ASIC recently issued a report on the handling of confidential information by listed entities and their advisers, focusing on analyst and investor briefings and unannounced corporate transactions. While the report does not identify any systemic issues, it does highlight a number of areas of concern. Partner Greg Bosmans and Special Counsel Gadi Bloch report.
How does it affect you?
- ASIC recognises the benefit in listed entities conducting analyst and investor briefings. However, ASIC stresses the need to have appropriate policies in place to ensure that no market-sensitive information is disclosed in the course of such briefings (and to enforce and monitor compliance with those policies).
- ASIC suggests that listed entities must take greater responsibility for the management of their own market-sensitive information, and that there are risks associated with delegating responsibility for such matters to their external advisers.
- ASIC has identified a particular concern in relation to the practice of financial advisers conducting 'market soundings' in advance of a rights issue.
Many listed entities maintain an active investor relations function, involving communications with analysts and institutional investors from time to time. In its report Report 393: Handling of confidential information: Briefings and unannounced corporate transactions ASIC acknowledges that analyst and institutional investor briefings can provide a useful supplement to formal market announcements and can improve the markets understanding of information concerning listed entities.
In August and September 2013, ASIC participated in a number of investor briefings by listed entities following the release of those entities' financial results. ASIC did not find any evidence of selective disclosure of confidential, market-sensitive information during those briefings (perhaps not an entirely surprising result motorists tend to make doubly sure that they stay within the speed limit when being followed by a police car).
ASIC nonetheless considers that briefings can pose a significant risk area for selective disclosure of market-sensitive information. This is particularly the case with smaller, less formal briefings, which tend to be less structured and scripted.
Despite these concerns, ASIC does not propose to issue any additional guidance in relation to analyst and investor briefings on the basis that they are adequately addressed by a range of existing ASIC and industry guidelines (although ASIC has indicated that it will continue to work with relevant industry bodies to improve relevant guidelines). Existing guidelines include ASIC Regulatory Guide 62 Better disclosure for investors and the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations.
Consistent with existing guidance, ASIC recommends that listed companies:
- be vigilant about what information is disclosed at analyst and investor briefings;
- refrain from trying to manage or correct market expectations through selective briefings;
- make access to their analyst and investor briefings as broad as possible, including through making webcasts, podcasts and/or transcripts available; and
- restrict the number and nature of employees that are authorised to communicate with analysts and investors.1
ASIC also expresses the view that mining and exploration companies should avoid disclosing information to analysts and investors that does not comply with relevant industry codes (such as JORC), on the basis that such information would potentially be misleading and deceptive.
Interestingly, ASIC places considerable focus on the role of analysts in ensuring that no confidential, market-sensitive information is disclosed during briefings. ASIC notes that analysts should not seek to elicit such information, should actively seek to identify whether any market-sensitive information they receive has previously been released to the market and should take appropriate steps where they consider this to be the case.
ASIC intends to continue to focus on analyst and investor briefings, including conducting a targeted review of research reports published by analysts to ensure that changes in research recommendations are not based on confidential, price-sensitive information obtained during a briefing.
The second area of focus in ASIC's review related to unannounced corporate transactions. In the course of its review, ASIC spoke to a range of companies, investment banks and other professional advisers regarding their policies and processes for handling confidential information, and reviewed a small sample of pro rata rights offers conducted during the previous 12 months.
Again, ASIC did not identify any systemic concerns, and noted that existing industry guidance2 in relation to the issue is generally adequate.
However, ASIC did note some concerns in relation to the practice of financial advisers conducting 'market soundings' in advance of a rights offer. This practice involves gauging the interest of institutional investors in a rights offer for the purposes of pricing the offer and assessing the viability of the offer and the likely financial exposure of the underwriter where the offer is to be underwritten.
If properly managed, a sounding process would not contravene relevant laws nor, in theory, impact the share price of the relevant entity. In particular, investors are generally only sounded after providing confirmations that they will not trade in the entity's securities or pass on the relevant information to other persons.
However, ASIC observed that, while there may not be a causal connection between the two, in the transactions within its sample where soundings were conducted before the announcement of the rights offer, the price of the entitys securities fell by a material amount in the days immediately preceding the announcement.
While ASIC does not suggest that the practice of conducting market soundings be discontinued, it did highlight the following concerns which it considers should be addressed:
- soundings being conducted before the imposition of a trading halt or the close of market (that is, during a 'live market'), such that investors would have an opportunity to trade on the basis of the relevant information; and
- an unduly high number of investors being sounded, increasing the risk of information leakage and insider trading.
Market soundings during a live market are contemplated by the AFMA guidelines, where it is not reasonably practicable to restrict the soundings to a non-trading period. ASIC suggests that some financial advisers take an overly liberal view of this flexibility. However, depending upon the nature of an offer, it may not be practicable to conduct soundings over the course of a single evening after the market has closed (and this may be well nigh impossible where the relevant entity is listed on a foreign exchange in addition to ASX). Accordingly, in some cases, the only way that a listed entity can ensure that the soundings are not conducted during a live market is to request a trading halt from ASX. In its report, ASIC encourages this course of action.
In our view, however, many listed entities would be justifiably reluctant to request a trading halt in these circumstances. An application for a trading halt (which is posted on ASX's Market Announcements Platform) is required to include an explanation as to why the trading halt is being sought. Accordingly, a listed entity would risk flagging a potential rights offer to the market that may not ultimately proceed (for example, if the soundings indicate that there is insufficient support for the offer). ASIC suggests (based on the observations of a single investment bank) that a listed entity would not suffer any detriment as a result of such a 'failed' potential capital raising. We suspect that few listed entities would share this view.
ASIC also observed that some of the listed entities in its sample did not have documented policies and procedures in relation to the management of confidential, market-sensitive information in respect of unannounced transactions, and tended to rely on their advisers in this respect. ASIC suggests that there are significant risks in doing so, and that listed entities must take responsibility for the management of their own market-sensitive information.
Although expressed as a broad principle, this commentary appears to relate primarily to the issue of market soundings discussed above. ASIC notes that there may be an inherent tension between an underwriter's desire to reduce its risk on a transaction by conducting soundings, and the need to keep information about the transaction confidential and limited to as few people as possible. In these circumstances, there may well be a need for a listed entity to carefully consider and test the advice of its underwriters regarding the need for, and scope of, potential market soundings.
Beyond such circumstances of divergent interests, we think ASIC's assessment of the risks involved is likely overstated where the listed entity has engaged sophisticated advisers who routinely deal in confidential, market-sensitive transactions. Such advisers can be expected in the normal course to have adequate procedures and processes for handling clients' confidential information. Accordingly, the need for the listed entity to provide express direction to them in relation to such matters is less pronounced.
- For example, ASIC suggests that if a mining company were to provide analysts with access to technical staff (who may not be fully versed in the company's relevant obligations, policies and practices) this could give rise to a heightened risk of inadvertent disclosure of confidential, market-sensitive information.
- In particular: the joint Governance Institute of Australia and Australasian Investor Relations Association publication Handling confidential, market-sensitive information: Principles of good practice; the Australian Financial Markets Association publication Handling confidential and price-sensitive information and soundings: Best practice guidelines (the AFMA guidelines); and ASX Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 - 3.1B.