Continuous disclosure, executive risk and ASIC

This article was co-authored with Jessica Markabawi.

Recent Federal Court proceedings on continuous disclosure obligations reflect the Australian Securities and Investments Commission’s (ASIC) ongoing commitment to monitor disclosures by listed businesses and to help ensure the market is accurately informed.

The recent action by ASIC also demonstrates a key area of focus that ASIC has articulated in its recently published Corporate Plan which is: “Deterring poor behaviour and misconduct through [ASIC’s] ‘Why not Litigate?’ discipline and driving cultural change using all of [ASIC’s] regulatory tools”.

Senior executives were found to have breached Corporations Act requirements, particularly for their involvement in failing to disclose the likelihood of a material decrease in earnings.

We are committed to help ensure the Australian financial system is resilient and stable by, for example…continuing to monitor and enforce adherence to continuous disclosure requirements to help ensure the market is accurately informed. ASIC Corporate Plan 2020-24 (pg 13)

This is a timely reminder to all executives of the potential impact on them of being ‘knowingly concerned’ in the contravention of Corporations Act requirements by failing to make relevant disclosures to the market or ASIC. That impact includes potential disqualification from managing corporations for a lengthy period (with the accompanying loss of livelihood and reputation that will entail).

Indeed, ASIC has specified a key strategic action for the regulator as being “monitoring false or misleading disclosures, with a particular focus on withdrawal of earnings guidance and sectors operationally impacted by the COVID-19 pandemic”.

The Court has emphasised the critical importance of periodic disclosure, noting that “the objectives sought to be served by the continuous disclosure regime relate to the efficiency and reliability of the capital markets and the accountability of participants in those markets. Contraventions of the continuous disclosure regime are serious”.

Despite acknowledging that the executives did not act wilfully, deliberately or dishonestly and did not accrue any personal gain from their conduct, the seriousness of their omissions was nonetheless reflected in the relatively severe periods of disqualification handed down. Disqualification orders on the executives concerned were applied by the Court as being “both necessary and sufficient to serve the interests of deterrence and protection”.

In order to provide some relief to businesses from the economic uncertainty caused by the COVID-19 pandemic, continuous disclosure rules were relaxed in May 2020, with that relaxation now extended until March 2021. These temporary changes replaced the objective ‘reasonable person’ test with a subjective standard based on knowledge, recklessness or negligence. Although not relevant to recent Court deliberations, the change has not diminished ASIC’s focus on the importance of continuous disclosure and its enforcement.

ASIC has also undertaken in its Corporate Plan to conduct intensive surveillance and enforcement work to deter poor behaviour and misconduct, and will focus on cases of high-deterrence value. The ASIC Office of Enforcement will be prioritising significant market misconduct which includes continuous disclosure matters.

ASIC alert (and Hayne)

Executives who are subject to Corporations Act disclosure requirements should view these ASIC statements as a further alert that ASIC’s supervision in this area is unlikely to let up.

Breaches of continuous disclosure obligations are also examples of non-financial risk (and, specifically, conduct, compliance or operational risks) being inadequately managed and addressed. As the recent Banking Royal Commission (BRC) noted, “prudent management of non-financial risks is equally important [to that of financial risks]”. Non-financial risks (and their adequate management) are clearly relevant to governance failures that result in continuous disclosure not happening in the way that it should.

For those businesses that suspect their continuous disclosure assessments and processes are not as effective as they might be, it is worth recalling a principal BRC recommendation made by Commissioner Hayne. Entities should, as reasonably as possible, take proper steps to assess the entity’s governance, identify governance problems and deal with them.

This applies as much to continuous disclosure practice as to other matters of corporate management.