Opinion article – market cleanliness
By Cathie Armour
From next week we will be in what market obervers call 'profit season', when most listed companies submit their preliminary financial accounts for the period ending on 31 December last year. Those companies have until the end of February to tell investors via the ASX how they performed.
There will be both 'upside surprises' and 'downside disappointments', and inevitably some will be preceded by shareprice movements. Just as inevitably, observers will claim, or shout, that there simply must have been a leak, and that ASIC should 'do something'. Where warranted, we will.
Information is the lifeblood of an economy, and the more freely it flows the better. The same applies to our markets, which can only operate fairly when the information they run on is accurate, useful and available to all.
Recent research from data-room provider Intralinks reported an uptick in information leaks ahead of major announcements such as merger or takeover deals globally and in Australia. The report also highlighted that leaks are still significantly less of an issue when doing transactions in the Australian market than in most other developed equities markets.
ASIC's primary role is to protect and enhance market integrity and a big part of this is ensuring all investors get access to information in an orderly and transparent way. That does not mean putting the shareholder inside the boardroom; some matters must be dealt with in a confidential and frank environment. But it does mean when relevant information does emerge it should not be selectively available.
Leaks of any type can create false markets and that affects market integrity - whether the reality of actual distortion, or merely the perception. For the millions of Australians with a significant part of the national $2 trillion superannuation pool in the sharemarket, that is important.
So ASIC is keenly interested in leaks. We will continue the focus of our regulatory work on managing confidential information. And we will continue to measure the level of information asymmetry, or cleanliness, of our markets.
Our own research last year found there had been a sustained improvement in cleanliness of Australia's listed equity market over the past decade.
Report 487 Review of Australian equity market cleanliness, looked at possible insider trading and information leakage ahead of material, price-sensitive announcements by analysing price movements or shifts in trading behaviour before these announcements. (And investors should know that ASIC examines all trading surrounding significant market announcements as a matter of course).
The results suggest the extent of insider information and the loss of confidentiality ahead of material announcements has actually declined over this longer-term period and shows a statistically significant improvement in market cleanliness.
Our research is based on traditional market cleanliness measures and on an innovative new market cleanliness measure linked to our market surveillance and access to enhanced data through ASIC’s Market Analysis Intelligence system.
ASIC released a report last August looking at the handling of confidential information. Specifically, between September 2014 and June 2016, we examined practices of investment banks and brokers in the Australian market and sampled transactions, including initial public offerings (IPOs) and secondary offerings. What we found was that most have appropriate procedures and policies to handle confidential information.
But we did find variations in market practices. For instance, some organisations do not have arrangements to manage staff who come in contact with confidential information. This includes the inadequate use or supervision of restricted trading lists and information barriers (widely known as 'Chinese walls').
ASIC found a number of firms do not provide sufficient staff training as to what constitutes confidential information, or employ people with insufficient experience to assess the information.
Firms should consider whether their controls - policies, procedures, training and monitoring - are appropriate and meet legal and regulatory requirements. They should also consider carefully the handling of confidential information and conflicts to ensure they are managing risk of insider trading. This is not just a legal requirement, but good business practice. It is also commonsense.
Along with having good policies, there should be effective physical and technological segregation between research, sales and corporate advisory staff. Firms may consider controls on electronic communications between research, sales and corporate advisory staff.
Enforcement action is never lightly taken, and always regrettable that it should be necessary. But take it we will where we think the law has been breached. In July 2014, the Federal Court found Newcrest Mining contravened its continuous disclosure obligations whenit failed to disclose information to the market that it disclosed to research analysts. The court required the company to pay a $1.2 million civil penalty.
Preserving the integrity and good reputation of Australia's financial markets is a critical priority for ASIC, and a never-ending task. Our research might show the markets are in good shape, but there is no room for complacency by any of us - regulators, companies, advisers, market operators or participants.
Capital can flow freely in both directions, and investors will not long put their savings at risk in an unsafe market where 'who you know' is more important than investment fundamentals.
For our part, ASIC remains intensely focused on the integrity of our equities markets.We have the systems, the expertise, the powers and the track record that mean investors can be confident we do take action where we see wrongdoing.
This article was published in the Australian Financial Review on Wednesday 1 February 2017.
Cathie Armour is a commissioner with the Australian Securities and Investments Commission.