Loose lips sink ships: ASIC’s report on the handling of confidential information in light of pending corporate transactions

04 Jun 2014

In the second half of 2013, ASIC reviewed the conduct of a number of listed companies and their advisers before the public announcement of market-sensitive corporate deals. In particular, ASIC focused on the measures taken to handle and protect confidential, price-sensitive information in the context of analyst briefings and unannounced, market-sensitive corporate transactions.

Based on its findings, ASIC did not feel it necessary to impose new standards or introduce revised guidance. Rather, ASIC reiterated the importance of adhering to the current market guidance.

Issues of concern

While ASIC found no evidence of selective disclosure during its review, a parallel study of the financial media found that the number of leaks in the media remains “significant”.

ASIC observed that the small-to-mid-cap listed entities often did not have specific policies in place for handling confidential, price-sensitive information and that they rely heavily on advisers to guide them on how to manage such information.

ASIC also noted that, on occasion, company employees sitting below the board and officer level, who may not be adequately aware of the obligations surrounding confidential, market-sensitive information, have been involved in discussions with analysts.

While listed entities and their advisers all complied with the “need to know” principle, ASIC noted that the number of people who knew about a transaction was relatively high, particularly within investment banks.

ASIC noted that none of the companies or advisers they reviewed had a documented leak investigation policy in place and few companies pre-drafted an ASX announcement to use in the event of a leak.

ASIC expressly stated its concern with the timing and number of soundings conducted by investment banks before either an announcement or a trading halt. ASIC listed a number of “concerning” practices:

  1. soundings taking place while the company’s shares are still being traded;
  2. relatively large numbers of investors being sounded out;
  3. reports that, although they may give their consent to soundings, small-to-mid-caps do not feel they had enough expertise to influence the number and manner of soundings; and
  4. companies being reluctant to place their securities into a trading halt or suspension until they have certainty that the capital raising will proceed

ASIC’s recommendations

ASIC reiterated the following guidance that listed entities should adhere to:

  1. ensure that policies are well understood within the entity and are consistently followed;
  2. be vigilant about what information is disclosed at analyst and investor briefings;
  3. refrain from trying to manage or correct market expectations through selective briefings;
  4. access to briefings by listed entities should be as broad as possible (including via podcast, webcast and publishing transcripts of the briefing);
  5. prepare for leaks about corporate transactions by composing draft requests for trading halts and draft ASX announcements; and
  6. have frank discussions with their advisers about if and when soundings should be conducted about a capital raising and consider using trading halts to manage the risks associated with soundings

Analysts and institutional investors should:

  1. know and comply with the relevant good practice guidance of briefings;
  2. not elicit confidential market-sensitive information from listed entities or other information that does not comply with the industry codes from listed entities; and
  3. know what to do if they suspect they may have been given confidential, market-sensitive information

What next?

ASIC has indicated that, on the back of this report, it intends to conduct a targeted review of research reports by analysts. This review will attempt to identify circumstances in which changes in research recommendations are based on non-public material information that analysts may have received from listed entities prior to any formal announcement.

Further information

Kemp Strang will continue to monitor, and advise you of, any further developments in this space. If you require further information from us as to how this may impact you or your business, please contact: noland [at] kempstrang [dot] com [dot] au (David Nolan), Partner or lambethj [at] kempstrang [dot] com [dot] au (Jason Lambeth), Partner.

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