CorpComms Magazine

All business journalists dream of the day when a kindly soul presents them with documents on a forthcoming mega-takeover that will guarantee their article a prominent position on the front page and leave all their competitors scrambling to catch up.

Scoops such as these are rare, and the benevolent people who hand over chapter and verse of a takeover deal even rarer. When leaks do occur, however, the ensuing witch-hunts often result in finger pointing - and the usual targets of those sharpened talons are the financial PR firms.

It is an accusation that makes financial PR professionals bristle. Many claim they are convenient scapegoats for other, more culpable, market participants. 'Every time details of any deal my firm was working on leaked, we were always blamed,' says one financial PR. 'The reality was that, on many occasions, the level of information appearing in newspapers was way beyond what we had been briefed on.'

But one director of corporate communications rebuts this: 'Whenever we have worked on any market-sensitive deals, we kept our financial PR agency out of the loop until it was too late for it to do anything with the information. It's not that I did not trust the consultants working on our behalf, but I knew that when they got back to their office there were no controls in place. Everybody in the firm would know of our plans, and then it became extremely difficult to ensure confidentiality.'

It is anecdotes such as these that prompted scare stories in recent years that the Financial Services Authority (FSA), the City watchdog, was planning to regulate financial PR firms. Three years ago, the media pages of newspapers were filled with indignant articles suggesting that 'Friday night drops' - when Sunday newspaper journalists were given market-sensitive information after the London Stock Exchange closed - would be outlawed.

Financial PRs worried that their influence would be curbed, and even simple guidance to journalists frowned upon by the FSA. Articles started to hint darkly that the FSA was looking for scalps, to identify PR wrongdoers and discipline them as a warning to others in the industry who might be tempted to stray. The reality, according to Alex Sandberg, chairman of financial PR firm College Hill, which employs 200 staff and is retained by 170 listed companies, was somewhat different.

Laying down the law
This month the FSA will begin seeking feedback from financial PR firms on a statement of good practice for the industry. 'It is non-prescriptive, will not be enforced by the FSA and is to be adapted by non-regulated businesses to fit their particular size and shape,' says Sandberg. 'It really isn't rocket science. But it makes eminent sense and is a good thing for our industry and other non-regulated businesses.'

Sandberg has been involved since last year in discussions about good practice as part of his role as a board member of the Public Relations Consultants Association (PRCA). He joined a consultative working party, along with Michael Sandler, co-founder of Hudson Sandler, that also included representatives from the FSA, the Confederation of British Industry and the London Investment Banking Association (LIBA).

It is understood that, prior to the establishment of the working party, the FSA had asked LIBA to draft a code of conduct for financial PR firms. 'Can you imagine the irony in that?' says one PR. 'Many people think investment bankers are the biggest source of leaks to financial journalists.'

The move had been prompted by an informal investigation that the FSA conducted into the share price movements of four companies ahead of a takeover. In all but one, there had been seepage of insider information. The investigation concluded that there were many fault lines in the information process surrounding takeover deals, from inadequate controls on personal account dealing to poor information technology systems (see Reviewing the evidence, below).

Volunteer force
While the FSA was able to work closely with firms it already regulates to tighten controls, it recognised that the best way forward for firms it did not have regulatory control over might be to develop a voluntary, industry-led statement of good practice.

'It is for all non-regulated market participants,' explains Sandberg. 'We are talking about financial PR but also financial printers and even companies that produce PowerPoint presentations for transactions.' The voluntary code does not, however, apply to lawyers involved in M&A work as existing guidelines are already in place (in Rule 4 of the Solicitors Regulation Authority's code of conduct).

'There are six overarching principles that, when taken together, are thought to be best practice,' Sandberg adds. 'We have tried to write them in plain English, keep them simple and make no presumptions about any company.'

He is confident the principles will not provoke controversy. 'I think most firms will read them and think, We do most of that already,' he says. 'But these principles are a very good health check and a sensible solution to this problem. This is not a one-size-fits-all approach. Firms can adopt the principles most appropriate for their business.'

While Sandberg does not say as much, it is also obviously in the interests of financial PR firms to adopt a voluntary code rather than risk the wrath of the FSA, which may ultimately consider compulsory measures.

Security measures
But a persistent flaw in any debate about whether to regulate financial PR firms or introduce a code of conduct for the industry is the fact that it is possible for anybody to open a PR company. There are no minimum standards or even legal requirements; theoretically, any one could open a financial PR firm, win a few clients and then trade on any information he or she receives.

