ASIC has reminded directors of their share trading obligations during COVID-19 and stated that it does not consider it good practice for directors to enter into margin call arrangements.
Given the significant volatility in the current market environment driven by COVID-19, ASIC has issued guidance that sets out some important reminders for directors and other insiders to consider when buying or selling shares.
As ASIC notes, directors may decide to buy or subscribe for shares in their company as a show of positive support at a time of uncertainty. On the other hand, a change in personal or financial circumstances may underpin a decision to sell. ASIC reminds directors to be mindful of both the legal restrictions that apply to share trading, as well as the impact that trading will have on their reputation and investor perceptions about the company.
In particular, ASIC states that directors should consider the following when deciding whether to buy or sell shares in their listed entity:
- Check your entity's trading policy: Is the company currently in a blackout period that would prohibit trading? If so, under the ASX Listing Rules, it is expected that a request for prior written approval will only be made in 'exceptional circumstances' as specified in the entity's trading policy. ASX has indicated that it expects approval to be granted sparingly and with caution.
- Consider the information in your possession: Even if the trade is allowed under the trading policy, a director must still consider whether they hold any inside information or information that could give rise to perceptions that could adversely impact their, or their listed entity's, standing or reputation. The value of such information is especially critical during COVID-19, which has resulted in an uncertain and volatile trading environment.
- Notify the market: Directors must ensure that the relevant market operator is notified of any change to their interests in securities within five business days. Directors who have, or will have, a substantial holding in a company or listed managed investment scheme may also need to comply with a separate obligation to file a substantial holding notice.
- Consider conflicts and disclosure obligations arising from margin loans and similar arrangements: ASIC considers that arrangements such as margin loans may create an incentive for directors to seek to ensure share prices remain at a level that avoids a margin call. ASIC is concerned that this may result in the director preferring a course of actions that provides short-term gains at the expense of a longer term outlook.
While many company share trading policies set out specific rules around margin call arrangements, ASIC has stated that directors should be mindful that these arrangements can create adverse market perceptions and that for these reasons, it does not consider it good practice to enter into margin call arrangements over their own listed entity's securities.
ASIC also reminds directors that margin loans over a material number of securities may trigger continuous disclosure obligations.
You can read ASIC's full statement on director trading during COVID-19 here.
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