30/07/2009 - 14:35

Tighter proposals for director trading

30/07/2009 - 14:35


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The Australian Institute of Company Directors says existing insider trading laws and rules governing director share trading are adequate and do not need tightening as recommended by the federal government's market advisory committee.

Tighter proposals for director trading

The Australian Institute of Company Directors says existing insider trading laws and rules governing director share trading are adequate and do not need tightening as recommended by the federal government's market advisory committee.

The government's Corporations and Market Advisory Committee today released its recommendations that include civil penalties to apply to insider trading and directors to disclose margin loans to shareholders.

CAMAC also recommended banning director share trading within the arbitrary blackout periods.

The AICD today said the recommendations could have a "detrimental impact on the important alignment between the interests of directors and investors".



Both announcements are below:



Implementing recommendations to ban director share trading within arbitrary blackout periods and force disclosure of director margin loans could have a detrimental impact on the important alignment between the interests of directors and investors, the Australian Institute of Company Directors (AICD) said today.

AICD was responding to recommendations from the Corporations and Market Advisory Committee (CAMAC) for listed companies to adopt trading policies prohibiting directors and executives from any trading in their company's shares in the 'blackout' period between the close of its accounts and the announcement of its results, or when it has any market sensitive matter under consideration.

Any waivers could only be made in cases of severe financial difficulty or other exceptional circumstances and only after consultation with the ASX or the Australian Securities & Investments Commission (ASIC).

CAMAC suggested the new restrictions could be included in the ASX Corporate Governance Council's Principles or as part of the ASX Listing Rules, but it left open that they may have to be imposed by legislation.

AICD said that the existing continuous disclosure regime and insider trading laws were adequate and the additional restrictions proposed by CAMAC were unnecessary and could be unworkable.

AICD has already urged companies to adopt clear and rigorous policies for director share trading in line with the ASX Corporate Governance Council's Principles which allow boards discretion to permit trading in restricted periods where a director's particular circumstances justified doing so. It has also suggested that when boards exercise their discretion companies should proactively announce this to the market.

According to John Colvin, Chief Executive Officer of AICD, the restrictions proposed by CAMAC went too far, removing much of this flexibility of directors to trade, in accordance with the law and with the approval of their board, where they had legitimate reasons to do so.

It is widely expected that directors hold shares in the listed companies of which they are a director, in order to align their interests with those of shareholders more generally.

The imposition of a ban on director trading in 'blackout' periods means directors and executives are taking on greater risk if they invest and have substantial holdings in their company's shares where they are denied the right to trade in certain periods in all but the most exceptional of circumstances.

"The consequences of this are likely to be a reluctance of directors to hold shares - certainly not in the current quantities that many do," Mr Colvin said.

"If directors cannot trade within certain periods, effectively a new class of shares is created," he said.

"It must also be remembered, as CAMAC points out, that insider trading laws apply at all times regardless of whether it is a 'blackout' period or not and directors are required to disclose trading in their companies securities."

Market Integrity and 'Rigorous ' regulation

AICD shares the view of CAMAC that a rigorous approach to the regulation of director share trading is necessary to ensure investor confidence in the integrity of the markets. However, Mr Colvin said that AICD was disappointed that the current insider trading laws, combined with ASX Governance Principles and company share trading policies, were not seen to be providing sufficient rigour.

By suggesting the new approach to regulating director trading is an "effective adjunct" to current insider trading laws, AICD believes CAMAC is acknowledging the challenges ASIC faces in proving and prosecuting those guilty of insider trading.

"We need greater investment in ASIC to enforce current insider trading laws; there should be no need to 'leap frog' incremental improvements in voluntary disclosure," Mr Colvin said.

Director Margin loans

The regime of regulating director margin loans does not require significant overhaul. In its March 2009 submission to CAMAC, AICD said that the existing regime of continuous disclosure is sufficient in requiring a company to determine whether a director's margin loan is 'material' or 'price sensitive' and therefore requiring disclosure.

Boards should be left to determine the appropriate level of internal regulation of director margin loans by putting in place internal policies that may, for example, prohibit directors from entering margin loans, set conditions on such arrangements or require directors to disclose details to the company, including when a margin call might be made and cannot be met by the director.

Possible harmonisation to Section 205G of the Corporations Act and ASX Listing Rules

Under Section 205G of the Corporations Act, directors are required to disclose their trades within a 14 day period. This requirement is in contrast to that of the ASX Listing Rules, which stipulates that companies must disclose director trades within five days. AICD is supportive of the suggestion by CAMAC that the two requirements be harmonised by amending the Corporations Act to require directors to disclose their trades to the market within five days. The consequent reduction in red tape and greater clarity is welcome.



