On 30 January 2015, ASX released its revised Listing Rules Guidance Note 27 Trading Policies (Guidance Note) to assist listed entities to comply with their obligations under the Listing Rules in relation to trading policies.
While no change has been made to the requirements in the Listing Rules relating to trading policies (Listing Rules 12.9 -12.12), the Guidance Note has been updated to incorporate learnings from market developments (since it was last updated in January 2012). It significantly expands upon the earlier guidance with a particular focus on the importance of listed entities having a ‘fit for purpose’ trading policy.
The Guidance Note makes clear that the purpose of the trading policy is to not only minimise the risk of insider trading, but also to avoid the appearance of insider trading and the significant reputational damage that may follow.
What should be done now
ASX is encouraging all listed entities to review their trading policies in light of the revised Guidance Note.
Key issues to consider include:
- whether the approval processes prescribed in the policy are sufficient to avoid not only the actuality but also the potential perception of insider trading;
- whether the entity’s ‘closed periods’ or trading windows are appropriately tailored to the entity’s circumstances;
- whether the policy should extend beyond the Key Management Personnel (KMP);
- the circumstances and manner in which ad hoc restrictions on trading may be imposed;
- the types of trading that should be restricted or prohibited (in addition to straight buying and selling); and
- the measures for monitoring and enforcing compliance with the trading policy.
The new Guidance Note appears to have been prompted at least in part by the controversy last year concerning David Jones (DJs) and share purchases by two directors which were announced just prior to the release of quarterly sales figures by DJs.
DJs had announced the resignation of its CEO Paul Zahra, and two directors who were relatively new to the board and had no shares raised the desirability of purchasing some shares to show their confidence in the company.
The directors each purchased some shares about a week later. The day after their purchases were disclosed to the ASX, DJs’ quarterly sales figures were announced. The figures were essentially flat, but the DJs share price rose. In the absence of any other explanation, the general assumption was that it must have been good news that the sales figures had not gone backwards, and there was a suggestion by some media commentators that the directors may have insider traded. The DJs' Chairman immediately approached ASIC to ask it to look into the situation to satisfy itself that there was nothing untoward.
It appears DJs also informed ASIC that, also just before the date of the directors’ purchases, Myer had approached DJs to discuss the potential of a nil premium “merger of equals”. The DJs board had considered such a proposal previously and determined immediately on receipt of the Myer approach that it was not worth pursuing. The directors purchased their shares before the board’s view was communicated back to Myer.
Myer’s approach did not become public until it was leaked some months later, on the day that ASIC made known that it would be taking no action. Both DJs and ASIC to some extent were criticised - DJs for alleged inadequate corporate governance and ASIC for taking no action.
There was more to the DJs story - principally a reported clash between the board and management with the market and the media taking sides, but the end result was that the two directors and the Chairman resigned.
ASIC subsequently made clear in a Senate Inquiry (which was looking generally into the performance of ASIC) that it was essentially satisfied that neither DJs’ flat quarterly sales results, nor the preliminary Myer approach which DJs had determined immediately to reject, constituted information which the directors should have known was price sensitive. However ASIC made the comment that directors, like anyone in public life, should appreciate that perception is sometimes reality, notwithstanding that there may be no breach of a legal obligation (in this case, the insider trading prohibition).
The need to address the risk of a perception of insider trading in formulating share trading policies is highlighted in the revised Guidance Note.
The objectives of the trading policy
The new Guidance Note emphasises that the purpose of a share trading policy should not be limited to legal compliance, it should also serve the purpose of assisting the entity to avoid the appearance of insider trading and managing the entity’s consequent reputational risk.
The Guidance Note recommends that an entity should have a ‘fit for purpose’ trading policy that is tailored to its specific circumstances. This includes whether the ‘closed periods’ or trading windows are appropriately set - for example a smaller entity with a stable business and illiquid securities may have a longer trading window as compared to a larger entity with highly liquid securities and a dynamic business.
