There has been recent market disquiet concerning the disclosure and non-disclosure of margin loans held by directors and senior executives. The Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) issued three statements in March to clarify and reinforce existing obligations in relation to share lending, short selling and false and misleading rumours.

Since that time, there has been considerable commentary on the impact of stock lending, short selling and margin lending on company performance, particularly in a volatile market.

With this in mind Chartered Secretaries Australia is seeking your views on these complex issues in order to develop a position on disclosure and explore whether further regulatory responses are required.

1. Should directors and executives be required to disclose if their shares are subject to a margin loan?

Yes 63%
No 37%

Comment

Subject to 2 below.
Directors should be required to advise the company secretary. Directors should not be treated any differently to other members.
Because directors selling shares in their company usually raises concern with other shareholders about the well-being of the company when the market is as volatile as it is at present. However, if shareholders were informed that the director was only selling because of a margin call, there is likely to be far less agro and panic.
No, except where holding is substantial, ie >5 per cent.
If directors have margin loans, the calling of which will have a grave affect on the financial stability of the organisation for which they are directors.
If director or executive holdings represent a significant interest in the company then they should be required to disclose margin lending arrangements impacting on those holdings. The rationale for this is that a margin call on the shares could lead to a forced sale of the shares causing a significant decrease in the share price which could negatively impact on other shareholders. Disclosure of margin loan arrangements on nominal shareholdings should not be required as potential margin calls are unlikely to impact on share price. The difficult issue is to determine the trigger point for disclosure.
Any decision to mandate disclosure of margin loan arrangements should be accompanied by stricter controls over short selling of company shares so that opportunists do not take advantage of the disclosures to force down the share price (by short selling the stock) to the level that triggers a margin call putting further downward pressure on the stock price.
Directors should be required to disclose whether any shares they hold in the company are subject to margin facilities. Executives who are not directors should also be required to disclose if they hold a material (to the company) number of shares subject to a margin loan.
Only if material.
There need not be any special disclosure requirements for executives' or directors' margin loans. Where a substantial shareholding is involved, disclosure of the interest of the margin lender should be disclosed — this would apply equally to shares held by directors, executives or any other shareholder.
Only if material to the company's share price.
Disclosed to the company so the company can assess materiality. Then subject to materiality to the ASX.
Subject to 2 below.
Should be same individuals for whom must disclosure share trades to ASX — therefore just directors.
Definitely.
It should be included as part of the corporate governance statement but obviously the wording of such a requirement needs careful consideration, eg it should apply to all of a company’s securities and not only shares.
I think this issue should be looked at in two parts. The first obligation should relate to disclosure by the director or executive to the company/board of margin loans and relevant details. The second (disclosure to the market) is more problematic and is a matter for judgement by the board as to whether the existence of such loans warrants disclosure under Listing Rule 3.1.
No, unless it is material.
Not in all circumstances. I believe that such disclosure should be made where it is considered material.
To a point as it all becomes part of corporate governance and risk issues, particularly if the bank has the availability to sell the shares without the consent of the holder.
Assume question means disclose to the market. It would be prudent for the company to be aware of shares owned by directors and key executives that are subject to margin loans.
Only if the margin loan security covers the company’s shares. The disclosure should be internal only.
The position may be considered relevant by the market in determining the directors' and executives' actual equity interest in the company.
Only in the event that the relevant director/executive holds a substantial number of shares in his company which are subject to such calls.
If the impact of the margin loan would require disclosure under Listing Rule 3.1 in the normal course, but not otherwise.

2. Should the privacy of directors’ and executives’ personal finances be respected and disclosure of a margin loan only be required when a margin position may be material to the company’s share price?

