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Australian consultation paper on market rumors

ASIC today released a Consultation Paper, Responsible handling of rumours, outlining some proposed principles and guidelines designed to assist market participants in their dealing with market rumours.

ASIC believes these proposed guidelines will help lift standards of conduct across the market by providing AFS licensees with a better understanding of their responsibilities when handling rumours, whether they are positive or negative in nature and whether the market is rising or falling.

Confidence in the integrity of capital markets is undermined if investors believe that rumours are actively spread in the market so as to distort proper price discovery. During the recent financial crisis there was much discussion about short selling on the back of negative rumours about an entity. In a rising market the distortion is artificial inflation of the price of a security.

The focus of this paper is on responsible handling of rumours. The Corporations Act prohibits making false or misleading statements and communicating material inside information. The guidelines in the paper supplement these provisions. They require AFS licensees to adopt policies to manage the circumstances where staff and representatives can pass on rumours, both internally and externally.

ASIC understands the importance of the free flow of bona fide, rationally held opinions in the market and the paper distinguishes rumour from opinion. The purpose of this paper is to improve the quality of information and discussion in the market.

The paper covers proposed principles to assist AFS licensees when handling rumours, these include: a requirement to have written policies and procedures on handling rumours and a process for supervising compliance with these; a requirement to have formal training for employees and representatives on the policies and procedures applicable to rumours; a general prohibition on the origination of rumours; a prohibition on the circulation of rumours, except where the rumour is in wide circulation and a judgement is formed that in the circumstances the rumour would not unduly distort the market; a process for attempting to verify rumours; and a requirement that a rumour must be described as such, if it is approved to be passed on, and must not be embellished.

ASIC is seeking the market's views on whether its proposed principles provide sufficient guidance for AFS licensees to exercise judgement in respect to identifying rumours and handling them.

The principles contained in the consultation paper released today will apply to stockbrokers, investment advisers and also investment managers. ASIC has a separate project reviewing practices for the handling of confidential information by listed entities and their advisers.

ASIC will be encouraging other industry groups with connections to the markets, such as the media, investor relations and public relations advisers, to consider if their practices should be reviewed, consistent with the principles in this consultation paper.

The consultation period ends on 9 November 2009.

Background In March 2008, ASIC formed Project Mint following concerns that there was an increase in false rumours associated with short selling. ASIC reminded the market of the laws that restrict this type of conduct (refer MR08-47). On 11 March ASIC advised it had started formally seeking information about trading in some securities (refer MR08-48).

In the initial stages of the Project ASIC’s focus was principally investigative – receiving and reviewing considerable amounts of trading data. As ASIC assessed the information it have gained a better understanding of market practices and widened its approach to focus more on market conduct practices.

Project Mint has progressed from an enforcement focussed activity to broader work designed to improve market conduct practices. Its’ activities have culminated in today’s release of rumour handling principles.

The Project has significantly enhanced ASIC’s relationship with the securities market through the resulting dialogue with market participants about proper conduct. As a result, ASIC now has arrangements with the brokers for better exchange of information about the market dealings.

The focus of ASIC’s current and future market conduct work is being undertaken by a range of specialist stakeholder teams formed under its new structure.

Download the Consultation Paper (CP 118)

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