Sandberg believes this risk is over-stated, however. 'M&A business is usually referred by either the client or the adviser, so you would need to have a track record and therefore would already have disciplines in place,' he explains. 'A complete cowboy with the express intention of abusing information would be discovered very quickly. Quite apart from the FSA, the Serious Fraud Office would be interested.' Insider dealing is, after all, a criminal offence for which the penalty can be a prison term.

Since Sandberg founded College Hill in 1990, he has had a rule that no employee may actively deal in shares. 'We are a recipient of price-sensitive information all day long,' he points out. 'Staff should not deal in shares. We must all seek permission from the compliance department, and permission may be withheld. I know a clean desk policy is sensible, but we're a little way off that. We do have good electronic entry security to our main office, however, and we are looking to tighten up our IT network access.'

 

Reviewing the evidence
The level of suspicious price movements ahead of takeover announcements prompted the Financial Services Authority (FSA), the City watchdog, to conduct an in-depth review of four deals last year.

The review, conducted on an informal basis - which enabled the FSA to have open and frank discussions with all interested parties - included three deals where there had been an unusual degree of share price volatility ahead of the announcements. The FSA visited all key parties, including the corporate finance advisers, lawyers, PR firms and financial printers, to investigate the internal controls, policies and procedures in place.

The watchdog subsequently discovered there were three different types of leaks:

• Accidental leaks, where staff inadvertently spilled information. These often arose due to weak controls or a lack of awareness or training
• Intentional leaks to the media for strategic purposes, perhaps to flush out other bidders or speed up the process
• Intentional leaks for market misconduct purposes, where someone knowingly discloses information, perhaps for insider trading purposes.

Unsurprisingly, perhaps, every firm the FSA spoke to was confident that leaks did not emanate from it, a view the authority considered overly complacent considering the price volatility in pre-takeover shares.

The watchdog also found that few companies had a formulated policy on how to conduct an internal review following an information leak. Indeed, many firms were reluctant to hold these reviews, which they described as time-consuming and difficult, because they would not accept that their staff had leaked information.

The FSA was further alarmed to discover that the number of insiders at many firms was significant, and suggested that more rigour should be applied to decide who needed to know about a deal. It found that information technology controls could be improved significantly to limit access to inside information, and that non-regulated firms, such as PR companies or financial printers, had limited training on market abuse and insider dealing laws.

Additionally, the FSA found that, when hiring a third party, firms all too often relied on confidentiality letters without actually getting any assurances that necessary controls were in place to keep information secret. Similarly, many firms relied on code words, which were substituted for the actual names of the parties involved, to maintain confidentiality. But the FSA found this scheme largely ineffective as most code names were relatively easy to decipher.

A further finding was that most non-regulated or non-professional firms did not monitor their employees' personal account dealing. Indeed, many did not even ensure their staff knew insider dealing was a criminal offence. Policies and controls relating to personal account dealing was the area where the FSA observed the widest range of practices, with differences even between firms in the same business category.

 

Statement of good practice

There are six overarching principles proposed by the working party. They suggest market participants should:

1 Ensure that there are clear policies and procedures in place for handling price-sensitive information and be definitive about who is responsible for implementing them
2 Be aware of and introduce adequate training in their business with regard to the handling of inside information
3 Introduce appropriate information controls along 'need to know' lines, where applicable
4 Introduce policies and controls for passing price-sensitive information to third parties
5 Think through IT security
6 Give consideration to employees' personal account dealing policies.

In its informal investigation into share price movements, the FSA found examples of what it perceived as good practice for each of these principles.

For example, it found some firms maintained formal documented policies relating to information handling and ensured all 'insider lists' were kept up to date. They also conducted exit interviews when staff members who held sensitive information resigned, to remind them of their confidentiality obligations.

In other firms, information about deals was limited to a minimum number of staff members, and only after they were signed off by a senior executive could another person be added to the insider list. Similarly, policies were in place to prevent staff working on sensitive papers in public places, such as on planes or trains.

When it came to IT, the watchdog thought good practice examples included restricting IT access to specific named individuals working on a specific deal, and the use of appropriate code names for files and folders. Some firms also employed dedicated IT support people for deal teams who were made aware of insider trading laws.

The FSA was also impressed by firms that trained all employees, including support and non-professional staff, on market abuse and insider trading laws.

 

Rule 2.1 of the Takeover Code
All persons privy to confidential information - and particularly pricesensitive information - concerning an offer or contemplated offer must treat that information as secret and may pass it to another person only if it necessary to do so and if that person is made aware of the need for secrecy. All such persons must conduct themselves in order to minimise the chances of an accidental leak of information.

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