Persons that should be covered by the trading policy
The Listing Rules only require a listed entity’s trading policy to cover trading in its securities by KMP. The Guidance Note provides more detailed guidance regarding to whom, in addition to KMP, listed entities should also consider extending the trading policy.
Specifically, the Guidance Note suggests that it may be appropriate for the trading policy to also cover the family members and closely connected entities of KMP, and other employees who may come into possession of confidential market sensitive information - such as the next layer of management, employees who work closely with or in proximity with KMP or staff who work in IT, finance or the strategic planning group or on ad hoc market sensitive matters.
The Guidance Note recommends that it is good practice for entities to include a requirement in their contractual arrangements with KMP (and similarly, in the employment contracts of any other employees who are covered by the trading policy) that they must comply with the policy. If the family and closely connected entities of the KMP are also covered by the policy, the KMP should also be made subject to a contractual requirement to ensure that such closely connected persons are aware of the trading policy and comply with it.
Ad hoc restrictions on trading
The Guidance Note highlights the importance of listed entities having a discretion to impose ad hoc restrictions on trading, but noting that the entity must be careful in how it handles this process to preserve the confidentiality of any ad hoc restrictions imposed to avoid potential news leaks.
In practice, listed entities may manage this risk by requiring clearance for any trading in the entity’s securities, or otherwise by limiting the communication of an ad hoc restriction only to those people who are directly involved in, or who have knowledge of, the relevant matter.
Restrictions on certain types of trading
The Guidance Note sets out detailed guidance in relation to the types of trading that entities may consider restricting or prohibiting (in addition to straight buying and selling). It recommends that entities should carefully consider whether to restrict or prohibit trading in derivatives over or in respect of the entity’s securities, short–term trading, short selling, hedging transactions, trading in the securities of other listed entities, margin lending and other secured financing arrangements.
In relation to margin lending and other secured financing arrangements, the Guidance Note recommends that entities should, at the very least, carefully consider requiring disclosure of such arrangements so that the board and senior management are not caught unawares if there is a default.
Procedures for clearing trades
The Guidance Note has expanded the guidance on matters that entities should consider when determining the procedures that should be followed for granting a clearance to trade.
- who should be designated to grant a clearance - that is, it should be someone in a position to know if the entity is about to make an announcement of market sensitive information, or release a financial report or data that might come as a surprise to the market;
- the factors which should be considered when granting clearance; and
- the period for which any clearance is valid.
The Guidance Note also observes that it would be prudent to state in the trading policy that:
- any clearance may be given or refused by the entity in its discretion and without reason;
- a clearance can be withdrawn if new information comes to light, or there is a change in circumstances;
- the entity’s decision is final and binding on the person seeking the clearance; and
- if clearance to trade is refused, the person seeking clearance must keep that information confidential.
Monitoring and enforcing compliance with the trading policy
The Guidance Note provides broader guidance regarding the measures that entities may take:
- to ensure that its KMP (and others covered by the policy) are aware of and understand their obligations under the trading policy; and
- to monitor and enforce compliance with the policy.
As noted above, such measures may include making KMP and other employees covered by the trading policy subject to a contractual requirement to comply with the policy.
While it is a matter for each listed entity to determine its own measures, the Guidance Note does recommend that an entity’s compliance measures should, at a minimum, include appropriate record keeping to capture all applications for clearances to trade, and decisions on such applications.
Other matters that could be addressed in the trading policy
The revised Guidance Note suggests other matters that listed entities may consider helpful and prudent to address in their trading policy, including providing context around the reason for having a trading policy, and the primacy of insider trading laws.
The DJs saga, ASIC’s observations at the Senate Inquiry and now the ASX’s revised Guidance Note on share trading policies each serve to remind directors and their advisers that the corporate governance compliance bar for directors and officers is a high one. It may not be enough just to observe legal prohibitions; they should go further, to avoid the potential for a public perception of breach (even if incorrect) and the consequent impact on market confidence in their governance practices.
Listed entities should now review their share trading policies and approval processes, and make individual approval decisions, with this consideration in mind.