Securities and financial services law [9th edition.] 9780409343076, 0409343072

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1st edition, An Introduction to the Securities Industries Acts, R Baxt, H A J Ford & G J Samuel, 1977. 2nd edition, An Introduction to the Securities Industry Codes, R Baxt, H A J Ford, G J Samuel & C Maxwell, 1982. 3rd edition, Stock Markets and the Securities Industry: Law and Practice, R Baxt, C Maxwell & S Bajada, 1988. Reprinted 1989 and 1990; supplement by R Baxt published 1992. 4th edition, Securities Industry Law, R Baxt, H A J Ford & A Black, 1993. 5th edition, Securities Industry Law, R Baxt, H A J Ford & A Black, 1996. 6th edition, Securities and Financial Services Law, R Baxt, A Black & P Hanrahan, 2003. Reprinted 2006. 7th edition, Securities and Financial Services Law, R Baxt, A Black & P Hanrahan, 2008. 8th edition, Securities and Financial Services Law, R Baxt, A Black & P Hanrahan, 2012. Reprinted 2015.



SECURITIES and FINANCIAL SERVICES LAW 9th edition Robert Baxt AO BA, LLB (Hons) (Syd), LLM (Harvard) Emeritus Partner, Herbert Smith Freehills Professorial Fellow, University of Melbourne

Ashley Black BA (Hons), LLB (Hons) (Syd), LLM (Hons) (Syd) Judge, Supreme Court of New South Wales

Pamela Hanrahan BA (Hons), LLB (Hons) (Melb), LLM (Hons) (CWRU), SJD (Melb) Professor and Director of Research, School of Taxation and Business Law, UNSW

LexisNexis Butterworths Australia 2017

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Baxt, R (Robert), 1938–

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Securities and financial services law. 9th edition. 9780409343069 (pbk). 9780409343076 (ebk). Includes index. Securities — Australia. Investments — Australia. Financial services industry — Law and legislation — Australia. Stock exchanges — Law and legislation — Australia. Black, Ashley; Hanrahan, Pamela F.

© 2017 Reed International Books Australia Pty Limited trading as LexisNexis. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in Gill sans and Sabon. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

Preface In this ninth edition of this book, we have again sought to provide a comprehensive and practical treatment of the regulation of financial products, financial markets and participants in the financial services industry. This is, of course, an area of significant practical importance for the Australian economy and for investors, including the many Australians who hold retirement savings in the form of superannuation. As in previous editions, an introductory chapter provides an overview of the purpose, structure and history of financial services regulation. Chapter 2 deals with the administration of the securities and financial services laws and examines the role of the Australian Securities and Investments Commission (ASIC), which has been under continuing scrutiny since the last edition. Chapters 3–6 deal with the nature of financial products and the regulation of offerings of financial products. This area is of obvious practical importance to product manufacturers, distributors and investors, and raises substantial regulatory challenges. Disclosure-based regulatory regimes have offered, and still offer, the promise of bringing risks to the attention of investors who can then take them into account. However, confidence in disclosure-based regulation has been shaken, or at least qualified, by the global financial crisis, and regulators are now seeking to engage with a more complex exercise in shaping regulation of particular products to minimise the adverse effects of investor biases. In parallel with doubts as to the effectiveness of disclosure, there have also been limited moves toward a form of merit regulation, by the product intervention power proposed by the Financial System Inquiry, also known as the Murray Inquiry (November 2014) (FSI Final Report) and in specific contexts, including the regulation of debentures issued by financial corporations. Chapters 7–9 deal with continuous disclosure and liability for defective disclosure, including an examination of securities class actions. Chapters 10–12 deal with regulation of financial markets and their participants. We trace developments since the transfer of primary responsibility for supervision of trading and related activity in the financial

markets from the Australian Securities Exchange (ASX) to ASIC, implemented by the Corporations Amendment (Financial Markets Supervision) Act 2010 (Cth). We have, in these chapters, also recognised recent developments, including a proposal to permit competition to the clearing functions of the ASX and its associated entities. We have also addressed developments in the regulation of over-the-counter derivatives since the global financial crisis and in relation to dark pools and algorithmic trading. Chapters 13–14 deal with licensing and conduct of business regulation affecting Australian financial services licensees. This edition again addresses the Future of Financial Advice Reforms, introduced following the Inquiry into Financial Products and Services in Australia (November 2009). Those reforms have, perhaps, now achieved an uneasy consensus, after a troubled exercise in law reform, and may have accelerated an existing trend to industry consolidation and integration of product manufacturers and advisory businesses. There remains a real question, recognised in these chapters, whether the present provisions dealing with commission arrangements will be sufficient to neutralise financial incentives for investment advisers to recommend inappropriate products. We have also included an examination of consumer protection in Chapter 15, which recognises the importance of retail investors in the Australian financial markets and the emphasis on consumer outcomes in the FSI Final Report. Chapters 16 and 17 deal with market misconduct and insider trading. As with previous editions, the authors have taken on different areas and responsibilities. Pamela Hanrahan has been responsible for Chapters 1–6, 8, the first part of Chapter 9, and Chapter 15. Ashley Black has been responsible for Chapters 7, 10, 13–14 and 16–17 and the second part of Chapter 9. Bob Baxt has been responsible for Chapters 11 and 12. Pamela Hanrahan and Ashley Black would like to take this opportunity to recognise the extraordinary achievement of Bob Baxt, who has now been involved with this work and its predecessors over nine editions, spanning nearly 40 years since its first edition (authored by Bob Baxt, Harold Ford and Graeme Samuel) was published in 1977. That achievement is, of course, but a small part of Bob’s wider contributions to

the study and practice of corporations and competition law, also over many years. Bob Baxt would like to acknowledge the work of Jessica Voong, Sam Hall and Taryn Wockner who worked with him at Herbert Smith Freehills in the preparation of his chapters. The authors would like to acknowledge with gratitude the support and assistance of the staff at LexisNexis Butterworths, and particularly Catherine Britton who has edited this edition.

Table of Cases References are to paragraph numbers 772 2656 Canada Inc (t/as) Swift Trade) v Financial Services Authority [2013] Ll LR 381 …. 16.13

A ABM Pastoral Co Pty Ltd, Re (1978) 3 ACLR 239 …. 2.76, 2.77 ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; 309 ALR 445; 99 ACSR 336; [2014] FCAFC 65 …. 1.28, 3.10, 3.11, 3.19, 3.37, 6.8, 8.39, 8.40, 8.45, 8.47, 13.68, 14.4, 14.10, 15.29 Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 …. 8.43 Ace Custom Service Pty Ltd v Collector of Customs (1991) 3 FCR 576 …. 2.50 Adams v Eta Foods Ltd (1987) 19 FCR 93; 78 ALR 611 …. 8.28 Adler v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission (2003) 179 FLR 1; 46 ACSR 504; 21 ACLC 1810; [2003] NSWCA 131 …. 2.88, 7.25, 9.20, 16.19, 17.41 Aequitas v Sparad No 100 Ltd (formerly Australian European Finance Corporation Ltd) (2001) 19 ACLC 1006; [2001] NSWSC 14 …. 14.9, 14.10 Airpeak Pty Ltd v Jetstream Aircraft (1997) 73 FCR 161; 144 ALR 448 …. 11.30 Alati v Kruger (1955) 94 CLR 216; [1955] HCA 64 …. 13.70 Aldred & Dept of the Treasury, Re (1994) 35 ALD 685 …. 8.49 Alfus v Pyramid Technology Corp 745 F Supp 1511 (ND Cal 1990) …. 17.42

Ali v Hartley Poynton Ltd (2002) 20 ACLC 1006; [2002] VSC 113 …. 14.6 All Class Insurance Brokers Pty Ltd (in liq), Re [2014] NSWSC 475 …. 14.69 Allen v Atalay (1993) 11 ACSR 753 …. 8.74, 11.30 — v Hyatt (1914) 30 TLR 444 …. 17.3 — v Townsend (1977) 16 ALR 301 …. 11.36 Almond Investors Ltd v Emanouel (2012) 91 ACSR 220; [2012] VSC 413 …. 6.45 Ambergate Ltd v CMA Corporation Ltd (admins apptd) (2016) 110 ACSR 642; [2016] FCA 94 …. 8.39, 8.40 Ampol Petroleum Ltd v RW Miller (Holdings) Ltd [1972] 2 NSWLR 850 …. 12.16, 12.17, 12.18 Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 20 ACSR 649 …. 17.16 Ange v First East Auction Holdings Pty Ltd (2011) 284 ALR 638 …. 15.20 Anglo-African Merchants Ltd v Bayley [1970] 1 QB 311; [1969] 1 Lloyd’s Rep 268 …. 14.8, 14.11 Annetts v McCann (1990) 170 CLR 596 …. 2.69 Ansett, Re (1991) 9 ACLC 277 …. 4.23 Ansett Transport Industries (Operations) Pty Ltd v Australian Federation of Air Pilots [1991] 1 VR 637 …. 11.36 Anti-Cancer Council (Vic), Re; Ex parte State Public Services Federation (1992) 175 CLR 442 …. 4.28 ANZ Bank Ltd v Ryan (1968) 88 WN (NSW) (Pt 1) 368 …. 2.77 Aon Risk Services Australia Ltd v Lumley General Insurance Ltd (2005) 13 ANZ Ins Cas 61-652; [2005] FCA 133 …. 13.40 Apple Computer Australia Pty Ltd v Mekrizis (2003) 44 ACSR 518; [2003] NSWSC 126 …. 14.78 Apple Computer Sec Litigation Re, 886 F 2d 1109 (9th Cir 1989) …. 9.42

Ararimu Holdings Ltd, Re [1989] 3 NZLR 487 …. 14.14 Arceneaux v Merrill Lynch Pierce Fenner & Smith Inc, 767 F 2d 1498 (11th Cir 1985) …. 14.35 Argos Pty Ltd v Minister for the Environment and Sustainable Development (2014) 254 CLR 394 …. 11.27 Armstrong v Jackson [1917] 2 KB 822 …. 11.18, 14.11, 14.84 Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565; [2002] NSWSC 16 …. 8.74 Ashbury v Reid [1961] WAR 49 …. 9.21 Ashby v Slipper (2014) 219 FCR 322; [2015] FCAFC 15 …. 2.88 Ashton Millson Investments Ltd v Colonial Ltd (2001) 162 FLR 145; 38 ACSR 323 …. 12.24, 12.25 — v — (2003) 48 ACSR 581 …. 12.24, 12.25 — v — [2004] HCA 348 …. 12.24, 12.25 Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1997) 25 ACSR 783 …. 11.36, 11.51 Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6 …. 14.5 Attorney-General (Gambia) v N’Jie [1961] AC 617; [1961] All ER 504 …. 11.27 Attorney-General (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110 …. 4.9 — v Mutual Home Loans Fund of Australia Ltd [1971] 2 NSWLR 163 …. 4.9 — v Quin (1990) 170 CLR 1; 93 ALR 1 …. 2.27 — v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261 …. 14.78, 15.20, 15.21 .au Domain Administration Ltd v Domain Names Australia Pty Ltd (2004) 207 ALR 521; [2004] FCA 424 …. 14.86 Australian Broadcasting Tribunal v Bond (1990) 70 CLR 321; 94 ALR 11;

[1990] HCA 33 …. 2.26 Australian Building & Construction Commissioner v Abbott (No 4) [2011] FCA 950 …. 9.21 Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 …. 15.18 Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324; [2009] FCA 17 …. 14.78, 15.20 — v CG Berbatis Holdings Pty Ltd (2000) 96 FCR 491; 169 ALR 324; [2000] FCA 2 …. 14.78 — v — (2003) 214 CLR 51 …. 15.20 — v Chats House Investments Pty Ltd (1996) 142 ALR 177; 22 ACSR 539 …. 9.37 — v CLA Trading Pty Ltd [2016] FCA 377 …. 15.10, 15.18 — v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 …. 14.78 — v Fisher & Paykel Customer Services Pty Ltd [2014] FCA 1393 …. 8.10 — v 4WD Systems Pty Ltd (2003) 200 ALR 491 …. 15.20 — v Giraffe World Australia Pty Ltd (1998) 84 FCR 512; [1998] FCA 819 …. 9.34 — v Hillside (Australia New Media) Pty Ltd t/as Bet365 [2015] FCA 1007 …. 8.47 — v Lux Distributors Pty Ltd [2013] FCAFC 90 …. 14.78 — v — [2013] ATPR 42–447 …. 15.20 — v Samton Holdings Pty Ltd (2002) 117 FCR 301; [2002] FCA 62 …. 15.20 — v Simply No-Knead Franchising Pty Ltd (2000) 104 FCR 253 …. 15.20 — v South East Melbourne Cleaning Pty Ltd (in liq) [2015] FCA 25 …. 14.78 — v Telstra Corp Ltd (2004) 208 ALR 459; [2004] FCA 987 …. 8.46

— v — (2007) 244 ALR 470; [2007] FCA 1904 …. 8.46 — v Ticketek Pty Ltd [2011] FCA 1489 …. 11.2 — v TPG Internet Pty Ltd (2013) 250 CLR 640 …. 8.46 Australian Elizabethan Theatre Trust, Re (1991) 30 FCR 491 …. 14.67 Australian Institute of Marine and Power Engineers v Secretary, Dept of Transport (1986) 13 FCR 124 …. 11.27 Australian Property Custodian Holdings Ltd (in liq) (recs and mgrs apptd) (controllers apptd) (No 3), Re (2013) 93 ACSR 382; [2013] VSC 154 …. 2.53 Australian Securities and Investments Commission v ABC Fund Managers Ltd (2001) 39 ACSR 443 …. 3.22 — v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; 105 ACSR 116; [2015] FCA 342 …. 2.72, 2.93, 4.9, 4.17, 7.25, 8.39, 8.72, 13.2, 13.5 — v — (No 2) (2015) 106 ACSR 302; [2015] FCA 527 …. 2.93, 4.51, 13.1 — v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 …. 2.91, 2.93, 13.59, 13.63, 13.64 — v Administrative Appeals Tribunal (2009) 181 FCR 130; [2009] FCAFC 185 …. 2.23 — v — (2011) 195 FCR 485; 85 ACSR 227; [2011] FCAFC 114 …. 2.18, 2.25 — v — (2010) 187 FCR 334; [2010] FCA 807 …. 13.57, 16.7 — v Arafura Equities Pty Ltd (2005) 56 ACSR 429 …. 3.22 — v Astra Resources plc (2015) 107 ACSR 323; [2015] FCA 759 …. 4.13, 4.17 — v Astra Resources Ltd (No 2) (2016) 113 ACSR 162; [2016] FCA 560 …. 4.51 — v Atlantic 3 Financial (Aust) Pty Ltd (2003) 47 ACSR 52 …. 3.22 — v — [2006] QSC 132 …. 13.2 — v Austral Timber Pty Ltd (1999) 17 ACLC 1697 …. 3.32

