On 7 July 2013, the Australian Securities & Investments Commission (ASIC) announced that this reporting season it will be focusing on communications between companies and investment analysts.
ASIC to raise awareness of selective disclosure
ASIC has indicated that its priority is to ensure that both large and small investors have equal access to market sensitive information when making an investment decision. In light of this, ASIC intends to raise awareness among listed entities of the risks of selective disclosure when briefing analysts and remind company officers of their continuous disclosure obligations.
This is the first reporting season since ASX issued its revised Guidance Note 8 (GN 8) on the continuous disclosure obligations of a listed entity. ASIC has indicated that if it determines that internal company policies regarding disclosure to industry analysts require improvement, it will consider providing additional guidance on the issue and contemplate whether tougher penalties are required.
The ASIC announcement came exactly one month after the controversy surrounding Newcrest Mining Limited (Newcrest), which involved the announcement of asset write downs, a production downgrade and company restructure only days after several equity research analysts had downgraded their ratings of Newcrest’s securities.
On 7 June 2013, Newcrest announced to ASX that it had completed a review of its business plan and 2014 budget and confirmed that $5 to $6 billion in asset write downs was likely, a gold production downgrade, the closure of its Brisbane office, job losses and the cancellation of its final dividend (7 June Announcement). Following the release of the 7 June Announcement to the market, Newcrest’s share price dropped 14%.
However, in the two trading days prior to the 7 June Announcement, several equity research analysts downgraded their earnings forecasts and profit guidance for Newcrest. As a result, Newcrest’s share price dropped from a closing price of $15.15 on 4 June 2013 to a closing price of $13.36 on 6 June 2013.
Immediately following the 7 June Announcement, ASX issued an “aware query” in respect of the decrease in Newcrest’s share price over the previous two trading days. ASX noted that three analysts had downgraded Newcrest’s shares on 4 and 5 June 2013. In response to the ASX aware query, Newcrest stated that the decisions of the board in relation to the 2014 budget and business plans were reached on 7 June 2013 and the 7 June Announcement was released prior to the market opening that day. Newcrest also confirmed that it was in compliance with its continuous disclosure obligations.
ASIC is currently investigating the circumstances surrounding the 7 June Announcement.
Lessons learned and practical tips
While ASIC is yet to completely confirm the results of its investigation, the Newcrest situation is a timely reminder of the potential adverse effects of a market perception that a listed entity has selectively disclosed information. Given that selective disclosure is under close scrutiny this reporting season, it would be remiss of a listed company not to review its continuous disclosure policies and ensure that they are consistently being followed.
Here are some practical tips to assist in avoiding the risks of selective disclosure:
- Review your company’s continuous disclosure policies
Companies should review their continuous disclosure policies and procedures to ensure they are adequate and up-to-date, particularly with regard to GN 8. They should also consider whether their officers and employees are actively complying with these policies. For a continuous disclosure policy to be effective, it must be actively implemented, communicated to all affected staff, properly supervised and monitored for effectiveness.1
- Oversee, coordinate and monitor disclosures to analysts
It is important to nominate a senior officer who will have responsibility for overseeing and coordinating disclosure of information to analysts. Prior to briefing analysts, the officer should be aware of all information disclosures, including information to be presented at private briefings.
To enhance transparency, the market should be advised prior to any briefing taking place. Group briefings are preferable as they help to ensure that all analysts are provided with the same information. If a private briefing is given to analysts, companies must be careful not to inadvertently disclose price sensitive information. Even drawing an analyst’s attention to particular information already in the public domain has the potential to lead to an analyst inferring information that is not available to the wider market.
Companies should also implement procedures for reviewing briefings and discussions with analysts after they have been held, so that any confidential price sensitive information that is accidentally disclosed can be immediately released to the market. All presentations and speeches given at briefings should be given to ASX and posted on the company’s website.
- Ensure your investor relations team is conscious of your company’s continuous disclosure obligations when briefing analysts
Investor relations programs are fraught with risk. While the purpose of such programs might be to ensure that analysts better understand the company and its operations, investor relations staff need to be acutely aware of the company’s continuous disclosure obligations and must appreciate that analysts cannot be given confidential price sensitive information not already in the market. Companies need to have procedures in place (and verify that those procedures are being followed) to ensure that investor relations staff do not unintentionally disclose such information to analysts.
Investor relations staff should be particularly careful when responding to analysts’ financial projections and reports and should avoid any suggestion that their own current projections or the market’s current projections are incorrect. GN 8 provides useful guidance on when it is appropriate for a listed entity to update earnings guidance and exploration and production targets.
Company staff should also be cautious when dealing with questions from analysts that raise issues outside the proposed scope of the briefing. If a question is asked during a briefing that cannot be answered without disclosing confidential price sensitive information, they should decline to answer or take it on notice. A response should not be provided until the relevant information has been released to ASX.
- Avoid the perception that there is unequal access to information among investors
Companies should avoid creating the perception that it selectively releases information to larger investors such as industry analysts. It can be highly detrimental to a company’s reputation if investors perceive that there is an unfair difference in access to material price sensitive information relating to the company, even if this is not the reality.
ASX has highlighted the importance of its market being perceived as giving all participants fair and equal access to information and ASX will query situations where this does not appear to be the case. If a matter is referred to ASIC, an investigation can be long and time consuming and do considerable reputational harm.
- Protect your confidential information
In specific circumstances, material information does not need to be disclosed to the market, provided that the information remains confidential. However, the loss of confidentiality will have major ramifications for a company’s disclosure obligations. For this reason, when disclosing confidential information to external parties, companies need to ensure that there are systems and policies in place to adequately protect the confidentiality of that information. It is essential that third parties in possession of such information are made aware of their obligation to maintain confidentiality, but also that the abuse of confidential information amounts to market misconduct and could result in that party breaching insider trading laws.
- Don’t let the temptation to selectively disclose negative information overshadow the importance of complying with your continuous disclosure obligations
It is important that companies resist the temptation to “soften the market” by selectively releasing negative information or forecasts to third parties prior to disclosing such information to ASX, or giving the impression that impending bad news is imminent. Subject to specific circumstances, when a listed entity becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of its securities, it is required to immediately tell ASX that information.
- Don’t hold briefings during pre-results period
Listed entities should consider whether it is appropriate to adopt a policy of not holding analyst briefings or otherwise discussing financial performance or earnings estimates (except to the extent that information has already been released to the market) in the period before the release of its results, i.e. from 1 June in the case of the full year’s results and from 1 December in the case of half yearly results, until release.