FCA advises issuers to take heed after PLC fined following Model Code breaches

The Financial Conduct Authority has fined Reckitt Benckiser Group plc £539,800 for breaches of the Listing Rules by failing to take reasonable steps to secure compliance by persons discharging managerial responsibilities with the Model Code, and associated breaches of the Disclosure and Transparency Rules. This decision highlights the need for robust procedures and regular training and the FCA “expects all listed companies to learn the lessons from this case”. There was no suggestion that any dealings took place on the basis of inside information.

What happened?

On a number of occasions, shares held in the brokerage account of a PDMR were pledged as security for a credit facility. This constituted dealing under the Model Code, but the PDMR did not seek clearance as required. When the company found out about these dealings, some two years after the first pledge, it did not notify the market as soon as possible (as required by DTR 3.1.4) but instead conducted a reconciliation exercise on the shareholdings of all its PDMRs. It came to light during that exercise that another PDMR had sold shares four years previously, a transaction that was not disclosed to the market and of which there was no record of clearance having been given for Model Code purposes. When the company did notify the market of these PDMR dealings, the notification did not include all the details required to be made public under DTR 3.

What were the systems failings?

The FCA identified a number of procedures and systems which it considered inadequate and which therefore gave rise to breaches of the Listing Rules and the Listing Principles. In particular:

  • the company’s systems did not enable it to effectively monitor all share dealing by its PDMRs or identify possible breaches of the Model Code. In particular there was an over-reliance on its share plan administrator to notify the company of any dealings by PDMRs;
  • the company failed to review its share dealing policy to identify or mitigate the risks which subsequently crystallised;
  • there was an over-reliance on the knowledge and experience of the PDMRs to comply with the Model Code and a lack of regular or structured training or reminders (except in advance of close periods); and
  • the process for giving clearance to deal under the Model Code was too informal and inadequate records were kept when clearance was given.

What lessons can listed companies learn?

In light of this decision and the FCA’s clear expectation that listed companies should learn from it, issuers should consider the following questions.

  • Is our share dealing policy up to date?
  • Do our PDMRs understand the restrictions placed both on them and on their connected persons under the Model Code, including the full range of types of dealings that are covered and the correct process for obtaining clearance? If we sent them a note of these obligations did they sign and return a copy to acknowledge their understanding?
  • Do we remind PDMRs regularly of the restrictions on dealing, as well as sending reminders when the company is entering a close period? Should we remind PDMRs of their obligations before certain trigger events, such as before a dividend if they may use the dividend proceeds to purchase more shares?
  • Does our process for PDMRs to obtain clearance to deal comply with the Model Code and do we keep adequate written records of any requests for clearance?
  • When was the last time we gave our PDMRs training on the Model Code (and other obligations)? Is it time for a refresher?
  • How do we monitor dealings by PDMRs? Can our procedures be improved so that we get timely information on any dealings by PDMRs and any unauthorised dealings can be investigated?
  • Should we conduct a reconciliation process to ensure there have been no PDMR dealings (including share pledges) that we are not aware of?
  • Do we have procedures in place to notify the market as soon as possible, and in any event by the end of the next business day, once PDMRs or their connected persons notify us of their dealings? Do we have a process for ensuring such announcements comply with the contents requirements of DTR 3?

Background

The Model Code imposes restrictions on dealings in a listed company’s securities by its PDMRs, to ensure that they do not abuse, or come under suspicion of abusing, their access to inside information. In particular, PDMRs must obtain prior clearance before any dealing takes place and such clearance may not be given in a prohibited period.

The Model Code is not directly enforceable against PDMRs. Instead, listed companies are obliged to require their PDMRs to comply and must take all proper and reasonable steps to ensure their compliance (LR 9.2.8 R).

Under the Listing Principles (LR 7.2) listed companies must also take reasonable steps to:

enable their directors to understand their responsibilities and obligations as directors; and

establish and maintain adequate procedures, systems and controls to comply with their obligations.

If a PDMR is permitted to deal, he or she must notify the company and the company must notify certain prescribed information to the market as soon as possible and in any event by the end of the next business day (DTR 3).

Click here for the FCA’s press release.

Click here for the FCA’s final notice.