— v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; 23 ACLC 929; [2005] NSWSC 267 …. 4.9, 4.21, 4.32, 6.23, 9.20, 13.24 — v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631; [2011] FCA 60 …. 4.13, 4.14, 4.17, 4.49 — v Beekink (2007) 61 ACSR 305; [2007] FCAFC 7 …. 2.91 — v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206; [2012] FCA 414 …. 13.57 — v Cassimatis (No 8) [2016] FCA 1023 …. 2.88, 8.59, 9.26, 12.31, 14.20 — v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 …. 3.22 — v Chemeq Ltd (2006) 234 ALR 511; 58 ACSR 169; [2006] FCA 936 …. 7.2, 7.23 — v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963 …. 1.28, 4.23, 7.15, 13.21, 14.10, 14.11, 14.12, 14.13, 17.16, 17.21, 17.33, 17.36 — v Comcash Australasia Pty Ltd (2004) 59 ACSR 632 …. 3.22 — v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240 …. 3.22 — v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; 224 FLR 50; [2009] QSC 58 …. 2.93, 4.17, 6.32, 8.42, 8.46, 8.49, 13.8 — v DB Management Pty Ltd (2000) 199 CLR 321; 33 ACSR 447; [2000] HCA 7 …. 2.34, 2.35 — v Donald (2003) 136 FCR 7; 48 ACSR 394; [2003] FCAFC 318 …. 2.24, 13.62 — v Drury Management Pty Ltd [2003] QSC 285 …. 3.22 — v Edensor Nominees Pty Ltd (2001) 204 CLR 559; 37 ACSR 1; [2001] HCA 1 …. 2.27, 2.28 — v Edwards (2004) 22 ACLC 1469 …. 3.22 — v Elm Financial Services Pty Ltd (2004) 186 FLR 295; 50 ACSR 406; [2004] NSWSC 859 …. 2.52, 2.70 — v — (2005) 55 ACSR 544; [2005] NSWSC 1065 …. 4.21, 6.23, 13.64

— v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168; [2004] WASC 241 …. 3.11, 3.17, 3.19 — v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387 …. 3.19 — v — (2000) 35 ACSR 620; [2000] QCA 452 …. 3.19 — v Fortescue Metals Group Ltd (2011) 190 FCR 364; 274 ALR 731; 81 ACSR 563; [2011] FCAFC 19 …. 7.5, 7.7, 7.16, 12.31 — v — (No 5) (2009) 264 ALR 201; 76 ACSR 506; [2009] FCA 1586 …. 7.5, 7.7, 7.15, 7.16 — v Frasers Project Managers Pty Ltd [2008] FCA 541 …. 3.22 — v Fuelbanc Australia Ltd (2007) 162 FCR 174; 64 ACSR 17; [2007] FCA 960 …. 3.22, 3.45, 12.34, 12.35, 12.37 — v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699; 60 ACSR 447; [2006] FCA 1415 …. 3.24 — v Great Northern Developments Pty Ltd (2010) 79 ACSR 684; [2010] NSWSC 1087 …. 3.11, 3.17, 3.21, 3.32, 4.17, 4.25, 6.32 — v Hellicar (2012) 88 ACSR 246; [2012] HCA 17 …. 2.78, 2.87, 2.90 — v Heydon Park Ltd [2005] FCA 1583 …. 16.25 — v Hutchings (2001) 38 ACSR 387; [2001] NSWSC 522 …. 3.17, 3.22 — v IIdylic Solutions Ltd; Australian Securities and Investments Commission v PJCB International Ltd (2009) 76 ACSR 129 …. 3.22 — v Intertax Holdings Pty Ltd [2006] QSC 276 …. 13.2 — v IPLUS Risk Management Pty Ltd [2006] FCA 583 …. 13.2, 13.39 — v Karl Suleman Enterprises Pty Ltd (2003) 45 ACSR 401; [2001] NSWSC 400 …. 3.32, 4.51 — v Knightsbridge Managed Funds Ltd [2001] WASC 339 …. 3.22 — v Landy DFK Securities Ltd (2002) 20 ACLC 1613 …. 3.22 — v Letten [2010] FCA 140 …. 3.22 — v Liban Net Pty Ltd (2006) 59 ACSR 571; [2006] FCA 1308 …. 13.2

— v Loiterton (2000) 101 FCR 370 …. 2.71 — v Macdonald (No 11) (2009) 230 FLR 1; 71 ACSR 368; [2009] NSWSC 287 …. 16.19, 17.41 — v — (No 12) (2009) 259 ALR 116; 73 ACSR 638; [2009] NSWSC 714 …. 7.2 — v Macro Realty Developments Pty Ltd (2016) 111 ACSR 638; [2016] FCA 292 …. 8.39, 8.72 — v Mariner Corporation Ltd (2015) 106 ACSR 343; [2015] FCA 589 …. 8.47 — v Matthews (1999) 17 ACLC 528; [1999] FCA 164 …. 13.8 — v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605; [2002] NSWSC 741 …. 2.93, 8.72, 8.73 — v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 …. 4.21, 6.23, 8.45, 9.19, 9.21 — v McDougall (2006) 229 ALR 158; 57 ACSR 175; [2006] FCA 427 …. 3.22, 13.2, 13.64 — v McNamara (2002) 42 ACSR 488 …. 3.22 — v Mercorella (No 2) (2006) 230 ALR 598 …. 3.22 — v Mining Projects Group Ltd (2007) 164 FCR 32; 65 ACSR 264; [2007] FCA 1620 …. 2.53, 16.19, 17.41 — v Monarch FX Group Pty Ltd (2014) 103 ACSR 453; [2014] FCA 1387 …. 13.2, 13.5, 13.64 — v Mount Warren Park (Nominees) Pty Ltd (2005) 56 ACSR 43 …. 3.22 — v Murdaca (2008) 105 ALD 461; 68 ACSR 66; [2008] FCA 1399 …. 2.24 — v Narain (2008) 169 FCR 211; 247 ALR 659; 66 ACSR 688; [2008] FCAFC 120 …. 4.9, 8.39, 9.15 — v National Exchange Ltd (2005) 148 FCR 132; 56 ACSR 131; [2005] FCAFC 266 …. 1.34, 14.78, 15.15, 15.20 — v Newcrest Mining Ltd (2014) 101 ACSR 46; [2014] FCA 698 …. 7.23

— v Online Traders Advantage Incorporated (2005) 194 FLR 449; 23 ACLC 1929; [2005] QSC 324 …. 13.5, 14.22 — v Oxford Investments (Tas) Pty Ltd (2008) 169 FCR 522; [2008] FCA 980 …. 13.2, 13.5 — v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 …. 13.2, 13.5 — v Parkes (2001) 38 ACSR 355; [2001] NSWSC 377 …. 2.93, 4.23, 8.73 — v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310 …. 2.93, 3.22, 4.9, 8.73 — v Petsas (2005) 23 ACLC 269; [2005] FCA 88 …. 17.5, 17.17, 17.30, 17.41 — v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192 …. 3.45, 9.20, 13.2, 13.5, 13.64 — v Piggott, Wood & Baker [2006] FCA 1774 …. 3.22 — v Plymin (No 1) (2003) 175 FLR 124; 46 ACSR 126; [2003] VSC 123 …. 16.19, 17.41 — v — (No 3) (2002) 42 ACSR 670; [2002] VSC 358 …. 2.69 — v Primelife Corp Ltd (2005) 54 ACSR 536 …. 3.22 — v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 …. 2.88, 2.90 — v Richards [2013] FCAFC 89 …. 9.37 — v Risqy Ltd [2008] QSC 107 …. 3.22 — v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290; 47 ACSR 649; [2003] FCAFC 244 …. 2.25, 13.18 — v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 …. 2.50, 2.52, 2.56, 2.67, 2.68, 2.70, 2.76 — v Somerville (2009) 74 ACSR 89; [2009] NSWSC 934 …. 9.20 — v Soust (2010) 183 FCR 21; 77 ACSR 98; [2010] FCA 68 …. 16.7, 16.13 — v — (No 2) (2010) 76 ACSR 1; [2010] FCA 388 …. 16.7

— v Southcorp Ltd (No 2) (2003) 130 FCR 406; 48 ACSR 187; [2003] FCA 1369 …. 7.2, 7.22 — v Stone Assets Management Pty Ltd (2012) 205 FCR 120; 90 ACSR 523; [2012] FCA 630 …. 2.93, 13.2, 13.5 — v Storm Financial Ltd (recs and mgrs apptd) (in liq) (No 2) [2011] FCA 858 …. 2.93 — v Sweeney [2001] NSWSC 114 …. 2.93, 8.73 — v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224 …. 8.42, 13.2 — v Takaran Pty Ltd (2002) 170 FLR 388; [2002] NSWSC 834 …. 3.22, 3.24 — v Tasman Investment Management Ltd (2006) 202 FLR 343 …. 3.22 — v Vizard (2005) 145 FCR 57; 54 ACSR 394; [2005] FCA 1037 …. 2.91, 17.17 — v West (2008) 100 SASR 496; 66 ACSR 143; [2008] SASC 111 …. 3.22, 3.31, 6.12 Australian Securities and Investments Commission, in the matter of Sino Australia Oil and Gas Ltd (in liq) v Sino Australia Oil and Gas Ltd (in liq) [2016] FCA 934 …. 8.39 Australian Securities Commission v Avram (1996) 70 FCR 481; 22 ACSR 307 …. 2.70 — v Bell (1991) 32 FCR 517; 6 ACSR 281 …. 2.74 — v Dalleagles Pty Ltd (1992) 8 ACSR 109 …. 2.51, 2.54 — v Deloitte Touche Tohmatsu (1996) 70 FCR 93; 21 ACSR 332 …. 2.94 — v Donovan (1998) 28 ACSR 583 …. 2.91 — v Graco (1991) 29 FCR 491; 5 ACSR 1 …. 2.70 — v Kippe (1996) 137 ALR 423; 20 ACSR 679 …. 13.53, 13.56 — v Kutzner (1998) 25 ACSR 723 …. 2.70, 2.76 — v Lucas (1992) 7 ACSR 676 …. 2.51, 2.52, 2.67

— v Macleod (2000) 22 WAR 255; 34 ACSR 135; [2000] WASCA 101 …. 16.22 — v Marlborough Gold Mines (1993) 177 CLR 485 …. 4.27 — v McLeod (2000) 34 ACSR 135; [2000] WASCA 101 …. 8.61 — v Mount Burgess Gold Mining Co NL (1994) 15 ACLR 714 …. 14.87 — v Multiple Sclerosis Society of Tasmania (1993) 10 ACSR 489 …. 11.36 — v Nomura International plc (1998) 89 FCR 301; 29 ACSR 473 …. 16.7, 16.12, 16.15 — v Paneth (FCA, Olney J, VG 3301/96, 11 July 1996, unreported) …. 16.29 — v Rohani (1998) 29 ACSR 106 …. 2.68 — v Zarro (1991) 32 FCR 546; 105 ALR 227; 6 ACSR 385 …. 2.51, 2.53 Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) 148 CLR 121; 6 ACLR 45; CLC ¶40-734; [1981] HCA 49 …. 3.19, 3.22, 3.24, 3.29 Australian Stock Exchange Ltd v Hudson Securities Pty Ltd (1999) 33 ACSR 416; [1999] NSWSC 1237 …. 11.25, 11.48 — v McLachlan (2002) 43 ACSR 362 …. 11.48 Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200 …. 8.49

B Ballantyne v Raphael (1889) 15 VLR 538 …. 13.8 Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm) …. 14.5 Bankers Trust International plc v PT Dharmala Sakti Sejahtera [1996] CLC 518 …. 14.5 Barclay MIS Group of Companies Pty Ltd v Australian Securities and Investments Commission (2002) 125 FCR 374; [2002] FCA 1606 …. 3.46 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 …. 14.67 Barclays Bank plc v Khaira [1992] 1 WLR 623 …. 14.5

Basic Inc v Levinson 108 S Ct 978; 485 US 224 (1988) …. 17.17 — v — 485 US 224; 108 S Ct 978 (1988) …. 9.40, 9.41, 9.42, 16.3 Basis Capital Funds Management Ltd v BT Portfolio Services Ltd [2008] 219 FLR 157; 67 ACSR 297; [2008] NSWSC 766 …. 6.60, 6.64 Bateman v Newhaven Park Stud Ltd (2004) 49 ACSR 454 …. 12.25 Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 …. 14.10 Baysington Pty Ltd, Re (1988) 6 ACLC 50 …. 11.30 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1; 33 ACSR 1; [1999] NSWCA 40 …. 14.14 — v Johnson (1993) 115 ALR 411 …. 8.52, 8.55 Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Ltd (2008) 246 ALR 361 …. 3.38 Beecher v Able 374 F Supp 341 (SDNY 2010) …. 8.49 Bell Group Ltd v Herald and Weekly Times Ltd [1985] VR 613; (1985) 9 ACLR 697 …. 11.31, 14.15, 14.16 Bendigo and Adelaide Bank Ltd v Cairncross (2011) 84 ACSR 589; [2011] NSWSC 610 …. 8.14 Berndale Securities Ltd v How Trading Pty Ltd (2010) 78 ACSR 218; [2010] VSC 216 …. 14.2, 14.10 Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321; [2003] FCAFC 232 …. 2.25 Birtchnell v Equity Trustees, Executors & Agency Ltd (1929) 42 CLR 384; [1929] HCA 24 …. 14.12, 17.36 Black v Shearson Hammill & Co 266 Cal App 2d 363 (1968) …. 17.36 Blacker v National Australia Bank Ltd [2001] ATPR ¶41-817 …. 9.22 Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24 …. 5.32 Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs & mgrs apptd) (in liq) (2015) 325 ALR 539; 108 ACSR 1; [2015] FCA 811 …. 9.38

