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Client Update: ASIC releases new best practice proposals

23 December 2009

In brief: The Australian Securities and Investments Commission has released a consultation paper seeking comment on proposed best practice guidelines for the handling of confidential information by companies and advisers. Partner Tim Lester and Lawyer Bree Rowswell look at the new proposals.

Consultation paper

ASIC Consultation Paper 128, Handling confidential information, released on 21 December 2009, sets out a range of best practice guidelines proposed by ASIC for the handling of confidential information, particularly in the context of capital raisings and mergers and acquisitions. The guidelines outline the standards of conduct and practices which ASIC believes companies should require from their directors, staff, transactional advisers and other service providers and were prepared in response to the occurrence of market-sensitive leaks over the past financial year.

Internal corporate policies and procedures

ASIC's recommends as best practice that companies have clear, documented internal policies that establish behaviour and procedures for the handling of confidential information. Specific proposals include that:

  • companies limit the number of people with access to confidential information to those who strictly require the information to undertake their business role;
  • information created or given to a company in a major transaction be classified according to the level of protection it requires in order to reduce mismanagement of confidential information;
  • companies ensure they have secure information technology systems and practices, information protection barriers and physical document management procedures in place;
  • companies maintain a register of all people, including all those people that work for the company's advisers, who are insiders on sensitive transactions so as to promote the 'need-to-know' principles and assist in investigating leaks or suspected leaks; and
  • formal, but proportionate, investigations should be conducted where a leak occurs or is suspected in a specific transaction to verify where the leak came from and deter employees from leaking information.

Obligations on individuals

ASIC notes that companies, advisers and other service providers should ensure that their employees properly understand their responsibility to keep information confidential, particularly in highly sensitive transactions. ASIC's guidelines propose that:

  • individuals involved in highly sensitive transactions should be required to sign individual confidentiality agreements to increase employees' personal responsibility and enhance the potential for preserving confidentiality;
  • listed companies should have securities trading restrictions for employees with access to confidential price-sensitive information trading in the company's financial products in a personal capacity, providing for pre-approval of all trades by these employees in the company's financial products, a requirement to provide the company with confirmation of the trade and regular disclosure of all security holdings by staff in sensitive roles; and
  • firms in the financial industry advising on market-sensitive transactions should have personal account dealing policies in place.

Releasing confidential information to third parties

ASIC believes that as part of best practice, companies should ensure that any external parties provided with confidential information have systems in place to protect that information. Further:

  • companies that are active participants in mergers and acquisitions or capital raisings should have umbrella agreements in place with investment banks and other advisers setting out general practices and principles to be adhered to when undertaking work for the company; and
  • all advisers should be required to sign transaction-specific confidentiality agreements before confidential information is released to the adviser (potential advisers should also be required to sign confidentiality agreements in order to reduce the risk of leaks following a 'beauty parade' to select advisers).

Sounding the market

ASIC also believes that market soundings increase the risk of misuse of price-sensitive confidential information and investment banks need to ensure they adopt adequate policies and procedures when sounding institutional shareholders. ASIC proposes that an investment bank should:

  • inform the company when it forms the view that it needs to sound the market and obtain the company's approval to do so;
  • conduct soundings only when the market is closed or the stock is in a trading halt, and sound as few parties as possible;
  • adopt a formal script detailing the conversation individual bankers may have with the institutions approached for sounding;
  • obtain verbal and written confirmation from institutions that agree to become insiders, to comply with insider trading restrictions before communicating confidential information to those institutions;
  • not discuss any price-sensitive information with institutions for a company that has not provided its approval to sound institutions; and
  • notify ASIC of certain details about the sounding (including the name of institutions contacted and whether each agreed to be made an insider, the time and date contact was made and the transaction that forms the subject of the sounding) within 48 hours of conducting the sounding.

General

According to ASIC, the misuse of confidential information about potential transactions poses several risks to the company conducting the transaction, including the risk that the company will be in breach of its continuous disclosure obligations under Chapter 3 of the ASX Listing Rules, that an employee or board member will engage in insider trading in breach of section 1043 of the Corporations Act 2001 (Cth), and that possible disclosure will constitute pre-prospectus advertising in breach of s734 of the Corporations Act. The guidelines are designed to be used by companies and their advisers to benchmark themselves against best practice, in order to strengthen their own controls and procedures so as to prevent market-sensitive leaks and maintain market efficiency.

Next steps

ASIC is seeking comments on its best practice guidelines from companies, advisers and other service providers that handle market-sensitive information. The closing date for submissions is 21 February 2010 and ASIC intends to release the final regulatory guide in April next year. If you are considering preparing submissions regarding ASIC's proposals or would like to discuss any aspect of the proposed guidelines, please do not hesitate to contact one of the below.

For further information, please contact:

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