In brief

  • A revised Guidance Note 27 has been released to assist listed entities comply with their obligations under the ASX Listing Rules in relation to trading policies.
  • The Note makes it clear that listed entities, through their trading policies, should not only minimise the risk of insider trading, 'but also avoid the appearance of insider trading'.
  • Guidance has been introduced about the implementation of an appropriate compliance framework to ensure that key management personnel (KMP) are aware of, and understand, their obligations under the trading policy and for listed entities to monitor and appropriately enforce compliance with the policy.
  • Enforcement action taken by the Financial Conduct Authority against listed entities in the United Kingdom provides practical lessons on implementing trading policy compliance frameworks. In particular, these cases highlight that listed entities should:
  • ensure that informal practices inconsistent with the trading policy do not develop, even if such practices are well intentioned or ‘in the spirit’ of compliance,
  • in considering what compliance measures are appropriate, avoid being overly reliant on KMP’s knowledge and experience to ensure adherence with the Listing Rules,
  • consider conducting periodic ‘health checks’ to get comfort that the systems and processes designed to support the trading policy remain appropriate, are properly implemented and have been embedded in business practice,
  • take a proactive approach to compliance - this can shield a listed entity from criticism by regulators or market commentators in the event things do go wrong, and
  • document the compliance framework to assist in demonstrating its efficacy should that ever be required.
  • Devoting a small amount of extra resource now to ensuring a robust compliance framework can mitigate or eliminate potential issues in the future.

Summary of key changes

The revised version of Guidance Note 27 has been released to assist listed entities comply with their obligations under the ASX Listing Rules in relation to trading policies. The revised Guidance Note outlines the suggested content, and the underlying legal, reputational and policy drivers, for a trading policy.

The focus of the revised Guidance Note is on a trading policy being 'fit for purpose' for the entity. It includes more detailed guidance on the matters that a listed entity may consider covering in its trading policy but also highlights the policy objective of Listing Rules 12.9 – 12.12. A firm’s trading policy should not only minimise the risk of KMP engaging in insider trading but is also critical in managing market perception and reputational risk relating to lawful trading by KMP. The ASX urges companies to consider the perception of KMP trading and the risk of criticism from market commentators and of scrutiny from regulators when framing their policies, so as to guard against reputational damage that may be caused to the individual and the entity.

The Guidance Note provides expanded guidance on a number of matters including the types of trading that could be prohibited (such as hedging and margin lending), the timing and duration of closed periods, imposing ad hoc restrictions on KMP trading, and procedures for approving clearances to trade. The update represents a very substantial revision, having increased the size of the Note from 7 to 23 pages.

New compliance requirements

Importantly, the Guidance Note outlines ASX’s expectations on listed companies for the compliance frameworks supporting their trading policies. It is not sufficient for companies to rely on the existence of a trading policy that meets the requirements of the Listing Rules unless companies also actively monitor and enforce compliance with that policy. A failure to implement appropriate measures is expressed to be a failure to comply with Listing Rule 19.2, which requires companies to honour the spirit, intention and purpose of the Listing Rules.

At a minimum, an entity’s compliance measures should include appropriate record keeping procedures to capture details of all applications by KMP for clearance to trade and its decisions on such application. Additional measures which may be appropriate depending on an entity’s circumstances include:

  • Awareness and understanding: incorporating a requirement in employment contracts with KMP that they must comply with the trading policy, conducting training programs for KMP, circulating regular email reminders to KMP and requiring periodic sign-offs by KMP that they understand the trading policy and are in compliance with it.
  • Monitoring compliance: requiring KMP to notify the entity of any acquisition or disposal of the entity’s securities within a nominated time period, putting in place an alert service with the entity’s share registry for it to be notified of any changes in KMP holdings, ensuring the board is notified of any trading by a KMP so that it is not caught unawares if the trading attracts criticism and requiring KMP to maintain a register of their trading.
  • Enforcing compliance: ensuring that breach of its trading policy by a KMP is treated as a serious matter that warrants an investigation as to the circumstances of the breach and, depending on the circumstances, appropriate disciplinary or remedial action.

The new requirement for an appropriate compliance framework goes hand-in-hand with the focus on managing market perception rather than just the risk of actual misconduct.

An international comparison

This emphasis in the revised Guidance Note on compliance suggests that the ASX will be concerned with steps listed companies have taken to ensure adherence to their trading policies, and not just whether there is evidence to suggest that KMP have actually engaged in insider trading.

Such a focus would be consistent with the approach in the United Kingdom in relation to listed companies’ obligations under UK Listing Rule 9.2.8R and the Model Code. Listing Rule 9.2.8R provides that listed companies must require every person discharging managerial responsibilities (or PDMRs) to comply with the Model Code and to take 'all proper and reasonable steps to secure their compliance'. Similar to the policy objectives outlined in the revised Guidance Note, the introduction to the Model Code states that the code’s purpose is 'to ensure that persons discharging managerial responsibility do not abuse and do not place themselves under suspicion of abusing, inside information'. The Model Code itself sets out in detail the manner in which PDMRs must seek clearance to deal in securities of the company, including, for example, a requirement that the company must keep records of dealing requests and the response given.

