The ASX has recently issued a Consultation Paper proposing to make amendments to the ASX Listing Rules primarily aimed at complementing existing insider trading laws by helping minimise the potential for insider trading and address the perceived risks of insider trading. This is intended to promote investor confidence on corporate governance matters of listed entities.
Adopt and Disclose a Trading Policy (with Prohibited Periods)
The ASX proposes to introduce a requirement for listed entities to adopt, and disclose, a trading policy that identifies periods during a year where trading in its securities by key management personnel will be prohibited.
Listed entities will have the flexibility of formulating their own trading prohibitions as are appropriate for the entity's particular circumstances. The approach of requiring listed entities to determine when to restrict their leaders from trading in the entity's securities is considered a proportionate and balanced approach to market integrity issues identified by the Corporations and Markets Advisory Committee in its June 2009 report to the Government on Aspects of Market Integrity.
The ASX Corporate Governance Council's Principles and Recommendations contain a recommendation that companies should establish a trading policy in respect of the company's securities by directors, senior executives and employees and disclose that policy (or a summary of it). Compliance with the recommendation is on the basis of "if not why not" requiring the company to follow the recommendation, failing which it must explain why the recommendation has not been followed. Commentary on this recommendation states that companies should also introduce appropriate compliance standards and procedures to ensure proper implementation of the trading policy. The commentary provides further guidance to companies by suggestions for the content of the trading policy.
The ASX considers that the perception that directors may be engaging in insider trading negatively impacts the reputation of the listed company and has potential to undermine market integrity. The ASX's approach is to impose minimum requirements regarding the adoption, content and disclosure of a trading policy under the Listing Rules, to complement existing insider trading and other market misconduct regulation.
Trading Policy Content
The proposed Listing Rule will enable listed entities to establish procedures for key management personnel to obtain prior written clearance for trading during a prohibited period in exceptional circumstances.
If the entity provides a mechanism for prior written clearance to trade in exceptional circumstances, the trading policy must include details of procedures for obtaining prior clearance and identifying the exceptional circumstances under which clearance to trade during a prohibited period may be permitted.
The company will need to determine the exceptional circumstances under which prior clearance may be granted for key management personnel to trade in a prohibited period under its trading policy. ASX suggests that exceptional circumstances would be limited to various passive trades and severe financial hardship, with a guidance note possibly providing appropriate interpretation.
The proposed listing rule will require listed entities to give their trading policy to ASX for market release (through the Company Announcements Platform). Similarly, any subsequent amendments to the policy would also be required to be given to ASX for market release.
Additional Director Trading Disclosures
It is proposed that Listing Rule 3.19A.2 be amended to include a requirement that listed entities disclose to the market, with a notification of a change to a director's notifiable interest (by lodgement of an Appendix 3Y):
- whether the change in the director's notifiable interest occurred during a prohibited period; and
- if so, whether prior written clearance was granted for the trade to occur during the prohibited period and if clearance was provided, the date that the clearance was provided.
The entity's trading policy will extend generally to trading prohibitions on the entity's key management personnel (as defined in Accounting Standard AASB 124 Related Party Disclosure) during specified prohibited periods. However, the additional trading disclosures proposed in Listing Rule 3.19A.2 and Appendix 3Y only apply to directors trading and not other key management personnel. This is generally due to the corresponding legislative requirement relating to disclosure only of directors' interests.
If these proposed Listing Rule amendments become effective, listed companies will be required to:
- carefully consider reputational risks from transparency regarding dealings by directors and other key management personnel and identify appropriate prohibited or “blackout” periods for trading in the company's securities by key management personnel; and
- adopt or review and update trading policies to comply with the new requirements, including identifying the prohibited or "blackout" periods, any exceptional circumstances under which clearance to trade during a prohibited period may be permitted and details of procedures for obtaining prior clearance.
Listed companies should have effective systems and arrangements in place with each of their directors to ensure that all information required to be given to the ASX for disclosure of directors' interests (including in an Appendix 3Y, with the proposed additional requirements) can be given within the five business day period.
ASX seeks comments on the proposed Listing Rule amendments and issues for inclusion in a guidance note on trading policies by Friday 26 February 2010. The final proposed amendments (following consideration of comments) will be provided to ASIC for comment and then formally lodged with the Minister for Financial Services, Superannuation and Corporate Law.
If the amendments are not disallowed by the Minister, they are envisaged to come into operation in late 2010 or early 2011.