The long-awaited report by the Corporations and Markets Advisory Committee into company director margin loans and trading, rumourtrage and selective analyst briefings was publicly released last week. The report, which was handed to Corporate Law Minister, Chris Bowen on 30 June 2009, recommended the introduction of civil penalties for the spreading of false rumours, also known as Rumourtrage (currently only criminal penalties exist) as well as providing ASIC with the ability to request police phone intercepts.

CAMAC also suggested while directors “should not be prevented from entering margin lending or other loan arrangements as such, a clearance procedure should apply, having regard to possible conflicts of duty and other problems that can arise where securities of the company are used as collateral.” The report also stated that companies’ annual reports disclose the number or percentage of its securities held by directors or executive officers that are subject to a pledge.

This recommendation drew the ire of the Australian Institute of Company Directors, which claimed that existing rules relating to directors’ margin loans are adequate. AICD spokesperson John Colvin claimed that “we have real difficulty with directors’ margin loans being disclosed to the market and short sellers being able to manipulate that.”

Shareholders and commentators appear to have taken a different view, especially given the havoc wreaked by director margin loans at ABC Learning Centres and MFS. After ABC’s collapse and the revelation that former CEO, Eddy Groves’ stake was funded by debt, former ABC Learning Chairwoman, Sallyanne Atkinson, admitted that she had been completely unaware that Groves’ stake had been funded by margin facilities. When questioned, Atkinson stated, “I didn’t know [of the margin loans] and perhaps I should have. Perhaps we should have as a board.”

In addition to disclosure of margin facilities, CAMAC recommend that as a matter of best practice, directors and executive officers should not be permitted to deal in the securities of their company in sensitive blackout periods and that directors and executive officers to disclose to the market, within a short time, all their dealings in relation to securities of their company.

While these recommendations are theoretically already mandated under existing insider trading laws, directors have in recent year shown scant regard for timely disclosure of their holdings or respect for “black-out periods”. (A black-out period is usually the period preceding release of a company’s financial statements or other market sensitive information. Director trading during such times is in effect, a mild form of insider trading, but it is practically impossible for ASIC to regulate such behaviour).

Unsurprisingly, AICD was highly critical of the recommendations seeking to ensure that directors be required to obey insider trading laws, with Colvin telling the Financial Review that “if directors cannot trade within certain periods, effectively a new class of shares is created.” Colvin also noted that “insider trading provisions already applied to directors trades.” Despite the AICD’s claims, non-executive directors, like executives, are privy to a wealth of market sensitive information by virtue of their roles. When a director accepts a non-executive role, they do so with the knowledge that trading in their company’s securities will be limited. (In any event, shareholders could rightfully question why directors would have any need to actively be trading in their own company’s securities. Infrequent purchases of securities would be easily possible outside the limited black-out periods).

As for the claim that insider trading provisions apply — that may be true in a technical sense, but in reality, the evidence suggests that directors are wantonly disregarding the Corporations Act provisions and actively trading shares in their company with what some might deem to be inside information.

A detailed report prepared by governance advisory firm, Regnan in April 2008 revealed that “during the year ended September 2007 almost half (97) of S&P/ASX200 companies failed to notify public capital markets of changes in director interests within five business days as required by the ASX Listing Rules. And more than a third (70) of S&P/ASX200 companies also breached the 14 calendar day rule stipulated by the Corporations Acts.”

Regnan’s report also found that “in 32 companies, directors were actively purchasing shares within eight weeks prior to a material earnings upgrade or takeover announcement” while “in 23 companies, directors were actively trading shares during the period following books close until the day results were released … in 8 of these 23 companies the directors actively traded on the same day as results were released, leaving the market no time to digest the results.”

The proposals are being considered by Corporate Law Minister, Chris Bowen and the Australian Securities Exchange.

Peter Fray

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