CFA Institute Reviews Current Regulations Regarding the Practice of Share Pledges

09 September 2009 - CFA Institute Reviews Current Regulations Regarding the Practice of Share Pledges by Directors and Controlling Shareholders - CFA Institute advocates greater disclosure standards across the Asia-Pacific region

Hong Kong, September 9, 2009 – The CFA Institute Centre for Financial Market Integrity (the CFA Institute Centre) has published a paper (PDF) reviewing the existing regulations on share pledges by directors and controlling shareholders of publicly listed companies. The issue of pledged shares is relevant as there have been several recent, high-profile cases in the Asia-Pacific region in which directors and/or shareholders pledged their shares to banks for margin loans; in several instances, pledged shares were sold to meet margin calls, leading to significant price declines and at times resulting in a change in control at the company.

The study reveals that disclosure rules for pledged shares and margin loans vary across the Asia-Pacific region. All markets require the disclosure of material, price-sensitive information; yet, the onus is on company directors to determine whether information is price sensitive and needs to be disclosed to the market. In the case of pledged shares, this can occur when the share price approaches trigger points whereby lenders can exercise their right to sell shares pledged for margin loans.

The CFA Institute Centre believes that listing rules which require directors to make judgment calls is inadequate given the number of small- and medium-sized companies that undertake the practice of share pledges for loans. The CFA Institute Centre recommends that there should be specific regulations for controlling shareholders and directors to disclose details of shares pledged on an event basis. There should also be disclosure of the shares owned by directors and shareholders as well as the percentage of shares owned to total issued capital.

“The CFA Institute Centre believes that the issue of pledged shares and margin loans is timely and relevant. We advocate that jurisdictions across the Asia-Pacific region improve their disclosure requirements in the best interests of investors. We believe in disclosure of critical information that leads to protection of investors,” said Lee Kha Loon, CFA, head, Asia-Pacific, CFA Institute Centre. “We are glad to see that some jurisdictions are implementing changes to make it mandatory for controlling shareholders to disclose pledged shares.”

CFA Institute Centre for Financial Market Integrity
The CFA Institute Centre for Financial Market Integrity develops timely, practical solutions to global capital market issues, while advancing investors’ interests by promoting the highest standards of ethics and professionalism within the investment community worldwide. It builds upon the CFA Institute 40-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession, which were first established in the 1960s. More information may be found at www.cfainstitute.org/centre/index.html.