Blomley v Ryan (1956) 99 CLR 362 …. 14.78 Blunt v Park Lane Hotel Ltd [1942] 2 KB 253 …. 2.53 Bodum v DKSH Australia Pty Ltd (2011) 280 ALR 639; 92 IPR 222; [2011] FCAFC 98 …. 8.47 Bond v Australian Broadcasting Tribunal (No 2) (1988) 84 ALR 646 …. 2.69 Bond Corporation Holdings Ltd v Sulan (1990) 2 ACSR 435 …. 2.51 — v — (1990) 26 FCR 580; 3 ACSR 172 …. 2.69 Bond Corporation Pty Ltd v White Industries Ltd [1980] 2 NSWLR 351 …. 3.13 Bonds & Securities (Trading) Pty Ltd v Glomex Mines NL [1971] 1 NSWLR 879 …. 14.11 Boomalli Ltd v Hake (1982) 7 ACLR 516 …. 12.19 Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 …. 1.5, 3.6 Boucher v Australian Securities Commission (1996) 71 FCR 122; 22 ACSR 503 …. 13.57, 13.58 Boughey v R (1986) 161 CLR 10; 65 ALR 609; 60 ALJR 422; [1986] HCA 29 …. 7.15, 16.7 Boys v Australian Securities Commission (1997) 24 ACSR 1 …. 2.68, 2.69 — v — (1998) 152 ALR 219; 26 ACSR 464 …. 2.68, 2.69 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 …. 14.2 Braun v R (2008) 68 ACSR 539; 190 A Crim R 497; [2008] NSWCCA 269 …. 16.25 Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317; 200 ALR 607; [2003] FCAFC 153 …. 9.30 Braysich v R (2011) 243 CLR 434; 83 ACSR 1; [2011] HCA 14 …. 16.15 Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 …. 14.9, 14.12, 14.13

Brereton v Australian Securities and Investments Commission [2007] FCA 651 …. 11.27 Bright v Femcare Ltd (2002) 195 ALR 574; [2002] FCAFC 243 …. 9.32, 9.33, 9.34 Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34 …. 2.88, 16.19, 17.41 Brisbane Broncos Leagues Club v Alleasing Finance Australia Pty Ltd [2011] FCA 106 …. 9.32 Broadbridge v Stammers (1987) 16 FCR 296 …. 11.27 Broken Hill Pty Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609 …. 4.8, 8.74, 11.30 Brolga Minerals NL v Stock Exchange of Perth Ltd (1971–73) ASLC 75007 …. 12.6, 12.7 Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 27 ACLC 712; [2009] FCA 450 …. 3.20 — v — (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 …. 3.10, 3.19, 3.20, 3.21, 3.25, 3.26, 3.27, 3.29, 3.32, 9.28 Brookfield Multiplex Ltd v The Owners Corporation Strata Plan 61288 (2014) 313 ALR 408; [2014] HCA 36 …. 14.5 Brown v Inland Revenue Commrs [1965] AC 244 …. 14.82 — v R (2006) 202 FLR 98; 58 ACSR 290; [2006] WASCA 145 …. 16.12 Brunninghausen v Glavanics (1999) 46 NSWLR 538; 32 ACSR 294; 17 ACLC 1247; [1999] NSWCA 199 …. 17.3 Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 …. 8.54 Burland v Earle [1902] AC 83 …. 17.3 Burns Philp & Co Ltd & Burns v Murphy (1993) 29 NSWLR 723; 10 ACSR 244 …. 2.16 Burns Philp Trustee Co Ltd (in liq) (No 2), Re (1992) 8 ACSR 533 …. 2.16 Burton v Arcus (2006) 32 WAR 366; 57 ACSR 468; [2006] WASCA 71

…. 3.19, 3.25, 3.28, 3.31 Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; 212 ALR 357; [2004] HCA 60 …. 8.45, 8.47 Byrne v Australian Airlines Ltd (1995) 185 CLR 410; [1995] HCA 24 …. 14.2

C C & J Hazell Holdings Pty Ltd, Re (1991) 9 ACLC 802 …. 4.23 Caason Investments Pty Ltd v Cao (2015) 108 ACSR 576; [2015] FCAFC 94 …. 9.47 Cackett v Keswick [1902] 2 Ch 456 …. 5.56 Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145; [2005] FCA 1280 …. 5.2 Caddigan v Grigg [1958] NZLR 708 …. 11.37 Cady Roberts & Co v SEC 40 SEC 907 (1961) …. 17.7, 17.17 Caines and Australian Securities and Investments Commission, Re [2012] AATA 289 …. 13.56 Cairnsmore Holdings Pty Ltd v Bearsden Holdings Pty Ltd [2007] FCA 1822 …. 13.1 Cammer v Bloom 711 F Supp 1264 (DNJ 1989) …. 9.42 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; 257 ALR 610; 73 ACSR 1; [2009] HCA 25 …. 8.45, 8.50, 9.18 Campbell and Australian Securities and Investments Commission, Re (2001) 37 ACSR 238; [2001] AATA 205 …. 13.18, 13.57 Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386; 229 ALR 58; [2006] HCA 41 …. 9.28 Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; [2000] HCA 12 …. 8.46, 8.47 Canada Inc (formerly t/a Swift trade Inc) and the Financial Conduct Authority (formerly the Financial Services Authority) [2013] EWCA Civ 1662 …. 16.13

Cardillo and Australian Securities and Investments Commission, Re (2000) 35 ACSR 731; 61 ALD 757; [2000] AATA 1053 …. 13.57 Cargill Inc v Hardin 406 US 932 (1972) …. 16.1 — v — 452 F 2d 1154 (8th Cir 1971) …. 16.1, 16.12 Carpenter v US 484 US 19 (1987) …. 17.7 Carragreen Currency Corporation Pty Ltd v Corporate Affairs Commission (1986) 7 NSWLR 705; 11 ACLR 298 …. 10.8 — v — (NSW) (1987) 5 ACLC 148 …. 3.19 Carras v Burns 516 F 2d 251 (4th Cir 1975) …. 14.35 Casaclang v Wealthsure Pty Ltd (2015) 107 ACSR 274; [2015] FCA 761 …. 8.59, 13.47, 13.49, 14.5 Cash Converters International Ltd v Gray (2014) 223 FCR 139; [2014] FCAFC 111 …. 9.30 Castlereagh Securities Ltd and The Companies Act (No 1), Re [1973] 1 NSWLR 624 …. 12.7 Catena v Australian Securities and Investments Commission (2011) 276 ALR 25; [2011] FCAFC 32 …. 13.57 — v — (No 2) [2010] FCA 865 …. 17.26 CECA Institute Pty Ltd v Australian Council for Private Education and Training [2010] VSC 552 …. 11.37, 12.32 Cee Bee Marine Ltd v Lombard Insurance Co Ltd (1989) 5 ANZ Ins Cas 60-890 …. 14.2 Central Rly Co of Venezuela (Directors etc) v Kisch (1867) LR 2 HL 99 …. 5.33 Centro Properties Ltd (in its capacity as a responsible entity of Centro Property Trust), Re (2011) 86 ACSR 584 …. 12.11, 12.13, 12.31, 12.34 CG Berbatis Holdings Pty Ltd v Australian Competition and Consumer Commission (2001) 185 ALR 555; ATPR 41-826; [2001] FCA 757 …. 14.78

Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 …. 14.11, 14.13, 14.14 Chapmans Ltd v Australian Stock Exchange Ltd (1994) 51 FCR 501; 14 ACSR 726 …. 11.37, 12.14, 12.32 — v Australian Stock Exchange Ltd (1996) 67 FCR 402; 21 ACSR 295 …. 11.37 — v — (No 3) (1995) 17 ACSR 524 …. 12.7 Charlton v Baber (2003) 47 ACSR 31; 21 ACLC 1671; [2003] NSWSC 745 …. 17.3 Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94 …. 8.54 Chiarella v US 445 US 222 (1980) …. 17.7, 17.30 Christopher Barker & Sons v IRC [1919] 2 KB 222 …. 14.8 Chugg v Pacific Dunlop Ltd (1990) 170 CLR 249; 95 ALR 481 …. 4.17, 6.32 Circle Petroleum (Qld) v Greensdale (1998) 16 ACLC 1577 …. 9.26 Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 …. 14.5 Civic Capital Ltd and Australian Securities and Investments Commission, Re (2007) 99 ALD 658; [2007] AATA 2042 …. 2.18 Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 …. 8.56 Clarke v Great Southern Finance Pty Ltd (2010) 80 ACSR 219; [2010] VSC 473 …. 9.4 Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57 …. 13.47 Cleary v Australian Co-operative Foods Ltd (No 2) (1999) 32 ACSR 701; [1999] NSWSC 991 …. 8.42, 9.15, 15.11 Clements v Bower (1990) 2 ACSR 573 …. 2.69 Clifford v Vegas Enterprises Pty Ltd [2011] FCAFC 135 …. 8.49, 8.55 Clyde Group Inc v Minister for Primary Industries and Water (2007) 17 Tas R 85; [2007] TASSC 95 …. 11.27

CME Properties (Australia) Pty Ltd v Prime Capital Securities Pty Ltd [2016] WASC 231 …. 2.93 Coakley and Australian Securities and Investments Commission, Re [2008] AATA 247 …. 4.21 Cock, Russell & Co v Bray, Gibb & Co (1920) Ll R 71 …. 14.2 Coco v AN Clark (Engineers) Ltd [1969] RPC 41 …. 14.82 Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24 …. 14.2 Coleman v Myers [1972] 2 NZLR 225 …. 17.3 Collard v Australian Securities and Investments Commission (2008) 252 ALR 353; [2008] FCA 1681 …. 2.74 Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 …. 8.56 Colorado Products Pty Ltd (in prov liq), Re [2014] NSWSC 789 …. 2.93, 8.46 Comité Interprofessionnel du Vin de Champagne v Powell (2015) 330 ALR 67; [2015] FCA 1110 …. 8.47 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; [1983] HCA 14 …. 14.78 Commission for Corporate Affairs (Vic) v Bracht [1989] VR 821 …. 4.23 Commissioner for Corporate Affairs v Green [1978] VR 505 …. 17.16 — v Nut Farms of Australia Pty Ltd [1980] CLC 40-642 …. 13.64 Commissioner of Police v Reid (1989) 18 ALD 439 …. 2.69 Commissioner of Taxation v Bank of Western Australia Ltd (1995) 61 FCR 407 …. 4.28 — v Hyteco Hiring Pty Ltd (1992) 39 FCR 502 …. 3.11 — v Murry (1998) 193 CLR 605; 155 ALR 67; [1998] HCA 42 …. 6.10 — v Silverton Tramway Co Ltd (1953) 88 CLR 558 …. 4.28 Committee on Direction of Fruit Marketing v Australian Postal

Commission (1980) 144 CLR 577 …. 4.28 Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; 102 ALR 453 …. 5.32, 14.10, 14.13, 14.14 Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Corke Instrument Engineering Pty Ltd (2005) 223 ALR 480 …. 11.36 Compaq Computer Australia Ltd v Merry (1998) 157 ALR 1 …. 9.20 Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; 92 ALR 193; [1990] HCA 17 …. 8.42, 15.11 Connell v National Companies and Securities Commission (1989) 14 ACLR 765 …. 2.75 Constable v Myer (1972) 3 DCR 41 …. 14.80 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226; [1986] HCA 14 …. 14.2, 14.8, 14.16 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8 …. 17.30 Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd (1986) 11 ACLR 566 …. 8.73 — v Yuill (1991) 172 CLR 319; 4 ACSR 624 …. 2.53, 2.54 Corporation of the City of Unley v South Australia (1997) 68 SASR 511 …. 4.6 Costello v Oppenheimer & Co, 711 F 2d 1361 (7th Cir 1983) …. 14.35 Courtney v Medtel Pty Ltd (2002) 122 FCR 168; [2002] FCA 957 …. 9.37, 9.38 CPT Custodian Pty Ltd v Commr of State Revenue (2005) 224 CLR 98; [2005] HCA 53 …. 3.34 Crane Co v Westinghouse Air Brake Co 400 US 822 (1969) …. 16.2 — v — 419 F 2d 787 (2d Cir 1969) …. 16.2 Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR 692; [2005] NSWSC 15 …. 3.25

Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789 …. 4.23 Curlex Manufacturing Pty Ltd v Carlingford General Insurance Ltd [1987] 2 Qd R 335 …. 2.50

D Dalton v AML Finance Corp Ltd (1980) Aust Sec Law Cases 76-006 …. 14.2 Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371; [1986] HCA 25 …. 11.18, 13.17, 14.9, 14.10, 14.84 Danae Investment Trust plc v McIntosh Nominees Pty Ltd (1993) 10 ACSR 1 …. 17.14 — v — (1993) 11 ACLC 1242 …. 17.14 Daniels v Anderson (1995) 37 NSWLR 438 …. 9.26 Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543; 43 ACSR 189; [2002] HCA 49 …. 2.54, 2.89 Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450; 244 ALR 552; [2007] FCA 1216 …. 14.34 Dartberg Pty Ltd (as t’ee for the Pollard Children Trust) v Wealthcare Financial Planning Pty Ltd (No 2) (2009) 74 ACSR 373; [2009] FCA 934 …. 9.18 Darwalla Mining Co Pty Ltd v F Hoffman-La Roche Ltd (No 2) (2006) 236 ALR 322; [2006] FCA 1388 …. 9.37 Davies-Roe and the Companies Act, Re [1965] NSWR 767 …. 2.71 Davis v Merrill Lynch, Pierce Fenner and Smith Inc 906 F 2d 1206 (8th Cir 1990) …. 14.35 — v Pennzoil Co 264 A 2d 597 (1970) …. 16.2 Daws and Australian Securities and Investments Commission, Re (2006) 91 ALD 138; [2006] AATA 246 …. 13.62 Dawson, Re [1966] 2 NSWR 211 …. 14.14

