Director trading recommendations present some concerns

Implementing recommendations to ban director share trading within arbitrary blackout periods and force disclosure of director margin loans could have a detrimental impact on the important alignment between the interests of directors and investors, the Australian Institute of Company Directors (AICD) said today.

AICD was responding to recommendations from the Corporations and Market Advisory Committee (CAMAC) for listed companies to adopt trading policies prohibiting directors and executives from any trading in their company’s shares in the ‘blackout’ period between the close of its accounts and the announcement of its results, or when it has any market sensitive matter under consideration.

Any waivers could only be made in cases of severe financial difficulty or other exceptional circumstances and only after consultation with the ASX or the Australian Securities & Investments Commission (ASIC).

CAMAC suggested the new restrictions could be included in the ASX Corporate Governance Council’s Principles or as part of the ASX Listing Rules, but it left open that they may have to be imposed by legislation.

AICD said that the existing continuous disclosure regime and insider trading laws were adequate and the additional restrictions proposed by CAMAC were unnecessary and could be unworkable.

AICD has already urged companies to adopt clear and rigorous policies for director share trading in line with the ASX Corporate Governance Council’s Principles which allow boards discretion to permit trading in restricted periods where a director’s particular circumstances justified doing so. It has also suggested that when boards exercise their discretion companies should proactively announce this to the market.

According to John Colvin, Chief Executive Officer of AICD, the restrictions proposed by CAMAC went too far, removing much of this flexibility of directors to trade, in accordance with the law and with the approval of their board, where they had legitimate reasons to do so.

It is widely expected that directors hold shares in the listed companies of which they are a director, in order to align their interests with those of shareholders more generally.

The imposition of a ban on director trading in ‘blackout’ periods means directors and executives are taking on greater risk if they invest and have substantial holdings in their company’s shares where they are denied the right to trade in certain periods in all but the most exceptional of circumstances.

“The consequences of this are likely to be a reluctance of directors to hold shares – certainly not in the current quantities that many do,” Mr Colvin said.

“If directors cannot trade within certain periods, effectively a new class of shares is created,” he said.

“It must also be remembered, as CAMAC points out, that insider trading laws apply at all times regardless of whether it is a ‘blackout’ period or not and directors are required to disclose trading in their companies securities.”

Market Integrity and ‘Rigorous ’ regulation
AICD shares the view of CAMAC that a rigorous approach to the regulation of director share trading is necessary to ensure investor confidence in the integrity of the markets. However, Mr Colvin said that AICD was disappointed that the current insider trading laws, combined with ASX Governance Principles and company share trading policies, were not seen to be providing sufficient rigour.

By sugesting the new approach to regulating director trading is an “effective adjunct” to current insider trading laws, AICD believes CAMAC is acknowledging the challenges ASIC faces in proving and prosecuting those guilty of insider trading.

“We need greater investment in ASIC to enforce current insider trading laws; there should be no need to ‘leap frog’ incremental improvements in voluntary disclosure,” Mr Colvin said.

Director Margin loans
The regime of regulating director margin loans does not require significant overhaul. In its March 2009 submission to CAMAC, AICD said that the existing regime of continuous disclosure is sufficient in requiring a company to determine whether a director’s margin loan is ‘material’ or ‘price sensitive’ and therefore requiring disclosure.

Boards should be left to determine the appropriate level of internal regulation of director margin loans by putting in place internal policies that may, for example, prohibit directors from entering margin loans, set conditions on such arrangements or require directors to disclose details to the company, including when a margin call might be made and cannot be met by the director.

Possible harmonisation to Section 205G of the Corporations Act and ASX Listing Rules
Under Section 205G of the Corporations Act, directors are required to disclose their trades within a 14 day period. This requirement is in contrast to that of the ASX Listing Rules, which stipulates that companies must disclose director trades within five days. AICD is supportive of the suggestion by CAMAC that the two requirements be harmonised by amending the Corporations Act to require directors to disclose their trades to the market within five days. The consequent reduction in red tape and greater clarity is welcome.

Media Contacts:
Steve Burrell, General Manager Communications and Public Affairs
(02) 8248 6627 or 0407 708 485
Juliet Chandler, Communications Advisor
(02) 8248 6624 or 0412 580 402

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Australian Institute of Company Directors (AICD) provides education, information and advocacy for company directors Australia-wide, with offices in each state to cater for over 24,000 members. AICD members work in diverse corporations such as small-to-medium enterprises, the ASX Top 200 corporations, public sector organisations, not-for-profit companies, large private companies and smaller private family concerns.