On 30 January 2015, ASX released its revised Guidance Note 27 (GN 27). GN 27 is intended to assist companies comply with their obligations under Listing Rules 12.9 to 12.12 in respect of company trading policies. The revised GN 27 provides significantly more detail and incorporates recommendations made in light of market developments since the last update in January 2012.
The key amendments incorporate a number of recommendations made by ASX in relation to company trading policies, including addressing the following items:
- policy objectives behind trading policies;
- who should be restricted from trading in a listed entity's securities;
- when should trading in a listed entity's securities be restricted;
- what types of trading should be restricted; and
- clearances to trade in a prohibited period.
Policy objectives behind trading policies
ASX has clarified that the policy objective behind trading policies is not only to minimise the risk of insider trading and market manipulation occurring but also to "avoid the appearance of insider trading", as this can have a significant reputational effect on the entity's standing with investors and the broader image of the ASX market.
The market is particularly sensitive to directors and senior executives trading in the lead up to the release of:
- periodic financial reports or other financial data; and
- an announcement of market sensitive information under Listing Rule 3.1, such as a material upgrade or downgrade in forecast earnings, a material trading update or the announcement of a material transaction.
ASX has expressed the importance, for the purposes of good governance, of having a fit-for-purpose trading policy in place, tailored to its particular circumstances, that effectively regulates when an entity's senior executives and directors may trade in its securities.
Who should be restricted from trading
Pursuant to Listing Rule 12.12, an entity's trading policy must cover key management personnel (KMP). Under the relevant accounting standard, KMP is defined to include "those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity".
ASX suggests entities consider whether it is appropriate to extend its trading policy to cover trading by a wider group of employees, in addition to its KMP, which may include the following:
- family members and entities closely connected to KMP;
- employees who work closely with KMP or in a finance area or strategic planning group within the entity;
- the next layer of management below KMP; and/or
- employees who may have access to their emails or other information such as IT staff.
To this end, it is suggested that the entity include a requirement in its contractual arrangements with KMP that they must comply with its trading policy and ensure that any closely connected persons or entities of the KMP are aware of the trading policy and that they comply. This has the effect of putting KMP and other employees covered by the trading policy on a "firm legal footing" and facilitates the taking of appropriate disciplinary action if the policy is breached.
When should trading in a listed entity's securities be restricted
Listing Rule 12.12.1 requires a trading policy to include information on "closed periods", when trading in a listed entity's securities is prohibited. The trading policy can comply with this requirement either by:
- generally prohibiting trading by KMP at all times except during certain specified "trading windows" (in which case, the closed period is the whole of the year apart from the specified trading windows); or
- specifying fixed periods, generally referred to as "black-out periods", throughout the year where trading by KMP is generally prohibited (in which case, the closed periods are the specified black-out periods).
ASX would generally expect entities to include within their closed periods the period from, or just prior to, the close of books at half and full-year end until a reasonable period after the release of their financial results for the half and full-year respectively.
In addition to specifying the "closed periods" in their trading policies, ASX strongly encourages entities to reserve the right to impose ad hoc restrictions on its KMP from trading in its securities at times when the entity is considering matters that are subject to the continuous disclosure regime pursuant to Listing Rule 3.1.
However, entities need to carefully manage and maintain confidentiality over the process of imposing ad hoc restrictions on trading to avoid the risk of speculative trading.
What types of trading should be restricted
While the Listing Rules only require an entity's trading policy to cover trading in an entity's securities (e.g. shares or options in the entity), ASX in GN 27 strongly recommends that the entity extend its trading policy to cover trading in an entity's derivative products (e.g. warrants, OTC options and CFD's), short-term trading and short selling of securities or derivative products by an entity's KMP or any other employees covered by its trading policy.
In addition, ASX recommends entities consider carefully whether its trading policy should prohibit KMP or any other employees covered by its trading policy from entering into margin lending or other secured financing arrangements in respect of its securities or, at the very least, require the disclosure of such arrangements to senior management and the board. This recommendation is aimed at preventing the default of any such financing arrangements which may cause a lender or financier to sell some or all of the securities in order to cover the default.
Procedures to clear trading
Listing Rule 12.12.4 requires an entity's trading policy to specify any exceptional circumstances in which KMP may be permitted to trade during a prohibited period with prior written clearance. Such exceptional circumstances are not prescribed under the Listing Rules and it is up to each entity to describe the appropriate exceptional circumstances in its trading policy.
In recognition that exceptional circumstances, by their nature, may not be able to be foreseen, ASX considers it acceptable for a trading policy to include a 'catch-all' discretionary power for a senior officer of the entity (e.g. the chairperson or the CEO) to determine that there are exceptional circumstances that warrant the granting of approval to a KMP to trade during a prohibited period. ASX emphasises that it expects that such discretionary power would be exercised sparingly and with caution.
In addition, ASX suggests it would be prudent for trading policies to state the following with respect to clearances to trade:
- any clearance to trade can be given or refused by the entity in its discretion, without giving any reasons;
- a clearance to trade can be withdrawn if new information comes to light or there is a change in circumstances;
- the entity's decision to refuse clearance is final and binding on the person seeking the clearance; and
- if clearance to trade is refused, the person seeking the clearance must keep that information confidential and not disclose it to anyone.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.