Day v Mead [1987] 2 NZLR 443 …. 14.14 De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) (2011) 281 ALR 454; 84 ACSR 527; [2011] FCA 645 …. 9.45 — v — [2012] FCAFC 28 …. 9.45 De Brett Seafood Pty Ltd v Qantas Airways Ltd (No 7) [2015] FCA 979 …. 9.37 Deloitte Ross Tohmatsu v Australian Securities Commission (1995) 54 FCR 562; 15 ACSR 652 …. 2.94 Delta Gold Ltd, Re (2001) 40 ACSR 347; [2001] FCA 1817 …. 12.7, 12.10, 12.11, 12.29, 12.39 Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 …. 8.51, 8.55 Deputy Commissioner of Taxation v Dick (2007) 64 ACSR 61; [2007] NSWCA 190 …. 9.26 Derry v Peek (1889) 14 App Cas 337 …. 8.62 Designbuild Australia Pty Ltd v Endeavour Resources Ltd (1980) 5 ACLR 610 …. 12.18, 12.22, 12.29 Deutsche Bank AG v Unitech Global Ltd [2013] EWHC 2793; [2014] 2 All ER 268 …. 16.23 — v — [2013] EWCA Civ 1372 …. 16.23 Devereaux Holdings Pty Ltd v Pelsart Resources NL (1985) 9 ACLR 879 …. 12.19 — v — (No 2) (1985) 9 ACLR 956 …. 8.54 Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; ATPR ¶46-248; [2004] NSWCA 58 …. 9.45, 9.49 Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424; 150 FLR 239 …. 11.38 Director-General, Department of Health (NSW) v NSW Nurses’ Association [2011] 209 IR 49 …. 11.27 Director-General of Fair Trading v First National Bank plc [2002] 1 AC 481 …. 15.18

Director of Consumer Affairs Victoria v AAPT Ltd [2006] VCAT 1493 …. 15.18 — v Scully (2013) 303 ALR 168 …. 15.20 Director of Public Prosecutions (Cth) v JM (2012) 90 ACSR 96; [2012] VSCA 21 …. 16.7 — v — (2013) 298 ALR 615; 94 ACSR 1; [2013] HCA 30 …. 16.7 — v Hill (2012) 223 A Crim R 285; [2012] VSCA 144 …. 17.10 — v — [2015] VSC 86 …. 17.37 — v O’Reilly [2010] VSC 138 …. 17.17, 17.37 Dirks v SEC 463 US 646 (1983) …. 17.7, 17.30 Dollas-Ford and Australian Securities and Investments Commission, Re (2006) 91 ALD 747; [2006] AATA 704 …. 13.56, 13.57, 16.25 Domain Names Australia Pty Ltd v .au Domain Administration Ltd (2004) 139 FCR 215; [2004] FCAFC 247 …. 8.46 Donald v Australian Securities and Investments Commission (2000) 104 FCR 126; 35 ACSR 383; [2000] FCA 1142 …. 13.57, 16.12, 16.14 Donald and Australian Securities and Investments Commission, Re (2001) 38 ACSR 661; [2001] AATA 622 …. 13.62 Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394; [2005] FCA 1483 …. 9.33 — v — [2009] FCA 19 …. 9.37 Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 …. 2.24, 2.37 Drexel Burnham Lambert International NV v Nasr [1986] 1 Lloyd’s Rep 356 …. 14.2, 14.5 D’Souza v Royal Australian and New Zealand College of Psychiatrists (2005) 12 VR 42 …. 11.25 Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446 …. 11.36 Dunlop Olympic Ltd v Trade Practices Commission (1982) 62 FLR 145 …. 2.50

Dura Pharmaceuticals Inc v Broudo 544 US 336; 125 S Ct 1627 (2005) …. 9.43 Durkin v Pioneer Permanent Building Society Ltd [2003] FCA 419 …. 14.78

E Earglow Pty Ltd v Newcrest Mining Ltd (2015) 106 ACSR 49; [2015] FCA 328 …. 7.15, 9.38, 9.51, 9.54 East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229; 63 ACSR 404; [2007] HCA 44 …. 2.28 Edgelow v MacElwee [1918] 1 KB 205 …. 13.8 Edward Wong Finance Co Ltd v Johnson, Stokes & Master (a firm) [1984] AC 296 …. 14.6 Eighty-Second Vocation Pty Ltd v Parere Investments Pty Ltd [2005] FCA 844 …. 5.32 Ekes v Commonwealth Bank of Australia (2014) 313 ALR 665; [2014] NSWCA 336 …. 9.36 Elkind v Liggett & Myers Inc 635 F 2d 156 (2d Cir 1980) …. 17.18, 17.42 Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; 185 FLR 245; 48 ACSR 621; [2004] VSCA 54 …. 16.19, 17.41 Ellison v Lutre Pty Ltd (1999) 88 FCR 116; [1999] FCA 399 …. 13.68 Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd (1987) 75 ALR 271 …. 9.22 Elsmore Resources Ltd, Re [2016] NSWSC 856 …. 5.47 Emu Brewery Mezzanine Ltd (in liq) v Australian Securities and Investments Commission (2006) 32 WAR 204; 57 ACSR 752; [2006] WASCA 105 …. 3.8, 3.22, 3.32 Endresz v Whitehouse [1998] 3 VR 461; (1997) 24 ACSR 208; 139 FLR 359 …. 16.22 Enviro Systems Renewable Resources Pty Ltd v Australian Securities and

Investments Commission (2001) 80 SASR 1; 36 ACSR 762; [2001] SASC 11 …. 3.31, 3.32 Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477; 118 ALR 392 …. 2.64 Eric Preston Pty Ltd v Euroz Securities Ltd (2010) 77 ACSR 135; [2010] FCA 97 …. 14.2, 14.6, 14.12 — v — (2011) 274 ALR 705; [2011] FCAFC 11 …. 14.2, 14.6, 14.12 Ernst & Ernst v Hochfelder 425 US 185 (1976) …. 16.1 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241; [1997] HCA 8 …. 14.5 Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 74 ALJR 339 …. 2.54 Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) 135 FLR 314; 22 ACSR 270 …. 8.74 Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394; 18 ACSR 404; 13 ACLC 1758 …. 17.5, 17.10, 17.13, 17.19, 17.28, 17.32

F Faberge Inc, Re 45 SEC 249 (1973) …. 17.26 FAI General Insurance Co Ltd v RAIA Insurance Brokers Ltd (1992) 108 ALR 479 …. 8.47 FAI Insurances Ltd v Pioneer Concrete Services Ltd (No 2) (1986) 10 ACLR 801 …. 12.30, 12.35, 12.36 FAI Traders Insurance Co Ltd v ANZ McCaughan Securities Ltd (1990) 3 ACSR 279 …. 14.16 Fame Decorator Industries Pty Ltd v Jeffries Industries Ltd (1988) 28 ACSR 58; 16 ACLC 1235 …. 16.2, 16.12 Famel Pty Ltd v Burswood Management Ltd (1989) 15 ACLR 572 …. 8.48, 8.49 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 …. 14.13, 17.30

Farley v Australian Securities Commission (1998) 16 ACLC 1502 …. 13.56, 13.57, 13.59 Fasold v Roberts (1997) 70 FCR 489 …. 15.11 Federal Commissioner of Taxation v Australia & New Zealand Banking Group Ltd (1979) 143 CLR 499; 23 ALR 480 …. 2.51 — v St Hubert’s Island Pty Ltd (1978) 138 CLR 210; [1978] HCA 10 …. 13.8 Felden and Australian Securities and Investments Commission (2003) 45 ACSR 111; 73 ALD 149; [2003] AATA 301 …. 13.57 Fenwick v Jeffries Industries Ltd (1995) 13 ACLC 1334 …. 16.2, 16.12 Finance Sector Union of Australia v Commonwealth Bank of Australia (1999) 89 FCR 417; [1999] FCA 59 …. 9.29 Financial Conduct Authority v Da Vinci Invest Ltd [2015] EWHC 2401 …. 10.5, 16.13 Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd (2006) 157 FCR 229; 60 ACSR 372; [2006] FCA 1805 …. 3.11 Findlay v Next Financial Ltd [2012] FCA 1350 …. 3.28 Fine v American Solar King Corporation 919 F 2d 290 (5th Cir 1990) …. 9.42 Fire & All Risks Insurance Co Ltd v Pioneer Concrete Services Ltd (1986) 10 ACLR 760 …. 12.36 Firewatch Australia Pty Ltd v Country Fire Authority (1999) 93 FCR 520; [1999] FCA 761 …. 15.11 Flavel v Giorgio (1990) 2 ACSR 568 …. 8.61 — v Roget (1990) 1 ACSR 595; 8 ACLC 237 …. 7.7, 7.12 Flexopack SA Plastics Industry v Flexopack Australia Pty Ltd [2016] FCA 235 …. 8.47 Forge v Australian Securities and Investments Commission (2004) 52 ACSR 1; [2004] NSWCA 448 …. 9.20 Forget v Baxter [1900] AC 467 …. 14.16

Forrest v Australian Securities and Investments Commission (ASIC); Fortescue Metals Group Ltd v Australian Securities and Investments Commission (2012) 247 CLR 486; 291 ALR 399; 91 ACSR 128; [2012] HCA 39 …. 7.5, 7.7, 7.15, 7.16, 7.17, 8.44, 8.47, 8.50, 12.31 Forty Two International Pty Ltd v Barnes (2014) 97 ACSR 450; [2014] FCA 85 …. 8.46 Foster and Australian Securities and Investments Commission, Re (1999) 57 ALD 779 …. 13.18 Francis v South Sydney District Rugby League Football Club Ltd [2002] FCA 1306 …. 14.78 Fraser v Australian Securities and Investments Commission [2011] AATA 944 …. 13.16 — v NRMA Holdings Ltd (1994) 14 ACSR 656 …. 8.55 — v — (1995) 55 FCR 452; 15 ACSR 590 …. 8.36, 8.42, 8.47, 8.48, 8.52, 8.54, 8.55, 15.11 Fridrich v Bradford 429 US 1053 (1977) …. 17.42 — v — 542 F 2d 307 (6th Cir 1976) …. 17.42 Frugtniet v Australian Securities and Investments Commission [2015] AATA 128 …. 13.56 Fysh v R [2013] NSWCCA 284 …. 17.17

G G8 Communications Ltd, Re (2016) 112 ACSR 22; [2016] FCA 297 …. 5.47, 6.61 Gaiman v National Association for Mental Health [1971] Ch 317 …. 11.36, 11.37 Gambatto v WCP Ltd (1995) 16 ACSR 1 …. 11.51 Gamble v Hoffman (1997) 24 ACSR 369 …. 9.26 Gangemi v Australian Securities and Investments Commission (2003) 129 FCR 284; 45 ACSR 383; [2003] FCA 494 …. 2.73, 2.74 Gardam v George Wills & Co Ltd (1988) 82 ALR 415 …. 9.18

GE Capital Australia v Davis (2002) 180 FLR 250 …. 8.74 GE Capital Corporate Finance Group Ltd v Bankers Trust Company [1995] 2 All ER 993; [1995] 1 WLR 172 …. 2.50 Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd (2005) 54 ACSR 111; 23 ACLC 1181; [2005] NSWSC 544 …. 6.10, 6.74 General Benefits Pty Ltd v Australian Securities and Investments Commission (2001) 161 FLR 82; [2001] SASC 137 …. 2.51 General Steel Industries Inc v Commr for Railways (1964) 112 CLR 125 …. 4.28 Genocanna Nominees Pty Ltd v Thirsty Point Pty Ltd [2006] FCA 1268 …. 9.15 George v Australian Securities and Investments Commission [2014] AATA 167 …. 13.16 — v Rockett (1990) 170 CLR 104 …. 8.49 Georges v Seaborn International (Trustee), Re; Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75 …. 14.69, 14.70 — v — [2012] FCAFC 140 …. 14.69 Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569; [2006] FCAFC 44 …. 14.11 Giorgianni v R (1985) 156 CLR 473 …. 4.50, 8.24, 9.19, 9.20 Glavanics v Brunninghausen (1996) 19 ACSR 204; 14 ACLC 345 …. 8.42, 17.3 Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82; 55 ALR 25; [1984] FCA 180 …. 8.45, 8.47, 8.59 Golden Bounty Resources NL v National Companies and Securities Commission (1990) 3 WAR 199; 3 ACSR 134; 8 ACLC 1123 …. 10.19 Golden Gate Petroleum Ltd, Re (2004) 50 ACSR 659; [2004] FCA 1119 …. 5.50

Golden Iron Resources, Re (2010) 79 ACSR 159; [2010] FCA 693 …. 5.50 Goode, Re; Ex parte Mount (1974) 24 FLR 61; 4 ALR 579 …. 14.14 Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435 …. 8.47 Gould v Vaggelas (1985) 157 CLR 215; [1985] HCA 75 …. 9.39, 9.52 Governments Stock and other Securities Investment Co v Christopher [1956] 1 WLR 237 …. 4.8 Graiseley Properties Ltd v Barclays Bank plc [2012] EWHC 3093 …. 16.23 Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 104 ACSR 195; [2015] FCA 149 …. 7.15, 7.16, 7.17, 9.46 — v — (2016) 330 ALR 642; [2016] FCAFC 60 …. 7.7, 7.14, 7.17 Greater West Insurance Brokers Pty Ltd, Re (2001) 39 ACSR 301; [2001] NSWSC 825 …. 14.69 Green v Daniels (1977) 13 ALR 1; [1977] HCA 18 …. 13.16 Green (as voluntary administrators of Bevillesta Pty Ltd), Re (2011) 84 ACSR 215; [2011] NSWSC 417 …. 2.18 Greenshields Inc v McDonough [1968] 1 OR 297 …. 14.16 Greenwood v Martins Bank [1932] 1 KB 371 …. 14.8 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 …. 14.10 Grofam Pty Ltd v ANZ Banking Group Ltd (1993) 43 FCR 408 …. 2.50 Guglielmin v Trescowthick (No 2) (2005) 220 ALR 515; [2005] FCA 138 …. 9.30, 9.31, 9.34 Gupta v Australian Capital Territory [2011] ACTSC 39 …. 11.27

H Halliburton v Erica P John Fund Inc 134 S Ct 2398 (2014) …. 9.41 Hamilton v Whitehead (1988) 166 CLR 121; 82 ALR 626 …. 4.49, 9.15

