose their HINs or SRNs, so that the company can arrange with its share registry to be notified of any changes in the KMP's holdings; and
- to keep their own register of trading in the company's securities, to which the company would have open access.