The Financial Services Authority (FSA), now the Financial Conduct Authority, announced earlier this year that it had, for the first time, imposed a fine against a listed company for a breach of the dealing provisions in the Model Code and the provisions in the Listing Rules with regard to compliance with the Model Code.
On 14th February, the FSA fined Nestor Healthcare Group Limited (Nestor) GBP 175,000 for failing to ensure that its board members and senior executives complied with the share dealing provisions of the Model Code.
David Lawton, the FSA’s director of markets, said: ‘The Model Code is fundamental in helping directors and senior executives protect themselves against suspicion of abusing inside information. Regardless of their size, the FSA expects listed companies to meet their obligations under the Listing Rules and the Listing Principles and ensure that the Model Code is complied with at all times. Nestor’s own share dealing policy fell by the wayside, which the FSA regards as unacceptable. Listed companies should ensure their practises in this area are fit for purpose.’
Nestor agreed to settle at an early stage and qualified for a 30 per cent discount on its penalty of GBP 250,000. However, this move did not mitigate the criticism it came under.
In its Final Notice, the FSA highlighted five key areas in which Nestor failed to meet the required standard. These were:
Not reinforcing awareness of its Share Dealing Policy
Despite the fact that Nestor had a Share Dealing Policy in place throughout the relevant period and that it issued six monthly reminders to all directors, Persons Dispensing Managerial Responsibility (PDMRs) and employee insiders reminding them that they were not permitted to trade during a close period - by failing to issue any reminders or training about the content of or the need to comply with the Share Dealing Policy, Nestor failed to ensure their awareness of the requirements of the Model Code.
Relying on experience and knowledge of directors
The FSA deemed that Nestor’s reliance on the experience and knowledge of its board members alone to enable it to meet the requirements of the Model Code was insufficient and increased the risk that PDMR dealings would be conducted in breach of the Model Code.
Not reviewing the adequacy of its PDMR share dealing arrangements
Nestor failed to review the adequacy of its PDMR share dealing arrangements and in doing so, overlooked a possible method by which poor practice could be identified.
Breaches of the Model Code
Where the roles of chairman and chief executive are combined (as they were at Nestor), that person must not deal in shares of the company without first notifying and receiving clearance from the board as a whole. Upon receiving such clearance to deal, restricted persons must deal as soon as possible and in any event within two business days. In one instance, a Nestor board member dealt in shares some two months after receiving clearance.
A company must also maintain a record of the response to any dealing request made by a restricted person and of any clearance given. A copy of this response and of any clearance must be given to the restricted person concerned. Nestor failed to maintain such records and thus was deemed to be in breach of the Model Code.
Failure to identify on-going breaches
Nestor failed to identify that its PDMRs had forgotten that they were required to comply with the Share Dealing Policy, that they were not complying with it and that breaches of the Model Code had occurred.
Practical steps that can be taken in light of the FSA’s decision:
TMF Group recommends the following steps be taken by company secretaries:
- PDMRs should be regularly reminded about the content of any share dealing code the company has in place and of their obligations under the Model Code. They should also be required to participate in periodic training sessions to remind them of these obligations.
- There should be a periodic review of the effectiveness of PDMR share dealing requirements, with any apparent deficiencies being addressed.
- Where the office of chairman and chief executive are combined, any clearance for that person to deal must come from the board as a whole.
- Adoption of a periodic review of compliance by PDMRs with the share dealing policy and in turn, the Model Code.
- Establishing a formal and robust share dealing application and clearance process. It is important that the process be given sufficient authority such that a request to deal may be refused if it does not satisfy the criteria of the Model Code.
- Include, in every clearance to deal notification, a clear statement that any trades must occur within two business days of the clearance being granted and that the clearance will lapse after this period.
- Maintain complete records regarding all applications to deal, any responses given and any clearances granted. A copy of any response and of any clearance must be also be given to the restricted person concerned.