Hannes v Director of Public Prosecutions (Cth) (No 2) (2006) 205 FLR 217; 60 ACSR 1; [2006] NSWCCA 373 …. 17.16, 17.17, 17.26, 17.28 Harbottle Brown & Co Pty Ltd v Halstead [1968] 3 NSWR 493 …. 11.48 Harman v Energy Research Group Australia Ltd [1986] WAR 123; (1985) 9 ACLR 897 …. 12.21 Harper v Costigan (1983) 50 ALR 665 …. 2.71 Harris v US 48 F 2d 771 (9th Cir 1931) …. 16.9 Harrison v Sandhurst Trustees Ltd [2011] FCA 541 …. 9.36 Hartman v R (2011) 87 ACSR 52; [2011] NSWCCA 261 …. 17.28, 17.37 Haslam v Money for Living (Aust) Pty Ltd (admin appt) [2007] FCA 897 …. 9.37 Hawkins v Clayton (1988) 164 CLR 539; [1998] HCA 15 …. 14.2, 14.5 Hayes and Australian Securities and Investment Commission, Re (2006) 93 ALD 494; [2006] AATA 1506 …. 13.56, 13.57 Hearn v O’Rourke (2003) 129 FCR 64; [2003] FCAFC 78 …. 8.42 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 …. 14.4 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 …. 14.12, 14.13 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 …. 8.52, 13.70 Hewson v Sydney Stock Exchange Ltd [1968] 2 NSWR 224 …. 14.11, 14.79 Heydon v NRMA Ltd (2000) 51 NSWLR 1; 36 ACSR 462; 19 ACLC 1; [2000] NSWCA 374 …. 7.25, 8.48, 14.5 Hibblewhite v McMorine (1839) 5 M & W 462; 151 ER 195 …. 16.30 Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd (No 2) [2007] FCA 36 …. 2.96 HIH Insurance Ltd (in liq), Re [2016] NSWSC 482 …. 9.48, 9.49, 9.52 HIH Insurance Ltd (in prov liq), Re; Australian Securities and Investments

Commission v Adler (2002) 168 FLR 253; 41 ACSR 72; [2002] NSWSC 171 …. 2.88, 4.23, 9.20, 16.19, 17.41 Hill v Rose [1990] VR 129 …. 5.32 Hillhouse v Gold Copper Exploration (No 3) (1988) 14 ACLR 423 …. 11.33 Hitchens, Harrison, Woolston and Co v Jackson & Sons [1943] AC 266 …. 14.17 Hlavinka v Commodity Futures Trading Commission, 867 F 2d 1029 (7th Cir 1989) …. 14.10 Hneidi v Minister for Immigration and Citizenship (2010) 182 FCR 115; [2010] FCAFC 20 …. 2.18 Hodgkinson v Simms (1994) 117 DLR (4th) 161 …. 14.10 Hongkong Bank of Australia Ltd v Australian Securities Commission (1992) 108 ALR 70; 7 ACSR 724 …. 2.28 Hooker Investments Pty Ltd v Baring Bros Halkerston & Partners Securities Ltd (1986) 5 NSWLR 157; 10 ACLR 524 …. 17.10, 17.13, 17.19, 17.32 — v — (1986) 10 ACLR 462 …. 17.10, 17.13, 17.16, 17.32 Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216; 18 ALR 639 …. 8.48 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64 …. 14.10, 14.12, 14.13 Houghton v Arms (2006) 225 CLR 553; [2006] HCA 69 …. 8.42, 9.15, 9.20, 15.11 Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 …. 12.16 Howarth and Australian Securities and Investments Commission, Re (2008) 101 ALD 602; 48 AAR 10; [2008] AATA 278 …. 13.56, 13.57 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 …. 9.52 Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330 …. 1.40,

1.56 Hudson Securities Pty Ltd v Australian Stock Exchange (2000) 35 ACSR 55 …. 11.25, 11.48 Hungier v Grace (1972) 127 CLR 210; [1972] HCA 42 …. 13.8 Hunt & Hunt Lawyers v Mitchell Morgan Nominees (2013) 296 ALR 3; [2013] HCA 10 …. 9.25 Hunt, Cox and Co v Chamberlain (1896) TLR 186 …. 14.17 Hunter v Mann [1974] QB 767; [1974] 2 All ER 414 …. 14.82 Hurley v McDonald’s Australia Pty Ltd [2000] ATPR ¶41-741 …. 14.78, 15.20 Hussein v Chung Fook Cam [1967] 3 All ER 1626 …. 2.68 Hyde v Sullivan (1956) 56 SR (NSW) 113 …. 13.8 Hydrocool Pty Ltd v Hepburn (No 4) (2011) 83 ACSR 652; [2011] FCA 495 …. 9.26

I ICAL Ltd v County NatWest Securities Australia Ltd (1988) 39 NSWLR 214; 13 ACLR 129; 6 ACLC 467 …. 5.56, 17.29 Idylic Solutions Pty Ltd, Re; Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 …. 2.93, 6.10 — v — (2013) 93 ACSR 421; [2013] NSWSC 106 …. 2.93, 13.63, 13.64 Inabu Pty Ltd v Leighton Holdings Ltd [2014] FCA 622 …. 9.36, 9.38 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; 68 ACSR 595; [2008] NSWCA 206 …. 5.31, 5.38, 9.45, 9.49 — v — (No 6) (2007) 63 ACSR 1; [2007] NSWSC 124 …. 9.15 Integrated Financial Group Pty Ltd v Australian Securities and Investments Commission (2004) 183 FLR 8; 49 ACSR 509; [2004] WASC 75 …. 2.51 — v — (2004) 187 FLR 7; 50 ACSR 673; [2004] WASCA 213 …. 2.51

International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 248 FLR 149; 82 ACSR 517; [2011] NSWCA 50 …. 3.1, 3.36, 3.37, 3.46, 6.11, 13.68 — v — (recs and mgrs apptd) (2012) 246 CLR 455; 292 ALR 233; 86 ALJR 1289; 91 ACSR 473; [2012] HCA 45 …. 3.1, 3.36, 3.41, 3.46, 3.59, 6.11, 13.68 International Vending Machines Pty Ltd, Re [1962] NSWR 1408 …. 9.26

J James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 …. 8.49 James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85; 81 ACSR 1; [2010] NSWCA 332 …. 7.3, 7.15, 7.16, 7.17, 7.22, 8.46, 8.59, 16.7, 17.18 Jameson v Professional Investment Services Pty Ltd (2009) 72 NSWLR 281; 253 ALR 515; [2009] NSWCA 28 …. 9.32 Jarra Creek Central Packing Shed Pty Ltd v Amcor Ltd [2008] FCA 575 …. 9.36 Jeffers v Australian Securities and Investments Commission (2015) 67 AAR 50; [2015] AATA 537 …. 2.23 Jetstar Airways Pty Ltd v Free [2008] VSC 539 …. 15.18 Jobbins v Capel Court Corp Ltd (1989) 91 ALR 314 …. 9.22 Joffe v R; Stromer v R (2012) 82 NSWLR 510; [2012] NSWCCA 277 …. 17.10, 17.28, 17.30, 17.37 John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 …. 14.10 John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) ATPR ¶41-249 …. 9.18 Johns v Australian Securities Commission (1992) 7 ACSR 703 …. 2.40 — v Australian Securities Commission (1993) 178 CLR 408; 11 ACSR 467; [1993] HCA 56 …. 2.40, 2.68, 2.70, 2.75

— v — (No 2) (1992) 35 FCR 146; 8 ACSR 156 …. 2.40, 2.70 — v Connor (1992) 35 FCR 1; 7 ACSR 519 …. 2.70 Johnson v Minet Mathers Ltd (1990) 6 ANZ Ins Cas 60-968 …. 14.2 Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27 …. 9.32 Johnstone v HIH Insurance Ltd [2004] FCA 190 …. 9.30, 9.33, 9.34 Jones v Canavan [1972] 2 NSWLR 236 …. 14.8, 14.12, 14.16 — v Dumbrell [1981] VR 199; (1968) 5 ACLR 417 …. 8.53 — v Leeming [1930] All ER Rep 584 …. 13.8 JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) …. 14.5 Jubilee Mines NL v Riley (2009) 40 WAR 299; 253 ALR 673; 69 ACSR 659; [2009] WASCA 62 …. 7.3, 7.7, 7.12, 7.15, 7.16, 7.17, 17.18 Jungstedt and Australian Securities and Investments Commission, Re (2003) 73 ALD 105; [2003] AATA 159 …. 13.56, 13.57

K Kamay v R (2015) 109 ACSR 611; [2015] VSCA 296 …. 17.37 Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602 …. 17.30 Karedis Enterprises v Antoniou (1995) 59 FCR 35 …. 9.22 Karounos v Corporate Affairs Commission (1989) 7 ACLC 567 …. 2.68 Keighley, Maxsted & Co v Durant [1901] AC 240 …. 14.8 Kelly v Willmott Forests Ltd (No 4) (2016) 112 ACSR 584; [2016] FCA 323 …. 9.37 Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183 …. 9.26 Kennedy v Australian Securities and Investments Commission (2005) 142 FCR 343; 52 ACSR 301; [2005] FCAFC 32 …. 2.68, 2.70 Keynes v Rural Directions Pty Ltd (2010) 186 FCR 281; 79 ACSR 405; [2010] FACFC 100 …. 3.1, 3.37 Khoo v R [2013] NSWCCA 323 …. 17.37

King v AG Australia Holdings Ltd [2002] FCA 1560 …. 9.37 — v GIO Australia Holdings Ltd (2000) 174 ALR 715; 100 FCR 209; [2000] FCA 617 …. 9.30, 9.36 — v — (2001) 184 ALR 98; [2001] FCA 308 …. 7.25 Kioa v West (1985) 159 CLR 550 …. 2.69 Kippe v Australian Securities Commission (1997) 16 ACLC 190 …. 13.16 Kirby v Centro Properties Ltd (No 6) [2012] FCA 650 …. 9.37 Klusman and Australian Securities and Investments Commission, Re (2010) 53 AAR 375; 117 ALD 617; [2010] AATA 709 …. 13.57 Koala Hydrophonics Ltd and Australian Securities and Investments Commission, Re (2002) 40 ACSR 529; [2002] AATA 41 …. 13.18 Kotan Holdings Pty Ltd v Trade Practices Commission (1991) 102 ALR 51 …. 2.52 Krypton Nominees Pty Ltd, Re [2013] VSC 446 …. 4.19 Ku v Song (2007) 63 ACSR 661 …. 3.1 Ku-ring-gai Co-operative Building Society (No 12) Ltd, Re (1978) 36 FLR 134; 22 ALR 621 …. 8.42 Kwikasair Industries Ltd v Sydney Stock Exchange Ltd [1968] ASLR 30,701 …. 12.7

L Lake Coogee Estate Management Pty Ltd v Australian Securities and Investments Commission (2006) 60 ACSR 281 …. 3.22 Lam v Rolls Royce plc (No 3) [2015] NSWSC 83 …. 9.38 Lantern Hotel Group v Australian Securities and Investments Commission [2015] AATA 428 …. 2.18 Laventhall v General Dynamics Corp 464 US 846 (1983) …. 17.42 — v — 704 F 2d 407 (8th Cir 1983) …. 17.42 Lawloan Mortgages Pty Ltd, Re (2002) 172 FLR 241 …. 3.22

Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 …. 2.69 Leda Holding Pty Ltd v Oraka Pty Ltd (1998) ATPR ¶41-601 …. 8.56 Lefkowitz v Smith Barney, Harris Upham & Co, 809 F 2d 154 (1st Cir 1986) …. 14.10 Lehman Bros International (Europe) (in admin), Re [2009] EWHC 3228 …. 14.69 Lehman Bros International (Europe) (in admin), Re [2010] EWCA Civ 917 …. 14.69 Lehman Bros International (Europe) (in admin), Re [2012] UKSC 6; [2012] 3 All ER 1 …. 5.47, 14.69 Leib v Merrill Lynch, Pierce, Fenner & Smith Inc 461 F Supp 951 (ED Mich 1978) …. 14.10 Leveraged Equities v Goodridge (2011) 191 FCR 71; [2011] FCAFC 3 …. 15.15 Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 107 ALR 291 …. 9.18 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 55 ACSR 583; [2005] FCA 1429 …. 8.54 — v Coopers Brewery Ltd (2006) 156 FCR 1; 236 ALR 561 …. 11.38 Little River Goldfields NL v Moulds (1991) 32 FCR 456; 6 ACSR 299 …. 2.68 Litton Industries Inc v Lehman Bros Kuhn Loeb Inc 709 F Supp 438 (SDNY 1989) …. 9.54 — v — 967 F 2d 742 (2d Cir 1992) …. 9.54 Lloyd v Citicorp Australia Ltd (1986) 11 NSWLR 286 …. 14.6 Lopez v Star World Enterprises Pty Ltd [1999] FCA 104 …. 9.37 Louth v Diprose (1992) 175 CLR 621; [1992] HCA 61 …. 14.78 Loxton v Moir (1914) 18 CLR 360 …. 3.8

M MacDonald v Australian Securities and Investments Commission (2007)

73 NSWLR 612; 65 ACSR 299; [2007] NSWCA 304 …. 16.19, 17.41 Macleod v Australian Securities and Investments Commission (2002) 211 CLR 187; 191 ALR 543; [2002] HCA 37 …. 16.22 Macquarie Advisory Group Pty Ltd (rec appt’d), Re; Macquarie Advisory Group Pty Ltd (rec appt’d) v Australian Securities and Investments Commission (1999) 33 ACSR 106 …. 2.74 Macquarie Bank Ltd and Australian Securities and Investments Commission, Re (2001) 39 ACSR 508; [2001] AATA 868 …. 3.9, 3.11, 4.4, 4.28 Maghun v Richardson Securities of Canada Ltd (1986) 34 DLR (4th) 524 (Ont CA) …. 14.10 Manasseh v R (2002) 167 FLR 44; 40 ACSR 593; [2002] NSWCCA 27 …. 16.5, 16.15 Manglicmot v Commonwealth Bank Officers Superannuation Corp (2010) 239 FLR 159; [2010] NSWSC 363 …. 14.55 Mansfield v R (2012) 247 CLR 86; 293 ALR 1; 87 ALJR 20; 91 ACSR 1; [2012] HCA 49 …. 17.5, 17.16, 17.28 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; [1998] HCA 69 …. 9.45 Marshall’s Valve Gear Co Ltd v Manning, Wardle & Co Ltd [1909] 1 Ch 267 …. 11.26 Martin v Federal Commr of Taxation (1953) 90 CLR 470 …. 13.8 Matthews v Australian Securities and Investments Commission [2009] NSWCA 155 …. 13.2 — v SPI Electricity Pty Ltd (No 13) [2013] VSC 17 …. 9.33, 9.38 Maxwell v Dept of Trade and Industry [1974] QB 523 …. 2.69 Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 …. 14.8 McCracken v Phoenix Constructions (Qld) Pty Ltd (2012) 289 ALR 710; 272 FLR 104; [2012] QCA 129 …. 2.93, 11.30 McDonald v Australian Securities Commission (1993) 30 ALD 71 …. 2.50