Yes 65%
No 35%

Comment

It may be difficult to interpret materiality.
Except that who makes decision as to what is material? There needs to be an objective test.
Given their position it should be disclosed at all times as material can be subjective anyway. The trading policies of individual companies should discourage this activity in the first place.
Any personal finance of directors and executives that has the potential ability to materially affect the financial stability/viability of the company should be part of the continuous disclosure rules.
No for directors, yes for executives who are not directors.
Directors should disclose whether any shares are subject to a margin loan. Executives who are not directors should also disclose if they have a material holding.
If a margin loan over a shareholding may be material to a share price, this would apply to any holding whether held by a director, executive or other shareholders. Disclosure of these interests should be based on the size and the materiality of the holding, not the identity of the holder. The regime for disclosure of relevant interests of substantial shareholders should be applied.
The director can take actions to shield his/her other finances from disclosure.
Disclosure if material number of shares are subject to margin loans.
Need a clear rule.
Shareholders deserve to know how the management views the stock as it can give away information about their long-term intentions. Share trading policies should make it compulsory to make disclosures re director and executive shareholdings.
Who would judge when a margin position may be material to a company’s share price? It would be very difficult to define at what point a margin loan is material.
Privacy should be respected but will be subject to the company's Listing Rule obligations in relation to continuous disclosure.
All directors share trading is required to be disclosed, despite the privacy issues. So margin loans should be the same. The loss of privacy is part of what is required to be a director and being entrusted with serving shareholders interests.
Full details do not need to be disclosed only to the extent of large holdings — in excess of 5 per cent of share capital of company and when the bank/financier has the ability to sell.
They are already required to disclose their shareholding and many companies have share trading policies that restrict their ability to have derivatives over the company’s shares. I believe that a margin loan is no different.
No exceptions.
Provided spirit of Listing Rule 3.1 is otherwise complied with.
The issue of ‘material’ needs to be defined by a certain percentage of issued capital.

3. Does the disclosure of shares held by directors and executives being subject to margin loans increase the vulnerability of the company’s shares to short-selling by hedge funds?

Yes 82%
No 18%

Comment

Unsure.
It does for small-mid cap companies. Not so apparent for large cap companies.
The regulators need to address the impact that short selling has on the market.
Only when the quantities are substantial.
Directors, CEO and key executives only.
Yes, if the holdings subject to the margin loan arrangements are significant. No, if the holdings are not significant.
Possibly, but that’s a reason to exercise care in entering into margin facilities, not a reason for lack of transparency with the market.
It could, but disclosure of triggers for the forced sale of any material holding could make a company's share price vulnerable.
Unavoidable — if the margin loan is material to the company's price, then the increased vulnerability needs to be known by the whole market, not just the subject of speculation or informed inside knowledge.
If a material amount is held.
If there are a material number of shares subject to margin loans.
Therefore they should not enter into margin loans.
They shouldn’t be doing it at all or, if they are, disclosing everything.
Possibly — particularly as the share price falls to level which may trigger such margin lending. This illustrates the importance of disclosing such information to the market.
It depends on what disclosure is made in respect of these loans.
Unless it is material.
I believe it will generally have the opposite effect.
May do if the quantity of shares subject to margin loans be significant or material in size.
If the number of shares subject to margin loans are substantial, disclosure can create a self-fulfilling prophecy.
This will depend on the relevant percentage that the executive owns.
May depend on the significance of the holdings.
I suspect the information is in the market in any event through the broking community.

4. Should the disclosure of directors’ and executives’ financing arrangements be required where failure to disclose might give a false impression of the degree of confidence the directors or executives have in the company or the amount of their personal wealth that they have committed to the company?