Nestor Final Notice

In a 2013 final notice concerning Nestor Healthcare Group Limited (Nestor), the Financial Services Authority (FSA) imposed a £175,000 fine on Nestor on the basis that it had failed to take all proper and reasonable steps to secure the compliance of its PDMRs with its trading policy.

Although Nestor had a trading policy in place that complied with the relevant provisions of the Model Code, Nestor was found to have utilised an informal and ad hoc practice in lieu of the procedures specified in its trading policies. This informal practice became entrenched over several years and resulted in:

  • PDMRs not fully understanding their responsibilities under the Model Code,
  • three share purchases being undertaken by PDMRs in contravention of the Model Code,
  • a failure to maintain a record of responses to clearance to deal requests and to provide a copy of the clearance to the restricted person concerned, as required by the Model Code.

Critically, the FSA did not allege that any dealings were based on inside information, or contend that any of the breaches were deliberate or reckless. Further, it noted that Nestor had taken steps to comply with its obligations under the Model Code by issuing six-monthly notifications to directors, PDMRs and employee insiders reminding them that they could not trade during specific periods. However, the FSA criticised Nestor for failing to issue reminders or training about the content of the formal trading policy, or otherwise seeking to reinforce awareness of the formal trading policy. The FSA determined that this led to Nestor’s PDMRs ‘forgetting that the [policy] existed and that they were required to comply with it’.

Reckitt Benckiser Group Final Notice

In a January 2015 decision in relation to Reckitt Benckiser Group Plc (Reckitt), the Financial Conduct Authority (FCA) imposed a £539,800 fine on the basis that Reckitt had:

  • used an informal policy for clearance to deal requests, and had breached the Model Code by failing to keep adequate records of the granting of such clearance requests,
  • been overly reliant on its PDMRs’ knowledge and experience to ensure compliance with the Model Code, Listing Rules and Listing Principles, as a result of Reckitt’s assumption that its PDMRs were already aware of the requirements of the Model Code,
  • failed to review its share dealing policy to identify or mitigate risks,
  • failed to provide its PDMRs with regular or structured training or reminders on the Model Code, other than reminders provided in advance of trading blackout periods when it reminded PDMRs of the prohibition on trading in such periods, and as part of Reckitt’s annual certification process, and
  • failed to notify the market of share dealings by two PDMRs in the required timeframe, and when notice was given to the market, failed to include all the relevant information.

The FCA again stressed that there was no allegation that the PDMRs had traded on inside information. However, the FCA also stated that it was reasonable to expect a listed company to 'take proactive steps' to comply with the relevant Listing Rules and to have in place procedures and policies that facilitated and encouraged compliance with the Model Code. Although Reckitt’s dealing policy complied with the Model Code and required, for example, that PDMRs complete ‘Intention to Deal’ forms when seeking clearance forms to deal, in practice such forms were not always completed, and PDMRs sought informal oral clearance instead.

Lessons learned

In light of the new Guidance Note, the key practical lessons applicable to ASX listed entities that can be drawn from these case studies are as follows.

  • Avoid informal practices developing: Entities should take steps to ensure that informal practices inconsistent with the trading policy do not develop, even if such practices are well intentioned or ‘in the spirit’ of compliance. Listed entities should consider training for all KMP as well as regular email reminders about KMP’s obligations generally, as well as in relation to the start and finish dates for a trading window or black-out period as they are about to occur.
  • Experienced KMP is no substitute for a compliance framework: In considering what compliance measures are appropriate, listed entities should avoid being overly reliant on KMP’s knowledge and experience.  Although Guidance Note 27 leaves significant discretion to listed entities in deciding upon what compliance measures are appropriate, we are of the view that having experienced KMP is not a sound reason for adopting a lighter touch framework than would otherwise be thought necessary given the size and nature of the organization.
  • Re-assess and verify: Listed entities should consider conducting periodic 'health checks' targeted at assessing whether systems and processes designed to support the trading policy remain appropriate, are properly implemented and have been embedded in business practice. Personnel can move on, procedures can fall out of practice and business context can change, all of which can create risk of failure in compliance systems.
  • Be proactive: No compliance framework will have a zero failure rate. However, being proactive will not only minimise conduct risk incidents but can act to shield a listed entity from criticism by regulators or market commentators to an extent in the event things do go wrong. Listed entities should keep this in mind when developing the compliance aspects of their trading policy.
  • Document the compliance framework and its operation: To facilitate any later reliance on the efficacy of a compliance framework, where systems or procedures are implemented to support the policy, these too should be documented. This includes, for instance, maintaining a training log, keeping a record of reminder emails sent and documenting any breach of the policy, the subsequent investigation and any remedial action taken.

The emphasis on compliance systems in the revised Guidance Note means listed entities should take measures to ensure that their share dealing policies not only meet the requirements of Listing Rule 12.12, but are being complied with in practice. Devoting a small amount of extra resource now to making sure the compliance framework is solid can mitigate or eliminate potential issues in the future.

This article was written by Jeremy Birch, Senior Associate, and Emily Rumble, Solicitor, Sydney.