McLachlan v Australian Securities and Investments Commission (ASIC) (1999) 85 FCR 286; 30 ACSR 418; [1999] FCA 244 …. 13.57, 13.58 — v Australian Securities Commission (1995) 28 ACSR 473 …. 2.69 — v — (1998) 28 ACSR 473 …. 13.57 — v Australian Stock Exchange (1998) 30 ACSR 139 …. 11.48 McLaughlin v Dungowan Manly Pty Ltd (2007) 61 ACSR 335 …. 11.51 McLellan v Australian Stock Exchange Ltd (2005) 144 FCR 327; 54 ACSR 446 …. 11.32 McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1 …. 9.38 McNab v Auburn Soccer Sports Club Ltd [1975] 1 NSWLR 54 …. 11.36 McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394 …. 8.45 Meaden v Bell Potter Securities Ltd (No 6) (2013) 233 FCR 81; [2013] FCA 1176 …. 9.29 Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1; 205 ALR 402; [2003] FCAFC 289 …. 7.25 Melbourne City Investments Pty Ltd v Worley Parsons Ltd [2014] VSC 523 …. 12.26, 12.39 Melbourne Home of Ford Pty Ltd v Trade Practices Commission (1980) 31 ALR 514 …. 2.50 Melinda Scott & Roach Graham Scott Pty Ltd, Re [2012] NSWSC 1643 …. 13.64 Mercantile Credits Ltd v Jarden Morgan Australia Ltd (1990) 1 ACSR 805 …. 14.19 Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450; [2010] FCA 472 …. 13.36 Mesenberg v Cord Industrial Recruiters (1996) 39 NSWLR 128 …. 11.30 Meth & Co (Aust) Pty Ltd v Commercial Banking Co of Sydney Ltd (1977–8) CLC 40-302 …. 14.14

MF Global Australia Ltd (in liq), Re (2012) 267 FLR 27; [2012] NSWSC 994 …. 5.47, 14.69, 14.70 Mickovski v Financial Ombudsman Service Ltd [2011] VSC 257 …. 12.32 — v — (2012) 36 VR 456 …. 12.32 Mid-America Federal Savings & Loans Association v Shearson/American Express Inc, 886 F 2d 1249 (10th Cir 1989) …. 14.10 Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384 …. 14.2, 14.6 Mier v FN Management Pty Ltd (2005) 56 ACSR 93 …. 3.22 Mihara v Dean Witter & Co, 619 F 2d 814 (9th Cir 1980) …. 14.35 Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 …. 8.46, 8.51, 8.52, 8.55 Minister for Immigration v Gray (1994) 50 FCR 189 …. 2.18 MIS Funding No 1 Pty Ltd v Buckley (2013) 96 ACSR 691; [2013] VSC 607 …. 4.20, 4.22 Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd and Australian Insurance Brokers (WA) Pty Ltd (1984) 3 ANZ Ins Cas 60-562 …. 14.2 Mobil Corp v Marathon Oil Co 669 F 2d 366 (1981) …. 16.1 Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626 …. 9.37 — v — (No 2) [2013] FCA 1163 …. 9.37 Morley v Australian Securities and Investments Commission (2010) 247 FLR 140; 81 ACSR 285; [2010] NSWCA 331 …. 2.13, 2.85, 2.88, 2.90 Moss v Morgan Stanley Inc 719 F 2d 5 (2d Cir 1983) …. 17.42 Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd (2014) 102 ACSR 636; [2014] NSWSC 1503 …. 13.68 Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275; [2007] FCAFC 200 …. 9.33, 9.34

Murphy v Overton Investments (2001) 112 FCR 182; [2001] FCA 500 …. 9.22 Musumeci and Australian Securities and Investments Commission, Re (2009) 109 ALD 677; [2009] AATA 524 …. 13.56, 13.57, 16.14 Mutual Home Loans Fund of Australia Ltd v Attorney-General (NSW) (1973) 130 CLR 103; 2 ALR 241 …. 4.9 Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556; 42 ALJR 316; [1968] HCA 74 …. 14.4 — v — [1971] AC 793 …. 14.4

N Nam Bee (Aust) Pty Ltd v Corporate Affairs Commission (NSW) (1987) 12 ACLR 391; (1988) 6 ACLC 79 …. 13.53 National Australia Bank Ltd v Norman (2009) 180 FCR 243; 74 ACSR 561; [2009] FCAFC 152 …. 3.21, 3.24, 3.28 National Companies and Securities Commission v Bankers Trust Australia Ltd (1989) 24 FCR 217; 1 ACSR 330 …. 2.69, 2.73 — v Monarch Petroleum NL [1984] VR 733; (1984) 8 ACLR 785; 2 ACLC 256 …. 11.34, 14.87, 16.22, 16.28 — v News Corporation Ltd (1984) 52 ALR 417; 8 ACLR 843 …. 2.65, 2.69, 2.75 — v Sim (No 2) (1986) 11 ACLR 171 …. 2.68 National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369; 61 IPR 420; [2004] FCAFC 90 …. 8.46, 8.47 National Nominees Ltd v Agora Asset Management Pty Ltd (No 2) [2011] VSC 425 …. 14.13 Neubronner v Milken 6 F 3d 666 (9th Cir 1993) …. 17.42 Nevitts Ltd v Cooper (1988) 10 Qld Lawyer Reps 40 …. 14.16 New Cap Reinsurance Corporation Ltd v Daya (2008) 66 ACSR 95; [2008] NSWSC 64 …. 3.11, 5.39, 8.42, 15.11

New South Wales v Commonwealth (1990) 169 CLR 482; 1 ACSR 137; [1990] HCA 2 …. 1.58, 2.2 — v — (2006) 229 CLR 1; [2006] HCA 52 …. 2.2 New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 2 All ER 1222; [1973] 1 WLR 1126 …. 14.12, 14.13, 17.36 New Zealand Stock Exchange v Listed Companies Association Inc [1984] 1 NZLR 699 …. 11.37 News Corporation Ltd v National Companies and Securities Commission (No 3) (1983) 8 ACLR 338; 49 ALR 719 …. 2.68 News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410; 21 ACSR 635; [1996] FCA 870 …. 14.12, 14.13 Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87; 2 ACSR 347 …. 11.27 Nocton v Lord Ashburton [1914] AC 932 …. 5.32, 14.14 Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1 …. 14.12, 14.13 North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68 …. 14.18, 14.87, 16.2, 16.12, 16.13 North & South Trust Co v Berkeley [1971] 1 All ER 980 …. 17.36 North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1 …. 8.49 Norwest Holst v Dept of Trade and Industry [1978] Ch 201 …. 2.68 Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981 …. 14.8 NSW Grains Board, Re; Smith v Lawrence (2002) 171 FLR 68; [2002] NSWSC 913 …. 4.6, 4.28

O Oasis Fund Management Ltd & Royal Bank of Scotland NV [2012] NSWSC 532 …. 9.37 Ogle v Strickland (1987) 71 ALR 41 …. 11.27

Oil Basins Ltd v Bass Straight Oil Company [2012] FCA 1122 …. 12.7, 12.10, 12.39 Oliver v Commonwealth Bank of Australia (No 1) [2011] FCA 1440 …. 15.15 Option Investments (Aust) Pty Ltd v Martin [1981] VR 138 …. 14.2 O’Reilly v Commissioners of State Bank of Victoria (1983) 153 CLR 1; 46 ALR 225 …. 2.50 Orison Pty Ltd v Strategic Minerals Corporation NL (1987) 77 ALR 141; 13 ACLR 314 …. 8.42 Osborne v Australian Mutual Growth Fund Ltd [1972] 1 NSWLR 100 …. 14.18, 16.30 Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd (2002) 20 ACLC 1; [2001] FCA 1402 …. 3.29 O’Sullivan v Australian Securities and Investments Commission (2015) 66 AAR 296; [2015] AATA 265 …. 2.23 Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17 …. 14.78

P P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) [2010] FCA 1029 …. 9.37, 9.42, 9.45 — v Multiplex Ltd (2007) 242 ALR 111; 25 ACLC 1192; [2007] FCA 1061 …. 9.44 Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 …. 14.6 Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249; [2014] FCA 35 …. 15.20, 15.21 — v — (2015) 236 FCR 199; 321 ALR 584; [2015] FCAFC 50 …. 14.78, 15.21 — v — (2016) 333 ALR 569; [2016] HCA 28 …. 14.78, 15.21 Panganiban v Australian Securities and Investments Commission (2016)

113 ACSR 452; [2016] FCA 510 …. 2.26, 2.27 Pappas v New World Oil Developments (1993) 117 ALR 304 …. 8.56 Parbery (as liquidators of Trio Capital Ltd (in liq)), Re (2012) 88 ACSR 700; [2012] NSWSC 597 …. 6.60 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; 42 ALR 1 …. 8.44, 8.45, 8.48 Parker v McKenna (1874) LR 10 Ch App 96 …. 14.11 Parry-Jones v Law Society [1969] 1 Ch 1 …. 14.82 Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 …. 9.37 Peil v Speiser 806 F 2d 1154 (2d Cir 1986) …. 9.40, 9.42 Peninsula Gold Pty Ltd v Sunbeam Victa Holdings Ltd (1996) 20 ACSR 553 …. 12.4, 12.8 Perdaman Chemicals and Fertilisers Pty Ltd v ICICI Bank Ltd [2013] FCA 175 …. 15.20 Pereira v Director of Public Prosecutions (1988) 82 ALR 217; 63 ALJR 1; [1988] HCA 57 …. 9.20, 13.36 Pergamon Press, Re [1971] Ch 388 …. 2.71 Permanent Trustee Australia Ltd v Dowd (1993) 11 ACSR 68 …. 2.96 Perre v Apand Pty Ltd (1999) 198 CLR 180; [1999] HCA 36 …. 14.5 Perrin v Williams (2014) 284 FLR 390 …. 11.27 Perron Investments (1989) 89 ATC 4310 …. 2.71 Peters v R (1998) 192 CLR 493; 151 ALR 51 …. 16.25 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457; [1939] ALR 124 …. 8.54 Petrusevski v Bulldogs Rugby League Club Ltd [2003] FCA 61 …. 9.33 Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277 …. 9.36 Philip Morris (Aust) Ltd v Nixon (2000) 170 ALR 487; [2000] FCA 229

…. 9.30 Pico Holdings Inc v Voss [2004] VSC 263 …. 9.15 Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165; 38 ACSR 122; [2001] HCA 31 …. 14.14 Police and Nurses Credit Society Ltd v National Australia Bank Ltd [2005] WASCA 68 …. 11.37 Polymedica Corp Securities Litigation, Re 432 F 3d 1 (1st Cir 2005) …. 9.42 Pong Su (Ruling No 21), Re; R v Ta Song Wong (2005) 202 FLR 1; [2005] VSC 96 …. 4.50, 8.24 Pont Data Australia v ASX Operations Ltd (1990) 21 FCR 385; 93ALR 523 …. 11.2 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 …. 9.36 Porter v OAMPS (2005) 215 ALR 327 …. 8.74 Posluns v Toronto Stock Exchange (1964) 2 OR 547 …. 11.36 — v — (1964) 67 DLR (2d) 165 …. 11.36 Potts v Miller (1940) 64 CLR 282 …. 9.52 Pramoko v Grande Enterprises Ltd (2016) 108 ACSR 469 …. 8.49 Premier Pacific Pharmaceutical Industries Ltd v Australian Stock Exchange Ltd (1995) 17 ACSR 426 …. 12.9 Prestia v Aknar (1996) 40 NSWLR 165 …. 15.11 Prudential Investment Co of Australia Ltd, Re (2003) 49 ACSR 147 …. 2.35 Pyneboard Pty Ltd v Trade Practices Commission (1982) 39 ALR 565 …. 2.50

Q Qantas Airways Ltd v Cameron (1996) 66 FCR 246 …. 15.20 QBiotics Ltd, Re [2016] FCA 873 …. 5.50

Quancorp Pty Ltd v MacDonald (1999) 32 ACSR 50 …. 11.27, 12.11, 12.29 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 …. 2.68 Queensland Power Trading Corporation and Australian Securities and Investments Commission, Re (2005) 89 ALD 346; [2005] AATA 945 …. 2.24, 2.31, 2.37, 3.55, 4.6 Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1; [2004] FCAFC 175 …. 9.20 Quinn & Australian Securities Commission, Re (1994) 12 ACLC 412; 19 AAR 321 …. 13.57, 13.59

R R v Adler (2005) 53 ACSR 471; 23 ACLC 590; [2005] NSWSC 274 …. 16.22 — v Board of Appeal; Ex parte Kay (1916) 22 CLR 183 …. 11.36 — v Chan (2010) 79 ACSR 189; [2010] VSC 312 …. 16.7, 16.12 — v Commissioner of Police of Northern Territory; Ex parte Edwards (1977) 32 FLR 183 …. 11.36 — v Commons (1986) 4 ACLC 551 …. 3.22 — v Commonwealth Conciliation and Arbitration Commission; Ex parte Angliss Group (1969) 122 CLR 546 …. 2.69 — v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 …. 11.31 — v Crabbe (1985) 156 CLR 464; 58 ALR 417; [1985] HCA 22 …. 7.15 — v Curtis (No 2) [2016] NSWSC 795 …. 17.30 — v Dalzell [2011] NSWSC 454 …. 17.17 — v De Berenger (1814) 3 M&S 67; 105 ER 536 …. 16.4, 16.17 — v De Silva [2011] NSWSC 243 …. 17.28 — v Doff (2005) 54 ACSR 200; [2005] NSWCCA 119 …. 17.26, 17.37 — v Evans [1999] VSC 488 …. 14.15, 17.26

