Keeping up appearances: ASX revises guidance on trading policies

On 30 January 2015 the ASX released an updated Guidance Note 27: Trading Policies (GN 27).  The release came after some highly publicised events that have called into question certain listed entities’ approach to, and enforcement of, share trading policies.

For example, the allegations of inappropriate share trading by two directors of David Jones in 2014, which led to an ASIC investigation of perceived insider trading activity.  Ultimately, ASIC did not take enforcement action against the directors involved. However, the subsequent resignation of the directors and the damaging publicity the matter caused for David Jones (since de-listed from the ASX), demonstrates the importance of having an effective trading policy in place which is enforced properly.

One size does not fit all

GN 27 emphasises that entities shouldn’t take a ‘cookie-cutter’ approach to drafting their trading policy.   Good governance ‘demands that an entity has in place a fit-for-purpose trading policy, tailored to its particular circumstances, that regulates when and how its directors and senior executives may trade in its securites.  The purpose of such a policy is not only to minimise the risk of insider trading but also to avoid the appearance of insider trading and the significant reputational damage that may cause.’

The two key themes of avoiding ‘risk’ and the ‘appearance’ of insider trading should inform how an entity reviews its trading policy in light of the new guidance in GN 27.

Ultimately however, the market and regulators will have the opportunity to judge the appropriateness of such a policy as, in accordance with Listing Rule 12.8, the trading policy is provided to the ASX for market release.

Key points

In summary, the revised GN 27 addresses the following key topics:

  • Purpose of the policy – as explained above one size doesn’t fit all.
  • Application of policy beyond key management personnel – who, in addition to Key Management Personnel (KMP), may be subject to the policy due to their capacity to access market sensitive information ahead of the market?
    It’s suggested that the policy also apply to persons such as:

    • executive assistants to KMP;
    • finance or strategy staff;
    • the next layer of management below KMP; and/or
    • staff who may have access to KMP email or document folders, such as IT staff.
  • Ad hoc application – entities should reserve the right to impose ad hoc trading restrictions on individuals (eg. those under KMP level working on a particular market sensitive matter) and are ‘strongly encouraged’ to also designate ad hoc trading periods as ‘closed periods’.  The prescription of ad hoc closed periods needs to be treated carefully to avoid market speculation.
  • Scope of affected activities – the ASX urges entities to ‘consider carefully’ formally extending the policy to cover trading in products and activities related to securities such as derivatives, short-term trading, short-selling, hedging transactions and margin lending – rather than limiting the policy’s application to securities.
  • Procedures to clear trading – increased number of governance suggestions are given here relating to when clearances can be given and how an application to trade should be understood within the entity.  For example, a policy should state that:
    • any clearance to trade can be given or refused by an entity in its discretion; and
    • a decision to refuse clearance is final and binding.
  • Primacy of insider trading laws – is emphasised as the ‘prudent’ inclusion of information in a policy reminding KMP and employees about how the possession of insider information can affect their trading activities.

Tough penalties should deter

To ensure that KMP and employees understand the importance of their organisation’s trading policy, and to reinforce its importance, it’s worth reminding them of what’s at stake if a person contravenes the insider trading or ‘market manipulation’ prohibitions of the Corporations Act.  Insider trading and market manipulation offences attract the following penalties for individuals:

  • criminal penalties of 10 years jail and/or a fine equal to the greater of $765,000 or three times the profit gained or loss avoided;
  • a civil penalty of up to $200,000; and
  • automatic disqualification from being a director or managing a company for 5 years.

The possibility of incurring these penalties should encourage all KMP and employees to review the trading policy and ensure that they understand how it operates and applies to them.

The recent sentences of the insider trading pair Lukas Kamay and Christopher Hill to a respective seven and three year jail terms should serve as a practical example of the serious consequences of breaching insider trading laws.

Training and eduction important for awareness

Entities and their company secretaries also need to review their compliance practices to ensure that employees and directors are aware of the policy and understand how to comply with it.  Awareness and compliance can be achieved through regular training and education.  GN 27 reminds entities that failing to have such measures could constitute a failure to comply with Listing Rule 19.2 to honour the ‘spirit, intention and purpose’ of the Listing Rules.

In GN 27 the ASX advises that it’s up to the entity to determine what these measures should be, but in particular, it should have appropriate record keeping procedures to capture details of applications by KMP for clearances to trade under a trading policy and its decisions on such applications.

Other steps include:

  • having contractual obligations that KMPs and employees must comply with the trading policy;
  • including a copy of the trading policy in ‘new starter’ packs; and
  • circulating reminders via email of the start and finish dates for a trading window or black-out period as they are about to occur.

GN 27 also lists measures an entity can take to monitor compliance with the policy such as requiring the KMP to notify it of the details of their holdings, including HINs or SRNs.

The key to effective compliance is a ‘compliance culture’ so in terms of conveying the meaning and importance of the trading policy, all entities should encourage a culture of awareness of the policy.

What’s next?

Although the ASX has not prescribed a deadline for compliance with GN 27, entities should be reviewing their existing trading policies in light of the suggestions made in it.  Changes may be required to update the policy, especially to ensure that the trading policy is ‘fit for purpose’ for that entity.

An updated version of the policy should be given to ASX if material changes have been made.  Even if material changes have not been made, the policy can still be given to ASX for consistency – especially if your organisation publishes  the policy on its public website.


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