ASX has recently updated its guidance note regarding trading policies. The updated guidance highlights the risks to listed entities where trading by directors and other key personnel results in speculation that the trading was motivated by insider knowledge of an impending announcement. Market criticism and public perception of inappropriate trading can impact reputations and have business and legal repercussions irrespective of any actual breach of insider trading laws.
The David Jones situation in October 2013 is a case on point. Widespread criticism followed trading by two directors in the days before strong sale results were released and immediately after a merger proposal from Myer was received. The trades occurred during a permitted trading window and were approved by the company chairman. ASIC investigated the claims of insider trading (but did not lay charges) and the two directors and chairman resigned.
The David Jones situation illustrates that the market is sensitive to trading by directors and key personnel in the period immediately before the release of material information. Speculation that the trading was motivated by inside knowledge is likely to attract the criticism of market commentators and the scrutiny of the regulators.
ASX’s expectation is that listed entities should adopt trading policies that not only address the legal risks of insider trading but also seek to avoid the appearance or perception of insider trading. This goes beyond technical compliance with the listing rules which set out minimum requirements. Rather, ASX has reinforced in its guidance note that trading policies should, as a matter of good governance and within the spirit, intention and purpose of the listing rules, address these broader issues of perception and the reputational damage that may result. ASX expects trading policies to be “fit for purpose” – that is, each policy should be tailored to the circumstances of each entity to regulate when and how directors and key personnel may trade in its securities. Some specific matters to consider include:
Does your policy extend to each director and key personnel’s closely connected persons and entities (eg. spouse, family companies)? If so, how is it enforced?
Does your policy extend to a wider group of employees who could have market sensitive information ahead of the market? For example, employees who work closely with directors and executives (such as, executive assistants), employees who work in the finance or strategic planning group, other managers, employees who have access to director's and executive's email/document folders (such as, IT staff). If so, how is it enforced?
Does your policy allow ad hoc trading restrictions to be imposed without hesitation in appropriate situations?
Does your policy regulate or prohibit particular kinds of trading? For example, trading in derivatives, short term trading, short selling, hedging, margin lending or trading in the securities of other companies.
Does your policy prohibit trading from or just prior to the close of books at each half/full year until a reasonable period after release of results?
In light of the updated ASX guidance and the spotlight on public perception of conduct, listed entities should review the adequacy of their trading policies.