Explainer: Continuous disclosure obligations

Can selective briefing ever be eradicated? Image sourced from www.shutterstock.com

Newcrest’s recent investigation by the corporate regulator into whether it breached its continuous disclosure obligations has no doubt proven a salutory lesson for listed companies as this reporting season continues.

The Australian Securities and Investment Commission has disclosure practices in its sights and a chastened Newcrest vowing to regain its reputation should have prompted other public companies to have a good look at their own compliance measures and not be complacent.

So just what is expected of Australian publicly listed companies?

Australia’s disclosure regime

Disclosure requirements are not new to company law in Australia and timely disclosure of material market information has been required for more than 100 years. The current continuous disclosure regime was introduced in 1994 and is regulated predominantly in Chapter 6CA (ss674-678) Corporations Act and through the ASX Listing Rules (Chapter 3).

Section 674 requires companies to notify investors through the ASX of any information not generally available that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the securities. Listing Rule 3.1 requires market-sensitive information to be disclosed immediately upon the entity becoming aware of it and Guidance Note 8 clarifies the application of 3.1.

Continuous disclosure aims not only to reduce information asymmetry between managers and investors, but also between different categories of investors. Effective and timely disclosure is a measure of good governance and is reinforced in Principle 5 in the ASX Corporate Governance Principles and Recommendations.

ASIC has several enforcement options available to it where a company breaches its continuous disclosure obligations. These include civil penalty proceedings with a maximum fine of $1 million, criminal penalty proceedings, enforceable undertakings and the use of infringement notices, introduced in 2004.

Compliance with an infringement notice does not, however, preclude ASIC from taking civil penalty proceedings against persons involved in the alleged breach, nor does it affect the right of third parties who may have been adversely affected by the conduct (s 1317HA).

However, whereas infringement notices enable breaches to be dealt with swiftly there is a possibility that large companies may see infringement notices and enforceable undertakings as an easy and cheap way out with minimal reputational impact.

The state of the continuous disclosure regime can be judged by ASIC’s policing activity. In his presentation to the Australasian Investor Relations Association (AIRA) on 31 July the ASIC Commissioner disclosed that since 2009 ASIC has prosecuted 28 insider trading actions, 18 successfully with five to be resolved and that ASIC’s conviction rate in the period from 2009 to now is about four times greater than during the previous decade.

There are currently 25 active insider trading investigations and since 2010 ASIC has issued a total of 11 infringement notices to nine entities for alleged failures to meet their continuous disclosure obligations.

Selective disclosure

The focus of ASIC’s investigation into Newcrest is whether it disclosed its position to selected analysts prior to the release on June 7 of a market update announcing massive writedowns and a production downgrade.

There is a close connection between selective disclosure and insider trading. Markets thrive on the flow of information; however this should not be at the expense of equity and efficiency. Nor should it hinder confident and informed investors. Selective disclosure skews analysts’ loyalty, prevents investors gaining equal access to information, undermines fairness and damages confidence.

Selective disclosure can create a vicious cycle where companies use selective access by analysts as a tool to secure favourable reviews in the understanding that access can be withdrawn if reports do not align with the company’s goals. Further, institutional investors may use their investment power to extract preferential access to information from listed companies through private briefings.

It is however too drastic to suggest banning selective briefings. They serve an important purpose by filling in gaps that may be missed by analysts in the normal course of their inquiries. This is relevant because in the end it is investors who profit from analyst expertise.

Webcasting, together with access to all relevant documents via the company website, is one way of levelling the playing field. Companies are already taking this lead in relation to formalised analyst, and in some cases, journalist briefings. But selective briefings are clearly another matter and although unfettered access to all analyst briefings may please retail investors, it is an unrealistic goal. It is in this context that ASIC’s recent surveillance initiative is an important addition to the disclosure regime.

Surveillance

ASIC’s new program of conducting spot checks with selected companies and monitoring compliance is overdue given the difficulty of successfully mounting and then succeeding in a criminal prosecution, as well as the overall costs implications for ASIC of both criminal and civil proceedings.

Laws are a mix of persuasion and punishment. What ASIC’s foray into analyst briefings introduces is a much-needed third pillar – participation. It is becoming increasingly clear that corporate governance can only be properly monitored and improved, if regulators participate in its processes.

Australia’s continuous disclosure laws hold up fairly well, but as always regulators like ASIC must balance the books and think creatively. The several layers of regulation, enforcement and guidance target the offending conduct in a comprehensive fashion. However the existence of regulation does not guarantee compliance. This is why the introduction of ASIC’s briefings surveillance initiative is perhaps the best evidence that the regulator is thinking ahead.

Of course once ASIC has infiltrated analyst briefings successfully it will then need to frequent the city cafes and bars where the real briefing takes place.