The Corporations and Markets Advisory Committee (CAMAC) has released its report Aspects of market integrity (June 2009).

The report responds to a request for advice in relation to a number of practices that have the potential to damage the integrity of the market and investor confidence. These practices are:

- directors' interests in the securities of listed companies and margin lending

- 'blackout' trading by company directors
- spreading of false and misleading information
- disclosure of information in the briefing of analysts.

The report notes that, while concerns about the practices may be heightened at a time when the market is under pressure and confidence has been shaken, they raise issues of continuing relevance.

The Convenor of CAMAC, Richard St John, said:

The thrust of the report is to reinforce good corporate practice and enhance disclosure in dealings by directors and executive officers in shares of their company. It promotes responsibility by market participants in the dissemination of information and assists enforcement of the law against market manipulation.

Dealing by directors in shares of their company

The report considers:

- the use by directors of margin lending arrangements in relation to shares in their company, and

- trading by directors in their company's securities during sensitive (blackout) periods, such as between the close of books and the release of financial results

in the broader context of the regulation of dealings by directors in the securities of their company. It also proceeds on the basis that the most senior officers of a company (executive officers) should be subject to duties and constraints similar to those that apply to directors, given their privileged position as corporate insiders.

The report recommends that, as a matter of best practice, directors and executive officers should be required to obtain the board's clearance for dealings in the securities of their company. While they should not be prevented from entering margin lending or other loan arrangements as such, a clearance procedure should apply, having regard to possible conflicts of duty and other problems that can arise where securities of the company are used as collateral.

The report also recommends that, as a matter of best practice, directors and executive officers should not be permitted to deal in the securities of their company in sensitive blackout periods.

The report proposes the implementation of clearance processes and restrictions on dealings by corporate officers as governance requirements by the ASX Corporate Governance Council or in the ASX Listing Rules. In the absence of effective implementation, a legislative approach could be considered.

CAMAC also recommends legislative action to require:

- directors and executive officers to disclose to the market, within a short time, all their dealings in relation to securities of their company
- a company to disclose in its annual report the number or percentage of its securities held by directors or executive officers that are subject to a pledge.

There is a further recommendation for tightening the insider trading provisions so that they apply to lenders and borrowers under margin lending and other financial arrangements in the same way as they apply to other market participants. On the other hand, CAMAC sees a need for an exception to the insider trading law to enable corporate insiders to use non-discretionary trading plans in order to meet regular or anticipated financial commitments or objectives.


The report considers the dissemination of false rumours against the background of the regime for disclosure of information to the market. The more timely and reliable the information available to the market, the less scope there is for the successful dissemination of false rumours.

The intentional spreading of false rumours is inimical to the maintenance of a fair, efficient and transparent market. While the market will never be free of rumour, egregious conduct should be pursued and eliminated where possible.

The law already contains a number of prohibitions relevant to the perpetration of false rumours and other forms of market misconduct. However, given the nature of this conduct, the uncovering of evidence and proof of elements of an offence present a challenge.

The report makes a number of recommendations in support of effective law enforcement:

- the introduction of civil penalties for market misconduct provisions where only criminal prosecution is now available

- empowering ASIC to require market licensees to have guidelines on rumour-mongering and to report any suspected misconduct

- empowering ASIC to make a banning order against a person who contravenes a licensee's guidance on rumour-mongering

- treatment of market manipulation as a serious offence for the purposes of telephonic interception legislation
making it an offence to provide false or misleading information to bodies that conduct clearing and settlement operations.

The report encourages ASIC, the ASX and industry bodies to develop further guidance to companies on how to respond to rumours about them. It also supports an ASIC initiative to develop best practice guidelines for market participants on responding to rumours of which they become aware.

Corporate briefing of analysts

The practice by which listed companies provide briefings to analysts, institutional investors and others is considered in the context of the regime for market disclosure and the prohibition on insider trading.

Briefings provide a useful supplement to more formal disclosures to the market and can assist in the clarification or assessment of available information. At the same time, there are risks involved, including of selective disclosure of market sensitive information or harm to investor confidence through perceptions that some market participants are receiving favoured treatment.

While not seeing a need for legislative intervention, the report identifies areas where there is scope for further promotion of best practice. It is in the interests of a well-run company to control its communications with analysts and others to ensure consistency and accuracy, as well as compliance with legal requirements.

The report proposes action by the ASX Corporate Governance Council to build on existing guidance and encourage more open practices in relation to briefings, including:

- making briefings more accessible (including through use of the Internet)

- keeping of records

- processes for checking information disclosed and rectifying any inadvertent disclosure by making the information generally available

restricting briefings during times of market sensitivity.


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