On the 14th February 2013 the FSA fined Nestor Healthcare Group Limited (“Nestor”) £175,000 for failing to take adequate steps to ensure that its senior executives and board members complied with the share dealing provisions of the FSA’s Model Code. This was not a case that resulted in questions over market conduct/manipulation or insider dealing under s118 of the FSMA. Nor was it a case where Nestor failed to have an adequate policy in place. This was a case where breaches occurred principally due to Nestor’s weak procedures which ostensibly allowed for policy to be “forgotten” by the board. The FSA’s fine represents the first penalty imposed on a company for breaches of the Listing Rules and Listing Principles relating to compliance with the Model Code, undoubtedly it will not be the last.
THE FSA’S FINDINGS
The FSA found that between October 2006 and June 2010 Nestor failed to take reasonable steps to secure the compliance of persons discharging managerial responsibility (“PDMR”) with paragraphs 3 -7 of the Model Code and in so doing breached Listing Rule 9.2.8 and that it failed to take reasonable steps to enable their directors to understand their responsibilities and obligations under paragraphs 3-7 or to maintain adequate procedures, systems and controls to enable compliance with the obligations set out under Listing Rule 9.2.8. Nestor had previously implemented a “Share Dealing Policy”, adherence to which, at least initially, would have ensured compliance by the PDMR with the Model Code. However, Nestor failed to take reasonable steps to ensure adherence to this policy and also failed to review and update the policy where necessary. Instead the FSA found that an informal and ad-hoc process was observed giving rise to four clear failings (i) PDMR failed fully to understand their responsibilities under paragraphs 3-7 of the Model Code; (ii) two separate purchases of shares by a PDMR were transacted without the required approval of the whole board, as provided by the Model Code; (iii) one purchase of shares by a PDMR was carried out over two months after proper clearance was received, whereas the Model Code states transactions should take place within 2 business days; and (iv) on four separate occasions Nestor failed to maintain records of responses to deal requests and to provide a copy of the clearance to the restricted person concerned.
The FSA fond that the Share Dealing Policy had been circulated to all directors, PDMRs and insider employees, and each had signed an acknowledgment confirming that they understood the requirements and that they would ensure compliance with them. Six monthly reminders were issued to all of the parties (as detailed above), reminding them about when trading would be permitted. However, the FSA found that Nestor did not review the adequacy of its PDMR share dealing arrangements and so poor practice was overlooked and the company failed to identify ongoing breaches. After distributing the Share Dealing Policy, Nestor also failed to issue reminders or provide training about its content or the requirement to comply with it, or to reinforce its Share Dealing Policy. It was not enough to rely on the experience and knowledge of directors alone to meet the requirements of the Model Code. In addition, the FSA found that Nestor failed to identify another company officer (other than the CEO and Chairman) or committee of the Board who would be designated to give clearance to deal, as stipulated by paragraph 4 of the Model Code. Nestor agreed to settle at ‘stage one’ and as such were given the usual 30% discount on their fine. Were it not for the discount they would have faced a penalty in the region of £250,000.
REGULATION AND LEGISLATION
The Model Code Imposes restrictions on dealing in the securities of a listed company beyond those provided in law. The intention of the Model Code is to ensure those “discharging managerial responsibilities” neither abuse nor place themselves under suspicion of abusing inside information that may be considered to be in their possession, concerns that will be especially heightened in periods running up to announcements concerning the company’s results. Further it states that such persons given clearance to deal must deal as soon as possible and in any event within two business days of clearance being received
Rule 9.2.8 requires a listed company to require every person “discharging managing responsibilities”, to comply with the Model Code and take all proper and reasonable steps to secure their compliance. It is important to note that this includes directors of the company and every senior executive of a company who has regular access to inside information, relating directly or indirectly to the issuer and has power to make managerial decisions affecting the future development and business prospects of the company. Listing Principles asserts that a listed company must take reasonable steps to (i) enable its directors to understand their obligations and responsibilities as directors; and (ii) establish and maintain adequate procedures, systems and controls to enable compliance with its obligations.
Again, the FSA can be seen exercising their regulatory powers in relation to failures of internal policy and procedures even where there has been no intentional breach of the rules, where no dealings have taken place on the basis of information, and where there has been no actual financial benefit from the misconduct. This penalty represents another example of the FSA fulfilling its “credible deterrence strategy” and sends out a strong deterrence message of the need to adhere to the Model Code. In addition, both the Model Code and Chapter 9 of the Listing Rules are seen as “fundamental to the protection of shareholders”, which continues to be at the top of the corporate agenda.
HOW DRUCES CAN HELP
We can help in (i) setting up your company structure; (ii) identifying those persons discharging managerial responsibility; (iii) identifying what constitutes “inside information” and “insiders”; (iv) identifying organisational, regulatory and legal risk; (v) assisting with policy architecture – drafting policies that are right for your company, one size does not fit all; (vi) undertaking policy reviews – as your company evolves your policies need to reflect changing risk; (vii) training and Education – providing effective in-house training to PDMR’s and reviewing training needs with necessary updates; (viii) providing advice on good Corporate Governance to promote adherence at all levels; (ix) providing assistance and support to your Company Secretary and/or in house legal team.
This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force on 28th February 2013.