Director share trading
All listed companies should have policies in place to deal with share trading by their directors and employees
John Price, Commissioner
This article was submitted to the Australian Institute of Company Directors for publication in the Company Director magazine in March 2014
Australia's corporate governance standards are some of the highest in the world. To maintain these standards it is vital that directors are aware of their responsibilities under the Corporations Act, the ASX Listing Rules, and best practice guidelines, and that directors promote the integrity of our markets.
Share trading by directors has recently been in the spotlight. Without specifically commenting on any particular cases, it is worth focusing on this issue as it is central to maintaining investor confidence in our listed companies.
All listed entities should have in place a policy about share trading by directors and employees. Directors should encourage a workplace culture where the policies regarding trading in the company's securities and the prohibitions around insider trading are clearly understood, along with an appreciation of the risks that the policy is addressing. Such a policy should include appropriate 'closed periods' or 'blackouts' where trading is prohibited, any restrictions or exclusions on trading during other trading 'windows', and state the approvals required to be obtained before trading.
Trading is not permitted under the law in any circumstances if the person trading knows unannounced, price-sensitive information. Prior to trading, directors need to consider whether the market is fully informed of all material price-sensitive information. Such a decision is often complex, and based on the particular circumstances at the time of trading. Where the decision is a difficult one, best practice is to err on the side of caution and consider not only the law but how the trading could be perceived by the market.
Each year, ASIC undertakes scores of investigations surrounding director share trading, many of which never become public or end up in court. Insider trading is difficult to prove, not just in Australia but in jurisdictions around the world.
Generally, there are four things that must be established when prosecuting insider trading:
- Firstly, did the person under suspicion actually have the information?
- Secondly, was that information inside information? That is, was it available only to them and not the rest of the market?
- Thirdly, was the information material? That is, would a reasonable investor expect that the information would have an effect on the price or value of the company shares. This is often a tricky issue.
- Lastly, even if the information is material, ASIC needs to prove the trader knew or ought to have known the information was material and not publicly available.
ASIC uses its powers to look at all information, and interview key people in relation to potential cases of insider trading. ASIC also uses independent experts who have experience in the markets, particularly on the issue of materiality. ASIC cases have to stand up in court, and so need to be based on hard evidence, not rumour or hearsay. Where ASIC does bring insider trading action it has a solid success rate. Since 2009, ASIC has prosecuted 32 insider trading matters and, of those, 23 have been successful with a number still before the courts.
These strong results are due to changes in the way ASIC approaches cases. The August 2010 transfer of real-time market supervision from ASX to ASIC gave ASIC new personnel with expertise in reading the market. And ASIC is now in the final stages of replacing its real-time surveillance system with a more powerful system, which will enable ASIC to link trading in the equities and futures market for the first time. Also, from early last year, brokers have been obliged to tell ASIC about suspicious trading. Brokers must inform ASIC if they suspect someone has placed an order or entered a transaction while possessing inside information or which could create an artificial price.
It is sometimes said that insider trading is a victimless crime. However this is not the case. Insider trading undermines the integrity of Australia's capital markets and fleeces investors of their rightful gains. Enforcement, especially of insider trading, is about punishing wrongdoing and, through that, shaping the behavior of the people ASIC regulate. But it is a contested process that takes time and resources and it is never straightforward. The public can be confident that ASIC is devoting its resources to confronting the issue and tackling this conduct.
Having said that, it is not just ASIC enforcement action that boards need to be wary of – inappropriate trading can have serious implications for a company's reputation. Boards can be swiftly punished by investors even where there is no proven breach of the law. This reinforces the need for boards to think carefully about the policies and practices they have in place to address this important issue.
John Price is a commissioner with the Australian Securities and Investments Commission