On 14 February 2013, the FSA imposed a penalty of £175,000 for breaches of the Listing Rules (LRs) and the Listing Principles in respect of non-compliance with the Model Code by Nestor Healthcare Limited (Nestor) which, at the relevant time(s), had its shares listed on the premium segment of the Official List.
In October 2005, Nestor issued a share dealing policy (SDP) in order to comply with the provisions of the Model Code. However, once the SDP had been issued, Nestor did not issue any reminders or training about its content or the requirement to comply with it, or otherwise reinforce awareness of it. This, combined with the very low number of actual dealings by persons discharging managerial responsibilities (PDMRs), resulted in Nestor PDMRs forgetting that the SDP existed and that they were required to comply with it. As a result, an informal practice developed whereby Nestor relied on the experience and knowledge of its board members to enable it to meet the requirements of paragraphs 3-7 of the Model Code.
Additionally, Nestor did not, during the relevant period, carry out any reviews of its PDMR share dealing compliance arrangements, which meant that it missed the opportunity to identify where poor practices had developed.
Breach of LR 9.2.8
Under LR9.2.8R, a listed company must require every PDMR, including directors, to comply with the Model Code and to take all reasonable steps to secure their compliance. The FSA concluded that Nestor had breached LR9.2.8R because it had failed to ensure that its PDMRs fully understood the requirements imposed under paragraphs 3-7 of the Model Code, and that it failed to take all proper and reasonable steps to secure the compliance of its PDMRs with these provisions. The reasons for reaching this conclusion included:
- by failing to issue any reminders or training with regard to the content of, or the need to comply with, the SDP, Nestor failed to ensure that the PDMRs were, on an ongoing basis, aware of the SDP which would, in turn, have made them aware of, and ensured their compliance with, all of the requirements of paragraphs 3-7 of the Model Code,
- Nestor’s reliance on the experience and knowledge of its board members alone to enable it to meet the requirements of paragraphs 3-7 of the Model Code was insufficient,
- by failing to review the adequacy of its PDMR share dealing arrangements, Nestor missed an opportunity to identify where poor practices might have developed,
- Nestor failed to identify that its PDMRs had forgotten that they were required to comply with the SDP, and were not doing so, or that breaches of the Model Code had taken place, and
several dealings took place in breach of the Model Code including:
- requisite approval not being sought,
- dealings taking place outside the time limit, and
- failure to keep proper records.
Breach of Listing Principles 1 and 2
Nestor’s failure to take all proper and reasonable steps to ensure that its PDMRs were, on an ongoing basis, aware of all of the requirements of paragraphs 3-7 of the Model Code and of the SDP was also held to be a breach of Listing Principles 1 and 2, as this failure also meant that Nestor had failed to take reasonable steps:
- to enable its directors to fully understand their responsibilities and obligations as directors under the Model Code, in contravention of Listing Principle 1, and
- to maintain adequate procedures, systems and controls to enable it to comply with its obligations under LR9.2.8R, in contravention of Listing Principle 2.
Listing Principle 2 was further breached because Nestor’s reliance on the experience and knowledge of its board members to meet the requirements of paragraphs 3-7 of the Model Code, rather than it having a robust process which ensured adherence to the SDP, meant that it had failed to take reasonable steps to maintain adequate procedures, systems and controls to enable it to comply with its obligations under LR9.2.8R.
In this instance the fine was decreased (from £250,000) as a result of Nestor's agreement to settle at an early stage. A number of mitigating factors were also taken into account. Nonetheless, the penalty imposed is a reminder of the increasing willingness of regulators to seek enforcement action in an effort to promote high standards of regulatory and market conduct.