Earlier this year, ASX issued a consultation paper on proposed changes to Guidance Note 8 that sought to clarify existing continuous disclosure policy. ASX has now released its consultation response, together with the final version of Guidance Note 8, which took effect on 1 July 2015. While the final version is largely consistent with the proposals in the consultation paper, ASX has also included additional cautionary guidance on engagement with analysts. Partner Emin Altiparmak, Senior Associate Alexandra Feros and Associate Lauren McInnes report.
An updated version of Guidance Note 8 came into effect on 1 July 2015. The changes that have been made are largely consistent with the proposals in ASX's consultation paper released in March 2015. However, in response to consultation feedback, ASX has also included additional guidance highlighting the care that listed entities should take in relation to analyst forecasts and briefings.
Broadly, the changes made to Guidance Note 8 since the version that came into effect in January 2014 involve further guidance on:
- When earnings surprises for listed entities that have not published earnings guidance are market sensitive. For listed entities in this situation, ASX reaffirms that the disclosure obligation arises where the difference in earnings between the listed entity's internal projections and the analyst consensus estimate is so significant that a reasonable person would expect the information to have a material effect on the price or value of the entity's securities (ie the Listing Rule 3.1 test), rather than necessarily applying the 5 to 10 per cent variation test recommended by ASX for listed entities who have published earnings guidance when considering whether to update that previous guidance.
- When a listed entity may be required to correct analyst forecasts or consensus estimates that differ from the entity's own internal earnings projections.
- When it would be appropriate for a listed entity to publish analyst forecasts or consensus estimates on the entity's relevant webpage or by market announcement, and ways to reduce the risk of this being seen as de facto earnings guidance.
For further details on these changes, please see our earlier Focus: Proposed Changes to ASX Guidance Note 8 on Continuous Disclosure.
ASX received nine written submissions in response to the consultation paper and also consulted with ASIC. The final version of Guidance Note 8 incorporates the following four key additional changes to reflect the feedback ASX received in the consultation process:
- Even if a listed entity publishes earning guidance, if it is also covered by sell-side analysts then ASX recommends that it still continue to monitor their forecasts and consensus estimates for any useful information they may reveal (such as a material divergence from the entity's guidance that may warrant further enquiry by the entity and, potentially, additional disclosure to the market).
- ASX has confirmed that where a listed entity is publishing information about analyst forecasts, it does not necessarily need to include all analysts known by the entity to cover its securities. However, if a particular analyst has been excluded, ASX expects the exclusion to be clearly disclosed, together with a reasonable explanation as to why (for example, if the forecast is outdated or contains a manifest error). While in theory this means that a listed entity could exclude a forecast it considers to be an 'outlier', ASX cautions that the entity could effectively be indicating that the excluded forecast is a significant distance from (and by necessary implication, that the forecasts not excluded are much closer to) its own internal earnings projections, and therefore runs the risk of the exclusion being seen as de facto guidance.
- If an entity has published analyst forecasts, ASX says it would have no issue with an entity referring interested parties (including analysts who want to understand where their own forecasts sit in comparison to their peers) to the relevant webpage or market announcement. ASX has confirmed it would not consider this to be de facto earnings guidance, provided the entity does not do or say anything that conflicts with the disclaimer that should appear on that webpage or announcement. For example, ASX warns against an entity referring an 'outlier' analyst to the relevant webpage or announcement and hinting that the analyst should amend its forecast to be closer to the average of its peers.
- In response to feedback it received, ASX has acknowledged that, in practice, listed entities may give a series of presentations to analysts and investors over a short period that contain materially the same information but have been tailored for each presentation. ASX has clarified that each subsequent briefing would not be regarded as a 'new' presentation and would not need to be released on the ASX market announcements platform, unless it contained new market sensitive information.
The submissions received by ASX and the additional changes made by ASX to Guidance Note 8 highlight the natural tension from a policy perspective of urging caution to be exercised by listed entities in any engagement with analysts, and such engagement occurring as a matter of engrained market practice.
In the final version of Guidance Note 8, ASX has backed away from some of its proposed guidance aimed at highlighting the risks inherent in conversations with analysts. Nevertheless, in its written response to the consultation feedback, ASX has repeatedly noted that it continues to expect entities to 'tread very carefully' in choosing to engage directly with analysts to avoid breaching their continuous disclosure obligations.