— v Farris (2015) 107 ACSR 26; [2015] WASC 251 …. 17.11 — v Firns (2001) 51 NSWLR 548; 161 FLR 294; 38 ACSR 223; [2001] NSWCCA 191 …. 7.14, 7.15, 17.25, 17.26 — v Frawley [2005] NSWSC 585 …. 17.17, 17.37 — v Ghosh [1982] QB 1053; [1982] 2 All ER 689; [1982] 3 WLR 110; (1982) 75 Cr App Rep 154 …. 16.25 — v Glynatsis (2013) 230 A Crim R 99; [2013] NSWCCA 131 …. 17.10, 17.37 — v Grunwald [1963] 1 QB 935 …. 8.68 — v Hall [2005] NSWSC 890 …. 17.17 — v Hannes (2000) 158 FLR 359; 36 ACSR 72; [2000] NSWCCA 503 …. 17.17, 17.26 — v Hartman (2010) 81 ACSR 121; [2010] NSWSC 1422 …. 17.28, 17.37 — v Hughes (2000) 202 CLR 535; 34 ACSR 92; [2000] HCA 22 …. 1.60 — v International Stock Exchange of UK and the Republic of Ireland; Ex parte Else [1993] 1 All ER 420 …. 11.37 — v Jacobson [2014] VSC 592 …. 16.3 — v Joffe; R v Stromer (2015) 106 ACSR 525; [2015] NSWSC 741 …. 17.37 — v Lloyd (1996) 19 ACSR 528 …. 16.3, 16.12 — v Loiterton (2005) 54 ACSR 728; [2005] NSWSC 905 …. 8.61, 16.22 — v M [1980] 2 NSWLR 195; (1979) 4 ACLR 610; ASLC 75-024 …. 8.61, 8.67, 16.15, 16.17 — v M R Shearer (David J, DCt (SA), No 36/98, 18 June 1998) …. 16.7 — v Mackinnon [1959] 1 QB 150 …. 8.62 — v Mansfield (2011) 251 FLR 286; 84 ACSR 389; [2011] WASCA 132 …. 17.28 — v Maurice; Ex parte Attorney-General (Northern Territory) (1987) 73

ALR 123 …. 2.69 — v McDonnell [1966] 1 All ER 193 …. 9.19 — v McQuoid [2009] 4 All ER 388; [2009] EWCA Crim 1301 …. 17.37 — v Panel on Takeovers & Mergers; Ex parte Datafin plc [1987] QB 815; [1987] 1 All ER 564 …. 11.25, 11.37, 12.32 — v Panel on Takeovers and Mergers; Ex parte Guinness plc [1989] 1 All ER 509 …. 11.37 — v Rivkin (2003) 198 ALR 400; 45 ACSR 366; [2003] NSWSC 447 …. 17.37 — v — (2004) 59 NSWLR 284; 184 FLR 365; [2004] NSWCCA 7 …. 17.11, 17.16, 17.17, 17.26, 17.28, 17.37 — v Serious Fraud Office; Ex parte Nadir (1991) 1 All ER 730 …. 2.69 — v Stephenson [2010] NSWSC 779 …. 17.17 — v Watson; Ex parte Armstrong (1976) 136 CLR 248 …. 2.69 — v Wright [1980] VR 593; (1980) 4 ACLR 931 …. 8.61, 16.22 — v Xiao [2016] NSWSC 240 …. 17.10, 17.28, 17.37 R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (1989) 1 ACSR 93 …. 13.18 Radiata Forestry Development Co Pty Ltd v Evans (1977) 3 ACLR 82 …. 4.9 Redmayne Bentley Stockbrokers v Isaacs [2010] EWHC 1504 …. 14.2 Redmond Family Holdings v Gc Access Pty Ltd [2016] NSWSC 796 …. 8.10, 8.46, 8.49 Reiffel v ACN 075 839 226 Ltd (2003) 132 FCR 437; 45 ACSR 67; [2003] FCA 194 …. 8.47, 9.22, 9.26 Renmark Hotel Inc v Commr of Taxation (1949) 79 CLR 10 …. 4.28 Repco Ltd v Bartdon Pty Ltd [1981] VR 1; (1980) 4 ACLR 787 …. 11.26, 11.31, 12.17, 12.18, 12.22, 12.29 RESI Corporation v Sinclair [2002] NSWCA 123 …. 4.6

Rest-Ezi Furniture Pty Ltd v Ace Shohin (Aust) Pty Ltd (1987) 5 ACLC 10 …. 14.6 Reynolds & Co Pty Ltd v Australian Stock Exchange Ltd (2003) 174 FLR 311; 44 ACSR 612 …. 11.32 Rhoads v Prudential-Bache Securities Canada Ltd [1992] 2 WWR 630; 63 BCLR (2d) 256 …. 14.6 RhonePoulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 68 ALR 77 …. 8.52 Ricegrowers Co-operative Mills Ltd v Bannerman (1981) 38 ALR 535 …. 11.27 Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; 50 ACSR 242; [2004] HCA 42 …. 2.53, 2.89, 16.19, 17.41 Rich & Silbermann v Australian Securities and Investments Commission (2004) 220 CLR 129; 50 ACSR 242; [2004] HCA 42 …. 13.53 Richards v Macquarie Bank Ltd (No 4) [2013] FCA 438 …. 9.37 Richmond River Pty Ltd v Australian Broadcasting Tribunal (1992) 34 FCR 385 …. 2.69 Riley (as trustee of Ker Trust) v Jubilee Mines NL (2006) 59 ACSR 252; [2006] WASC 199 …. 7.12, 7.15 Riley McKay Pty Ltd v Bannerman (1977) 15 ALR 561; ATPR 17,403 …. 2.50 Risqy Ltd (No 2), Re (2008) 66 ACSR 679; [2008] QSC 139 …. 13.7 Rivkin Financial Services v Softcom Ltd (2004) 51 ACSR 486; 23 ACLC 42; [2004] FCA 1538 …. 7.16, 17.18 Roadships Logistics Ltd v Tree (2007) 64 ACSR 671; [2007] NSWSC 1084 …. 5.56 Robinson v Merrill Lynch, Pierce, Fenner and Smith Inc 337 F Supp 107 (1971) …. 14.12 Robox Nominees Pty Ltd v Bell Resources Ltd (1986) 13 ACLR 475; 4 ACLC 164 …. 11.27

Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply Authority t/as Seqwater (No 5) [2015] NSWSC 1771 …. 9.30, 9.32 Rogers v Whitaker (1992) 175 CLR 479; [1992] HCA 58 …. 8.50, 14.5, 14.6 Romano v Merrill Lynch, Pierce Fenner & Smith Inc, 834 F 2d 523 (5th Cir 1987) …. 14.10 Roots Partnership v Lands End Inc 965 F 2d 1411 (7th Cir 1992) …. 9.42 Rosenberg v Australian Securities and Investments Commission (2010) 117 ALD 582; [2010] AATA 654 …. 13.57, 16.14 Royal Bank of Canada v Inland Revenue Commrs [1972] Ch 665 …. 3.11 Russell v The Duke of Norfolk [1949] 1 All ER 109 …. 11.36 RWG Management Ltd v Commissioner for Corporate Affairs (Vic) [1985] VR 385; (1984) 9 ACLR 739 …. 13.26 Ryan v Triguboff [1976] 1 NSWLR 588 …. 8.59, 17.16 Ryder v Osler, Wills, Bickle Ltd (1985) 16 DLR (4th) 80 …. 14.10

S Sage v Australian Securities and Investments Commission [2005] FCA 1043 …. 13.57, 13.61 Saints Gallery Pty Ltd v Plummer (1998) 80 ALR 525 …. 9.18 Samuel Holdings Pty Ltd v Securities Exchange Guarantee Corporation Ltd (2010) 80 ACSR 706; [2010] QSC 450 …. 6.11, 6.60 San Sebastian Pty Ltd v Minister Administering Environmental and Planning Assessment Act 1979 (1986) 162 CLR 340; [1986] HCA 68 …. 14.4 Santa Fe Industries, Inc v Green 430 US 462 (1977) …. 16.1 Saxby Bridge Financial Planning Pty Ltd and Australian Securities and Investments Commission, Re (2003) 46 ACSR 286; [2003] AATA 480 …. 13.18 SCF Finance Co Ltd v Masri (No 2) [1986] 1 All ER 40 …. 14.12

Schaudi v Califano, 647 F 2d 165 (6th Cir 1981) …. 14.10 Schlick v Penn-Dixie Cement Corp 507 F 2d 374 (2d Cir 1974) …. 16.2 Scott v Avery (1856) 5 HL Cas 811; 10 ER 1121 …. 11.48 — v Brown, Doering, McNab & Co [1892] 2 QB 724 …. 16.4 — v Handley [1999] FCA 404 …. 2.90 Seagar v Copydex Ltd [1967] 2 All ER 415 …. 14.82 Seagrim v Australian Securities and Investments Commission [2012] AATA 583 …. 13.56 Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596; [1979] HCA 51 …. 14.2 Securities & Exchange Commission v Adler 137 F 3d 1325 (11th Cir 1998) …. 17.12 — v Capital Gains Research Bureau Inc 375 US 180 (1963) …. 16.27 — v Commonwealth Chemical Securities Inc 574 F 2d 90 (2d Cir 1978) …. 16.16 — v Lund 570 F Supp 1397 (CD Cal 1983) …. 17.29 — v MacDonald 699 F 2d 47 (1st Cir 1983) …. 17.17, 17.18 — v Materia 745 F 2d 197 (1984) …. 17.7 — v Mayhew 121 F 3d 44 (1997) …. 17.17 — v National Bankers Life Insurance Co 334 F Supp 444 (ND Tex 1971) …. 16.11 — v — 447 F 2d 920 (5th Cir. 1973) …. 16.11 — v Resch-Cassin & Co, Inc 362 F Supp 964 (SDNY 1973) …. 16.13 — v Texas Gulf Sulphur Co 394 US 976 (1969) …. 17.5, 17.7 — v — 401 F 2d 833 (1968) …. 17.5, 17.7, 17.17, 17.18, 17.26 — v Thrasher 152 F Supp 2d 291 (2001) (SDNY 2001) …. 17.17 — v Willis 825 F Supp 617 (SDNY 1993) …. 17.7 Securities Exchanges Guarantee Corporation Ltd v Aird (2001) 161 FLR

420; 38 ACSR 185; [2001] NSWSC 379 …. 10.42 Securities Exchanges Guarantee Corporation Ltd (as Trustee for National Guarantee Fund), Re [2016] NSWSC 76 …. 10.38 Selangor United Rubber Estates Ltd v Craddock (No 3) [1986] 2 All ER 1073 …. 17.30 Selig v Wealthsure Pty Ltd (2013) 94 ACSR 308; [2013] FCA 248 …. 14.5 — v — (2015) 320 ALR 47; 89 ALJR 572; 105 ACSR 552; [2015] HCA 18 …. 9.25 Senanayake v Cheng [1966] AC 63 …. 13.70 Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 …. 9.21 Shaddock v Parramatta City Council (1981) 150 CLR 225; [1981] HCA 59 …. 14.4 Shafron v Australian Securities and Investments Commission [2012] HCA 18 …. 4.23 Shapiro v Merrill Lynch, Pierce, Fenner & Smith Inc 495 F 2d 228 (2d Cir 1974) …. 17.7, 17.17, 17.42 Shapowloff v Dunn (1981) 148 CLR 72; [1981] HCA 21 …. 14.17 Shaw Stockbroking Ltd v Australian Stock Exchange Ltd (1998) 26 ACSR 702 …. 11.48 Shearson Hayden Stone Inc v Leach, 583F 2d 367 (7th Cir 1978) …. 14.10, 14.12 Sheen v Fields Pty Ltd (1984) 51 ALR 345; 58 ALJR 93 …. 8.47 Shi v Migration Agents Registration Authority (2008) 235 CLR 286; [2008] HCA 31 …. 2.24 Silver v New York Stock Exchange 373 US 341 (1963) …. 11.36 Sim v National Companies and Securities Commission (1988) 13 ACLR 191 …. 2.68 Skelton v Wood (1894) 71 LT 616 …. 14.18 Skoljarev v Australian Fisheries Management Authority (1995) 133 ALR 690 …. 2.18

— v — (1996) 41 ALD 481 …. 2.18 Slade v Shearson Hammill & Co, Inc 517 F 2d 398 (1974) …. 17.36 Smith v Anderson (1880) 15 Ch D 247 …. 13.8 — v Capewell (1979) 142 CLR 509 …. 6.10 — v Chadwick (1884) 9 App Cas 187 …. 9.39 — v Papamihail (1998) 88 FCR 80; 29 ACSR 184 …. 2.76 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 …. 9.52 Smithers v Beveridge (1994) 14 ACSR 197 …. 9.19 Solco Ltd, Re (2015) 106 ACSR 591; [2015] FCA 635 …. 5.50, 6.61 Solloway v Blumberger [1933] SCR 163 …. 14.16 — v McLaughlin [1938] AC 247; [1937] 4 All ER 328 …. 14.18, 14.73, 14.81 Somerville v Australian Securities Commission (1993) 11 ASCR 595; 11 ACLC 1132 …. 2.94 Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; 60 ACSR 292; [2007] HCA 1 …. 8.42, 9.1 Sorby v Commonwealth (1983) 152 CLR 281 …. 2.53 Sovereign Capital Ltd and Australian Securities and Investments Commission, Re (2008) 109 ALD 398; [2008] AATA 901 …. 13.53 Spence v Crawford [1939] 3 All ER 271 …. 13.70 Sreika v Cardinal Financial Services Ltd [2000] FCA 1647 …. 9.29 Spedley Securities Ltd (in liq) v Greater Pacific Investments Pty Ltd (in liq) (1992) 30 NSWLR 185; 7 ACSR 155 …. 14.87 Spargos Mining NL v Standard Chartered Australia Ltd (No 2) (1989) 1 ACSR 314 …. 2.52 Springwell Navigation Corporation v JP Morgan Chase Bank [2010] EWCA Civ 1221 …. 14.5

