Australian Securities and Investment Commission (ASIC) Commissioner John Price has warned that ASIC will pursue enforcement action against companies who do not comply with their continuous disclosure obligations, in particular where they disclose price sensitive information to analysts before disclosing information to the ASX.
ASIC’s crackdown on how companies deal with analysts at investment banks and broking houses comes on the back of the ‘Newcrest saga’. Newcrest Mining Limited’s shares drop by almost 12 percent when a series of analysts downgraded their estimates of gold production just days before Newcrest confirmed, on 7 June, a production downgrade, $6 billion in asset write downs, job losses, and cancellation of its final dividend.
As a result, Newcrest’s continuous disclosure practices came under close scrutiny which prompted ASIC to announce a plan to monitor both the one-on-one discussions between company management and analysts as well as the group briefings of analysts of a sample of listed companies during this reporting season.
ASIC’s plan has been criticised for being impractical given that a company may engage in numerous informal or unscheduled telephone discussions with various analysts and that ASIC’s presence may stifle conversation in the informal analyst briefings. Whether or not the plan is effective, ASIC’s vigilance is a strong warning to listed companies, heading into the reporting season, that it is serious about monitoring compliance with the continuous disclosure regime following the new and revised rules and guidance which took effect on 1 May.
A recent article on this topic can be found via the following link.
Partner Michael Hansel and Associate Katherine Hammond outline five tips for listed companies and directors to avoid breaching the continuous disclosure rules, in light of the areas of regime which have attracted recent attention.
- Be careful what you tell analysts
Companies, fund managers and analysts need to remember and be careful to keep the conversation to information that is already publicly available.
Companies must disclose any price sensitive information to the ASX first. In particular, companies must not ‘soften the market’ by providing any potentially price sensitive information or suggestion of impending ‘bad news’ to analysts before disclosing to the ASX.
ASIC Commissioner, Cathie Armour, in charge of market integrity, has noted that ‘analysts who obtain price-sensitive, non public information from a company, then share it with fund managers, could be guilty of so-called “tipping” offences punishable by up to 10 years jail’.
Companies should also make sure all analysts are provided with the same information. Group briefings are preferable because information is more likely to leak in casual meetings with only a few people.
- Monitor, but don’t disclose anything on, social media
In Australia, disclosure of price sensitive information must first be made on the ASX’s Market Announcement Platform, and not through any other platform such as Facebook or Twitter.
This is in stark contrast to the approach in the United States. The US Securities and Exchange Commission (SEC) has recently issued a report saying companies can use social media platforms for regulated disclosures, including financial updates and announcements of material transaction, as long as investors had previously been told where to look for disclosure.
The ASX has recognised the reality of social media and advises companies negotiating confidential market sensitive transactions to monitor any third-party investor blogs, chat-sites or other social media for leaks, as a matter of course. However, companies do not need to undertake the impossible task of monitoring all social media, but rather just the forums that the company is aware of that regularly include postings about the company.
As well as ensuring that there has been no leak of price sensitive information, monitoring social media is a prudent practice for a Company as it may mitigate the potential damage of a hoax announcement.
- Disclose material terms of services contracts with directors
Many directors and members of management are not aware of the significant new ASX Listing Rule 3.16.4 which requires a company to immediately disclose the material terms of all new (or varied) services, consultancy or employment contract which the company enters into with its CEO, a director or any other person or entity who is a related party. There are only limited exceptions to this rule.
- Remember the consequences
Among other enforcement remedies, ASIC can issue an infringement notice to a company of up to $100,000 for a single breach of the rules.
The Company and its directors may also face civil penalty or criminal action, resulting in significant personal liability.
Importantly, failure to comply with the continuous disclosure rules can prevent a company from being able to utilise some mechanisms to raise capital for a period of 12 months, notably the ability to undertake a rights issue without a prospectus or the ability to offer shares under a ‘share purchase plan’.
- Review the rules
Directors and management should review the new continuous disclosure rules and ASX’s revised guidance (“Guidance Note 8”) and ensure that the company has an updated compliance program in place to ensure that the company’s continuous disclosure practices satisfy the ASX’s expectations and minimise the risk of potential liability.
A 16-page abridged version of the 78-page Guidance Note 8 has been specifically drafted for directors as a point of reference when considering their disclosure obligations.