Yes 67%
No 33%

Comment

Not otherwise than as indicated above.
Full disclosure at all times will remove any ambiguity. This comes with the territory if you want to become a director of an ASX listed entity.
If so, then governance protocols need to be put around the rules of hedge funds short selling.
ACSI and other governance groups have indicated that they do not support senior executives and directors hedging shareholdings (and in particular unvested share plan holdings) against downward movements in the share price on the basis that they should be exposed to the same share price volatility as other shareholders. They encourage companies to disclose any such financing arrangements in the annual report. It is arguable in the interests of transparency that margin loan arrangements designed to take advantage of upward movements in the share price should similarly be disclosed in the annual report. This is an issue that should not be regulated but instead be issued as a voluntary ASX Corporate Governance Council guideline to be addressed by each company. The policy should be covered in each company's securities dealing code and disclosed in the annual report.
If a director has a large margin loan over a shareholding this actually suggests a higher degree of confidence in the share price and an expectation of a share price.
Disclosure only where material.
Potentially.
Financing arrangements per se should not need to be disclosed; however, I think there is a strong argument for the disclosure of margin lending or any other financing arrangement which could cause a forced sale of the director's shares.
Gives shareholders an idea of their level of commitment to the company.
To correct a false market in the company's listed securities but I am not certain that the mere existence of such loans can be directly linked to the relevant director/executive's degree of confidence in a company.
Such a requirement would be too subjective and make compliance very difficult.
Isn't this the problem we have witnessed recently, that no-one knew about the margin loans but knew the directors had significant shareholdings (and interpreted that to mean that the directors had very high confidence in the company)?
Assumes that borrowing to finance equity shows a lack of confidence when it can actually be seen to be the reverse — have so much confidence that the director is willing to take on risk by borrowing.
Directors are already required to advise the shares that they hold so much of this information is already available.
The better approach is to require disclosure of all.
Suggest that this query goes more to the issue associated with the need of executives to report share trading activities generally.
I don’t believe you can draw conclusions on confidence based on whether someone has a loan or no loan. The conclusion would be more around their wealth and tax arrangements.

5. Does your company currently have a share trading policy for directors and executives in place?

Yes 100%

Comment

Standard for a listed company
Required under ASX Corporate Governance Council Principles
We have a share watch put on all company directors, executives and employees with our share register, who report to us within three days as to any trading that has occurred.

6. Does your company have in place a process for tracking compliance with the share trading policy?

Yes 81%
No 19%

Comment

Not a strict process; directors are obliged to advise board of any dealings in company's shares. Company Secretary can confirm with the share register those holdings known of.
Director/executive/employee honesty system.
Partly — senior management’s dealings are tagged according to the accounts they have provided to us. Note that it is not possible to fully track compliance as a staff member may set up a new account and not disclose it so that it cannot then be tracked.
Compliance with the Code of Conduct, which includes compliance with all company policies, is monitored. Employees are asked to confirm their Code of Conduct compliance each year.
The directors shares are tagged as are senior executives. Part of the holdings are held in escrow and in some cases this is a requirement of the plan which saw the executives and directors receive the shares.
Not a formalised process but checks are done.
We do check directors’ shareholdings against 3Ys on an annual basis, but we don’t monitor employee trading. My concerns around this are (1) privacy; (2) any serious insider trading is more likely to be in a name we wouldn’t recognise; (3) resourcing; and (4) what are your legal obligations if you suspect something — would there be an obligation to report it to a regulatory authority or the police?

7. Is tighter regulation required in relation to short selling and stock lending?

Yes 82%
No 18%

Comment

Greater disclosure of short selling is required.
There is too much market manipulation occurring via these mechanisms.
Short selling is a form of market manipulation, although it is often dressed up as assisting to create an efficient market. Perhaps all short selling transactions should be indicated as such in trade data. At the moment speculation, fear and greed drive the market to excesses.
Definitely should be regulated against.
Given recent events it would seem so.
Absolutely. Parties involved in short selling should be required to disclose details of significant short selling in company stocks conducted over a period of time in a similar manner to the substantial shareholder reporting. Details should include the name of the short seller, the party lending the stock and the period of the loan, the volume and prices of shares sold over a period of time. The fines associated with failing to make settlement should also be significantly increased to deter hedge funds treating the fines as a routine transaction cost.
Current market issues seem to be more about exposing flaws in underlying business models than flaws in the regulation of short selling and stock lending.
The existing rules should be enforced.
I'm not convinced that short selling and stock lending are the key drivers here — if the market was inherently stable, then these practices would not be taking place.
Rampant short selling can create a false market.
ASX is hopelessly conflicted. I don’t know what sort of regulation by ASIC would work as it’s been going on for years.
These functions add to the efficiency of the marketplace.
More transparency in this area would be helpful.
Perhaps for senior executives as well as directors.
Disclosure should be made for the same reasons referred to in 1 above, ie the position may be considered relevant by the market in determining the directors' and executives' actual equity interest in the company.
Maybe there should be some sort of disclosure obligation on the person/company doing it subject to some materiality level.