Key Points: There are a number of things that companies can do to limit
the potential fallout from trading policy breaches.
The release of ASX's latest figures on directors' trades
during a blackout period is a good opportunity for companies and
directors to do some housekeeping.
The blackout period is typically between the end of the
financial year or half-year and the publication of the
company's annual or half-yearly results. Some companies also
have self-imposed additional blackout periods. There is no law
against directors' trading during that time, but it causes
serious problems for both the company and the involved
Directors' trading policies
ASX's corporate governance rules effectively require
companies to publish a directors' trading policy. Typical
policies will either prohibit trading during the blackout period or
allow trading in limited circumstances with the written approval of
the chairman or the Board.
The purpose and benefit of the trading policy is twofold:
it helps to prevent insider trading by directors; and
it therefore assures investors and potential investors that the
company takes the threat of insider trading and market integrity
But trading during blackouts isn't illegal, is
Some companies and directors may take comfort in the fact that
trading during blackouts doesn't necessarily mean that there
has been insider trading.
When directors trade during a blackout period, the reputational
benefit of the company's trading policy, and the integrity of
the market, are put at risk. It's not the kind of risk that a
rational person would want to take. It is also for this reason that
ASX requests (though it is not mandatory) that blackout trading
should be disclosed to the market and only be permitted in
ASX has an ongoing program of reviewing share trades by
directors during blackout periods. It publishes statistics about
what it finds. ASX recently noted that one third of directors'
sharemarket trades occur during blackout periods. In the first
three months of 2009, it found 35 potential contraventions of
trading policies. That was a very small percentage of all director
trades, but the percentage is irrelevant: each of the companies
involved received a detailed "please explain" letter from
ASX. As well as being plain embarrassing, dealing with the ASX
query chews up valuable management time and resources, and affects
the credibility of the company among the market and
Where it obtains evidence that insider trading has occurred, ASX
passes it on to ASIC. This escalates the problems for both the
director and the company (possible insider trading contraventions
are not a good look).
Possible future changes to disclosure
ASX has called for compulsory disclosure of share trades by
directors during blackout periods in order to prevent insider
trading. In many cases where directors have obtained permission
from the chairman or the Board to trade during the blackout period,
that approval or its reasoning is not disclosed to the market.
The Corporations and Markets Advisory Committee has also
recommended that the period for disclosing trades generally be
reduced to two business days. Currently, the legislation and rules
stipulate differing deadlines, from five business days to 14
What can be done?
There are a number of things that companies can do to limit the
potential fallout from trading policy breaches. Many companies and
directors last looked at their trading policy a few years ago, when
ASX required them to publish them on their websites.
Review the existing policy to determine if it is
effective enough. For example, if trading during blackout
periods is allowed, are there effective controls on it? Under what
circumstances would trading be permitted? If the chairman's or
the Board's approval is needed, is there an alternative
procedure to cover the chairman's absence, or situation where a
Board meeting cannot be convened within an appropriate timeframe?
Are there policies to ensure transparency in the chairman's or
Board's decision, internal transparency, and as and where
appropriate, disclosure of the reasoning to allow trading during a
Ensure that directors know and understand the
policy. Signing off or agreeing to follow the policy
doesn't necessarily mean that it is understood.
Don't "set & forget".
Actively monitor compliance with the policy. ASX discovered eight
trades that were contraventions of company trading policies.
However, those trades only involved six directors - which means
that at least one director breached the policy more than once.
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.
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