Leaking confidential, market sensitive information about a proposed corporate transaction ahead of a market announcement threatens market integrity because it impairs the flow of market sensitive information to the market in an equitable manner. The current Financial System Inquiry should see this as part of its mandate and foster a corporate, professional and regulatory framework that is capable of providing reasons for behaving in an ethically responsible manner when handling price sensitive information.
ASIC’s report on confidential information contains little that is surprising. It confirms that while selective disclosure of confidential information, particularly through analyst and investor briefings, remains a significant area of risk there was no evidence of systemic failure through selective disclosure.
What it did find was that the number of leaks reported in the media remains significant. This is rightly recognised as a threat to Australia’s financial system. The general perception remains that “Australia by far is the leakiest market” of the major exchanges. As one report had it, “there is a culture of some people getting information out to the press.”
In contrast ASIC found that overall, Australia compared favourably to Hong Kong in relation to leakage of confidential, market sensitive information and “the Asia-Pacific region as a whole compared favourably to Europe, the Middle East and Asia, but did not perform as well as North America.” Let’s call that a B-, or “could do better.”
In its report, ASIC provides recommendations to help prevent future leaks. Given they largely accord with existing best practice guidance, we doubt the advice will rise above what might be described by some as “a penetrating glimpse of the obvious”.
For most companies the various suggestions boil down to:
- Having systems in place to protect confidential, market sensitive information.
- Keeping an insider list when conducting a confidential, market sensitive transaction.
- Making sure all key personnel are aware of their confidentiality obligations.
- Knowing who, how and when people are being sounded on their behalf in relation to a transaction.
ASIC also endorses the industry standards on the management of confidential information, for example: Handling confidential, market-sensitive information: Principles of good practice issued by AIRA and the Governance Institute of Australia.
Already there have been some calls for increased regulation and heightened disclosure requirements in response to ASIC’s findings. But this begs the broader question of why does market sensitive information continue to leak? Is the Australian market different from other markets? And is increased regulation, larger penalties or a bigger regulatory budget for enforcement the best path forward?
Australia is not alone in being concerned about this issue: in 2013 a study titled M&A Confidential: What happens when deals leak studied over 4,000 global M&A transactions and found plenty of evidence of leaking. Indeed a recent study by Informed Options Trading Prior to M&A Announcements: Insider Trading? found in that in the run-up to an announcement of a merger, there is increased abnormal trading volume in equity options of the target.
RECALIBRATING THE SYSTEM - MURRAY?
ASIC’s solution is in fact a renewed focus on enforcement efforts and to continue urging entities, their advisers, and analysts to comply with their obligations – a call on everyone to ‘please, be more vigilant’.
But, there is room for the current Financial System Inquiry to consider recommendations beyond simply being more vigilant in maintaining the status quo. Perhaps, to fulfil its mandate and properly position Australia’s financial system for the future, the FSI should consider including in its recommendations a shift from the present system to one with an embedded ethical restraint on misbehaviour.
Could the FSI introduce a new philosophical underpinning for our financial system that moves away from the basis discussed by Hanrahan of an efficient allocation of resources through a process of price discovery to one that is more overtly focused on an explicit fairness standard?
Such a concept is not new; fairness underpins our insider trading and continuous disclosure rules. Without them, potential investors might consider that the markets operate on the strength of "insider" information. The fairness principle says that for a market to operate efficiently, its participants and potential participants must have trust in its ability to function equitably.
By all means, persist with the present approach, which will predictably involve strengthened regulations, enhanced disclosure requirements and more reports, but that does not seem to be getting us where we need to be, it is not restoring trust. Instead, we need a stronger philosophy that underpins a narrative about the duties, responsibilities, and rights of individuals and institutions when it comes to handling sensitive information.
This article originally appeared online at the University of New South Wales’ Centre for Law, Markets and Regulation.