Listed entities should have in place a share trading policy that regulates trading in the entity’s securities by its key management personnel. For example, ASX Listing Rule 12.9 sets out minimum requirements, and ASX Guidance Note 27 states, “Entities are free to adopt a trading policy that covers other matters and that suits their individual circumstances”.
Listed entities should consider reviewing their policies to ensure they are broad enough to minimise the risk of trading by staff (including employees, consultants and contractors) prior to material announcements. In the last 12 months, through its regular surveillance activities, the Australian Securities and Investments Commission (ASIC) has identified several cases where employees, consultants or contractors of entities, or their related parties, have traded prior to material announcements. The trading has been of sufficient concern to ASIC that further enquiries were warranted.
ASIC has responded to these cases by commencing enquiries and in some cases formal investigations, which can involve ASIC:
- Approaching the company and interviewing senior executives.
- Issuing notices to produce documents. This can require electronic forensic work to search for emails, calendars, instant messages and phone records to determine what the person trading knew at the time of the trade.
- Issuing notices for electronic devices such as phones, notebooks or tablets used by the trader.
- Interviewing the person trading and sometimes their work colleagues.
Even in cases where ASIC ultimately does not find evidence of insider trading, the exercise may cost the company significant management and staff time. For example, in some recent cases the entity has had to engage electronic forensics experts and lawyers. The trading also has the potential to cause damage to the reputation of both the company and the employee in question. Even where the trading is legal, there can still be a public perception of unfairness because management are seen to be trading when they might know information that others don’t.
These cases could easily be avoided if the share trading policy prevented the trading in the first place or gave staff clear guidance.
What can be done?
What can companies do to minimise the risk of ASIC knocking on the door in these situations?
- Consider who the policy covers. Policies apply to officers and key management personnel as required by the ASX Listing Rules, but what about other staff? It is worth considering whether other employees, consultants and contractors in your organisation may have access to inside information and if so, whether your policy should be extended to cover other people. Access to inside information by others may be direct or indirect, for example if staff are working in the head office, in an open plan office, or if they are able to overhear regular discussions in the office regarding the information.
- Consider if the policy is clear on whether approval is required prior to trading. Some policies ASIC has seen are unclear in this regard and the staff member who traded, and even management, have not been certain as to its operation. Many policies have closed or “blackout” periods to covers periods prior to scheduled announcements, usually the release of the half yearly and yearly accounts and the annual general meeting. But what about outside these periods? Consider the need for staff to seek approval at other times to cover circumstances when the company has inside information and an unscheduled material announcement is likely or imminent – even if the employee did not have access to inside information.
- Communicate the policy to staff. Ensure staff members are trained in the policy and provide regular reinforcement such as reminding staff when blackout periods commence, and also of the need to seek approval at other times.
- Enforce compliance by taking action when the policies are breached (even if just a reprimand) and advise ASIC if the trading is suspicious, so it can take steps to secure any evidence.