ASX rule change could create ‘two-tier’ regulatory system, warns AIRA

Proposed changes to Australia’s continuous disclosure rules have come under fire from the Australasian Investor Relations Association (AIRA).
 
As the Australian Securities Exchange (ASX) plans an update to its Guidance Note 8, which in part directs companies as to when they are required to provide profit updates, AIRA has warned that the rule changes could put some companies off giving guidance altogether.
 
AIRA supports an update to Australia’s continuous disclosure rules, however, which the ASX itself notes are in need of clarification following the last major rewrite in 2013.

‘ASX has been concerned, for example, that the updated guidance had been misinterpreted to mean listed entities need to give an earnings update just because their actual or projected earnings differ from consensus forecasts by a relatively small amount,’ the exchange noted in a March press release. ‘This may have led to attempts by some listed entities to shape analyst forecasts in a non-public or selective manner.’
 
Australian continuous disclosure rules require companies to have regard to consensus, explains Ian Matheson, AIRA’s chief executive. If a company is 5 percent-10 percent away from consensus or from the previous corresponding period, ‘that is the trigger for a profit update.’
 
The ASX has also voiced concerns in its consultation paper that while some companies have a stated policy of not giving earnings guidance, a number were ‘disseminating analyst forecasts or consensus estimates in a manner that could be interpreted by some as quasi earnings guidance.’
 
The proposed changes set out different requirements for companies choosing to give guidance and those that choose not to, which could result in some companies – especially smaller firms with fewer resources – simply choosing to end guidance practices altogether, says Matheson.

‘It’s not clear at the moment in these changes whether [the ASX] is defining guidance as non-financial guidance as well, such as capex or production guidance,’ he adds. ‘If it does intend to include non-financial guidance, that makes these proposals potentially even more difficult.
 
‘If a company does give guidance, and if the obligation on it is going to be somehow different because it’s giving guidance, then our concern is that a lot of small and mid-cap companies that are less well understood by the market and maybe less well researched may take the view that this is all just too hard. That’s an undesirable outcome where investors and analysts could be less well informed about a company.’
 
AIRA, whose 160 corporate members represent more than A$1.2 tn ($953 bn) of market capitalization, and more than 80 percent of the total market capitalization of companies listed on ASX, also warns that its members tend to treat ASX ‘guidelines’ as ‘mandatory’ rather than ‘voluntary’.
 
The final rewrite of the rules will come into force on July 1.