Obligations re Brokers Coverage/Guidance

June 1 2014

BOARDWORX BRIEFING | Obligations with Brokers & Analysts Guidance

What is your obligation where Brokers or Analysts provide coverage guidance that may be inaccurate.

Legislative requirement – ASX Listing Rules

There is a risk here of re-quoting a large section of the recently revised Guidance Note 8 which deals with Continuous Disclosure, so this will be limited to a summary of some key points:

–        False Market:  Listed entities have a responsibility to correct a false market – that is, where there is material misinformation or materially incomplete information in the market (which includes but is not limited to the media, social media and broker / analyst guidance) which is compromising proper price discovery.

–        Earnings Guidance:  The provision of earnings guidance by a listed entity, must have a reasonable basis in fact.  So there needs to be appropriate due diligence, with underlying figures and assumption vetted and signed off before the guidance is released (preferably the Board as this is the signing body for financial statements).  Whilst listed entities may not provide earnings guidance, there needs to be caution in not providing de facto guidance – even statements such as “comfortable with”, or “expect earnings to be in line with analysts’ forecasts”, or “in line with or a particular percentage range above or below prior period” is regarded as de facto guidance by the ASX.  If these types of comments are made to analysts and the ASX becomes aware of them, it has the power to instruct the listed entity to make a statement to the market.

–        Earnings Surprises:  If the listed entity becomes aware that its earnings for the current reporting period will differ materially from market expectations (established by earnings guidance, sell-side analysts or earning results for the prior corresponding period), then consideration needs to be given around advising the market of this. Companies will of course need to remain conscious of their continuing obligations under Listing Rules 3.1A and 3.1B namely their primary continuous disclosure obligation and obligation to correct false markets.

While the determination of materiality remains a matter for the board to determine in each particular circumstance, ASX has provided guidance as to materiality in the context of earning surprises, listing the following considerations:

  • whether near term earnings is a material driver of the value of the entity’s securities;
  • whether the difference is attributable to a non-cash item (such as depreciation, amortization or impairment charge) that may not impact on underlying cash earnings;
  • whether the difference is a permanent one or is simply due to a timing issue (e.g. a material revenue or expense item that was expected to be booked in one reporting period is to be booked in a different reporting period);
  • whether the difference is attributable to one-off or recurring factors; and
  • whether the relative outlook for the entity in coming financial periods is positive or negative.

–        Correcting Analyst Forecasts:  An entity that is covered by sell-side analysts should generally be monitoring analyst forecasts and/or consensus estimates so that it has an understanding of the market’s expectations for its earnings.  ASX doesn’t believe that a listed entity has any obligation to correct the earnings forecast of any individual analyst or the consensus estimate of any individual information vendor to bring them into alignment with its own internal earnings forecast.  However as stated above, there is an obligation to provide an appropriate announcement immediately if and when it becomes aware of a market sensitive earnings surprise.

The ASX also states that ‘where an entity becomes aware that an analyst’s forecast for its earnings differs materially from its internal forecast, it is in the entity’s interests for it to explore with the analyst why that might be so and, if it becomes apparent that the analyst may have made a factual or computational error or may have missed a particular announcement, point that out to the analyst.’

ASIC also provides guidance around responding to financial projections and reports by noting that comments on market analysts’ financial projections should be confined to errors in factual information and underlying assumptions.  Responses which may suggest that projections are incorrect should be avoided.

Your Communication Policy

A review of your Market Communications Policy should be undertaken to review the sections of the policy that deal with Market Rumours and Speculation, Communications with Analysts and Investors and Open Briefings to Investors and Analysts etc, to ensure that they all accord with commentary in the ASX Guidance Note 8.  Specifically, review any sections on Responding on Financial Projections and Reports which may or may not permit the authorised spokesperson to point out factual inaccuracies and discuss assumptions (in accordance with the ASX Guidance Note).