Stafford v Conti Commodity Services Ltd [1981] 1 All ER 691 …. 14.6 Standard Chartered Bank v Ceylon Petroleum Corp [2011] EWHC 1785 (Comm) …. 14.5 — v — [2012] EWCA Civ 1049 …. 14.5 Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4) [2003] 1 AC 959 …. 9.15 Standard Chartered Bank of Australia Ltd v Antico (No 1) (1995) 18 ACSR 1 …. 4.23 Stockbridge v Ogilvie (1993) 43 FCR 244; 10 ACSR 688 …. 2.70, 2.74 Story v National Companies and Securities Commission (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560 …. 13.18, 13.53, 13.63 Stoyeff v Masu Financial Management Pty Ltd (2008) 66 ACSR 585; [2008] FCA 897 …. 6.33 Strong v Repide 213 US 419 (1909) …. 17.3 Stylis v United Medical Protection Ltd [2007] NSWCA 109 …. 11.38 Sullivan & Long Inc v Scattered Corp 47 F 3d 857 (7th Cir 1995) …. 16.1 Sumiseki Materials Co Ltd v Wambo Coal Pty Ltd (No 2) (2013) 93 ACSR 693; [2013] NSWSC 488 …. 11.51 Supercar International Holdings Ltd v Sommers (2011) 84 ACSR 466; [2011] NSWSC 336 …. 8.17 Switzerland Australia Health Fund Pty Ltd v Shaw (1988) 81 ALR 111; ATPR ¶40-866 …. 8.47 Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236; 16 ACSR 148 …. 1.48, 3.6, 6.6

T Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 …. 8.59 Tadoran Pty Ltd (in liq) v NG Delaney Insurances Pty Ltd (1989) 5 ANZ Ins Cas60-900 …. 14.2 Tag Pacific Ltd v Bos Stockbroking Ltd (1989) 15 ACLR 337 …. 14.16

Tarrant v Australian Securities and Investments Commission (2013) 62 AAR 192; [2013] AATA 926 …. 14.64 — v — (2015) 104 ACSR 275; [2015] FCAFC 8 …. 13.59 Tasmanian Spastics Association, Re; Australian Securities and Investments Commission v Nandan (1997) 23 ACSR 743 …. 2.91 Tate v Williamson (1866) 2 Ch App 55 …. 5.32 Taylor v Telstra Corporation Ltd [2007] FCA 2008 …. 9.37 Tepko Ltd v Water Board (2001) 206 CLR 1; [2001] HCA 19 …. 14.4 Thomas v Powercor Australia Ltd [2011] VSC 614 …. 9.38 Thompson v Australian Securities and Investments Commission (2002) 117 FCR 159; 41 ACSR 456; [2002] FCA 512 …. 2.98, 5.57, 5.61 — v Meade (1891) 7 TLR 698 …. 14.2 Thomson v Smith Barney, Harris Upham & Co, 709 F 2d 1413 (11th Cir 1983) …. 14.35 Thornton v SEC 171 F 2d 702 (2d Cir 1948) …. 16.15 Tiernan v Blyth, Eastman, Dillon & Co, 719 F 2d 1 (1st Cir 1983) …. 14.35 Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 27 ALR 367; 42 FLR 331; [1979] FCA 85 …. 8.47, 8.59 Timbercorp Finance Pty Ltd (in liq) v Collins [2015] VSC 461 …. 9.36 — v — [2016] VSCA 128 …. 9.36 Timor Sea Petroleum NL, Re (2000) 35 ACSR 186; [2000] VSC 337 …. 4.15, 4.27 Titan Steel Wheels Ltd v The Royal Bank of Scotland plc [2010] EWHC 211 (Comm); [2010] 2 Lloyd’s Rep 92 …. 14.5 TNT Australia Pty Ltd v Poseidon Ltd (No 2) (1989) 52 SASR 383; 15 ACLR 80 …. 12.23 TNT Skypak International (Aust) Pty Ltd v Commr of Taxation (1988) 82 ALR 175 …. 2.25

Tobin v Broadbent (1947) 75 CLR 378; [1947] HCA 46 …. 14.73 Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29,699 …. 15.20 Tooheys Ltd v The Minister for Business & Consumer Affairs (1981) 36 ALR 64 …. 11.27 Torkington v Magee [1902] 2 KB 427 …. 3.8 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 …. 14.82 Trade Practices Commission v Abbco Ice Works Pty Ltd (1994) 52 FCR 96 …. 2.89 — v — (1992) 109 ALR 465 …. 8.59 — v Service Station Association Ltd (1993) 44 FCR 206; 116 ALR 643 …. 8.59 — v Tubemakers of Australia Ltd (1983) 47 ALR 719 …. 9.16 Trane Co v O’Connor Securities 561 F Supp 301 (SDNY 1983) …. 16.7 Transmarket Trading Pty Ltd v Sydney Futures Exchange Ltd (2010) 188 FCR 1; 78 ACSR 507; [2010] FCA 534 …. 10.16, 11.21 Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA 69 …. 9.45 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 …. 14.8 Trollope v The Honourable Justice Middleton (2008) 159 FCR 507 …. 11.27 Turner and Australian Securities and Investments Commission, Re [2009] AATA 417 …. 13.57 Tweed v Australian Securities and Investments Commission (2008) 47 AAR 518; [2008] AATA 514 …. 13.57

U United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1; [1985] HCA 49 …. 13.8

United States v Brown 79 F 2d 321 (2d Cir 1935) …. 16.15 — v Carpenter 791 F 2d 1024 (1986) …. 17.7 — v Chestman 112 S Ct 1759 (1992) …. 17.7 — v — 947 F 2d 551 (2d Cir 1991) …. 17.7 — v Hall 48 F Supp 2d 386 (SDNY 1999) …. 16.1 — v Mulheren 938 F 2d 364 (2d Cir 1991) …. 16.2 — v Newman 464 US 863 (1983) …. 17.7 — v — 664 F 2d 12 (1981) …. 17.7 — v — 773 F 3d 438 (2d Cir 2014) …. 17.30 — v O’Hagan 521 US 642 (1997) …. 17.7 — v Salman 792 F 3d 1087 (9th Cir 2015) …. 17.30 — v Smith 155 F 3d 1052 (9th Cir 1998) …. 17.12 — v Teicher 987 F 2d 112 (2d Cir 1993) …. 17.12 Utz v Javor [1973] 2 NSWLR 1 …. 16.30

V Vanmarc Holdings Pty Ltd v P W Jess & Associates Pty Ltd (2000) 34 ACSR 222 …. 11.30 Varcoe v Sterling (1992) 7 OR (3d) 204 …. 14.10 Vault Market Pty Ltd, Re [2014] NSWSC 1641 …. 13.39, 13.64 Verschuur v Vynotas Pty Ltd [2004] VSC 130 …. 9.37 Vetter v Lake Macquarie City Council (2001) 202 CLR 439; [2001] HCA 12 …. 2.25 Viacom International v Icahn 946 F 2d 998 (2d Cir 1991) …. 9.54 Voli v Inglewood Shire Council (1963) 110 CLR 74; [1963] HCA 15 …. 14.6 von Doussa v Owens (1982) 6 ACLR 692 …. 2.53

W W Noall & Son v Wan [1970] VR 683 …. 14.16, 14.17, 14.19 WA Pines Pty Ltd v Bannerman (1980) 30 ALR 559; [1980] FCA 79 …. 13.16 — v Hamilton (1980) CLC ¶40-654 …. 3.29 — v Registrar of Companies [1976] WAR 149; (1976) 1 ACLR 431 …. 4.9 Wade v A Home Away Pty Ltd (1980) CLC ¶40-669 …. 3.22 Waimond Pty Ltd v Byrne (1989) 18NSWLR 642 …. 14.5 Wakim, Re (1999) 198 CLR 511; 31 ACSR 99; [1999] HCA 27 …. 1.60 Waldron v Auer [1977] VR 236; (1977) 2 ACLR 514 …. 13.8, 13.64 — v MG Securities (A’asia) Ltd [1975] VR 508 …. 13.64 Walsh v Permanent Trustee Australia Ltd (1996) 21 ACSR 213 …. 2.94 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd (2014) 290 FLR 18; 101 ACSR 643 …. 11.51 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; 109 ALR 247; [1992] HCA 55 …. 9.22, 9.45 Wardley Australia Ltd, Ex parte; Ex parte Bond Corporation Holdings Ltd (1991) 9 ACLC 1565 …. 2.75 Warner v Elders Rural Finance Ltd (1992) 113 ALR 517 …. 8.52, 8.55 Warner, Re GTL Tradeup Pty Ltd (in liq) (2015) 104 ACSR 633; [2015] FCA 323 …. 14.70 Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492; [1948] 1 ALR 89 …. 2.37 Waterhouse v Waterhouse (1999) 46 NSWLR 449 …. 8.74 Watson v AWB Ltd [2007] FCA 1367 …. 9.29 — v — (No 3) (2009) 181 FCR 96; [2009] FCA 1174 …. 2.53 Wave Capital Ltd, Re (2003) 47 ACSR 418 …. 5.50

Wayde v New South Wales Rugby League (1985) 61 ALR 225 …. 11.51 Wealthsure Pty Ltd v Selig (2014) 221 FCR 1; [2014] FCAFC 64 …. 14.5 Weinberger v Inglis (No 2) [1919] AC 606 …. 11.36 Wenzel v Australian Stock Exchange Ltd (2002) 125 FCR 570; 44 ACSR 1 …. 11.29 Wepar Nominees Pty Ltd v Schofield (No 2) (2014) 99 ACSR 234; [2014] FCA 225 …. 9.37 Western Australian Turf Club v Commr of Taxation (1978) 139 CLR 288 …. 4.28 Westpac Banking Corporation v Jamieson (2014) 98 ACSR 63; [2014] QSC 32 …. 15.28 Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR ¶40-940 …. 8.49 White v Shortall (2006) 68 NSWLR 50 …. 12.34, 12.35, 12.36, 12.37 Whitlam v Australian Securities and Investments Commission (2003) 57 NSWLR 559; 46 ACSR 1; [2003] NSWCA 183 …. 2.88 Wilkinson v Feldworth (1998) 29 ACSR 642 …. 9.15, 9.19 — v Katies Fashions (Aust) Pty Ltd (1986) 67 ALR 137 …. 9.18 Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR 459; [2000] FCA 1925 …. 9.37 — v — (No 5) [2001] FCA 399 …. 9.38 Willmott Forests Ltd (in liq) and Willmott Finance Pty Ltd (in liq), Re (2011) 85 ACSR 71; [2011] VSC 348 …. 13.33 Wilmar Sugar Australia Ltd v Queensland Sugar Ltd [2016] FCA 20 …. 11.51 Wilson v Comtech Telecommunications Corp 648 F 2d 88 (2d Cir 1981) …. 17.42 — v MF Global UK Ltd [2011] EWHC 138 (QB) …. 14.5 — v Great American Industries Inc 855 F 2d 987 (1988) (2d Cir 1988) …. 17.17

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2012) 301 ALR 1; [2012] FCA 1028 …. 1.28, 3.10, 3.11, 3.30, 14.10 — v — (No 3) [2010] FCA 747 …. 9.29 Winter v Australian Securities Commission (1995) 56 FCR 107; 16 ACSR 61 …. 2.69 Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199 …. 9.38 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649 …. 8.52 Wong v Silkfield Pty Ltd (1999) 199 CLR 255; [1999] HCA 48 …. 9.32 Wood v National Companies and Securities Commission (1990) 2 WAR 176; 1 ACSR 779 …. 2.73, 2.74 Woodcroft-Brown v Timbercorp Securities Ltd (2011) 253 FLR 240; 85 ACSR 354; [2011] VSC 427 …. 5.26, 5.27, 5.35, 6.6, 6.39, 6.46, 6.51, 6.53 — v — (in liq) (2013) 96 ACSR 307; [2013] VSCA 284 …. 6.6, 6.46, 6.51, 6.53, 6.54 Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28 …. 13.68 Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; [2004] HCA 16 …. 14.4, 14.5 Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431; 9 ACLC 539 …. 14.13 Wotton v State of Queensland [2009] FCA 758 …. 9.37 Wright Heaton Ltd v PDS Rural Products Pty Ltd (1982) 7 ACLR 140 …. 8.61 Wright Patton Shakespeare Capital Ltd and Australian Securities and Investments Commission, Re (2007) 99 ALD 335; [2007] AATA 2101 …. 5.55 Wright Patton Shakespeare Capital Ltd and Australian Securities and Investments Commission, Re [2008] AATA 1068 …. 6.45

Wright v SEC 112 F 2d 89 (1940) …. 16.16

Y YFFM v Australian Securities and Investments Commission [2010] AATA 340 …. 13.57 York Street Mezzanine Pty Ltd (in liq), Re (2007) 162 FCR 358; 64 ACSR 1; [2007] FCA 992 …. 3.11 Yorke v Lucas (1983) 49 ALR 672 …. 8.59 — v Lucas (1985) 158 CLR 661; 61 ALR 307 …. 8.10, 8.44, 8.48, 9.18, 9.19, 9.20

Z Zephyr Holdings Pty Ltd v Jack Chia (Aust) Ltd (1988) 14 ACLR 30 …. 12.28 Zhang v Minos Securities Pty Ltd [2008] NSWSC 689 …. 13.47 Zhang De Yong v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384 …. 9.31 Zweig v Hearst Corporation 594 F 2d 1261 (9th Cir 1979) …. 16.27 Zytan Nominees Pty Ltd v Laverton Gold NL (1988) 1 WAR 227; 14 ACLR 524 …. 12.22, 12.25, 12.29

Table of Statutes References are to paragraph numbers

Commonwealth Acts Interpretation Act 1901 …. 1.62 s 15AA …. 3.19 s 15AB …. 3.19 s 25C …. 2.52 s 34AA …. 2.16 Administrative Appeals Tribunal Act 1975 …. 2.22, 2.23, 2.24, 2.25 s 25 …. 2.22 s 27 …. 2.22 s 35 …. 2.23 s 41 …. 2.23 s 41(2) …. 2.23 s 43 …. 2.24 s 43(1) …. 2.24 Administrative Decisions (Judicial Review) Act 1977 …. 1.62, 2.26, 2.68, 2.94, 11.37, 12.14, 13.55, 13.62 s 5 …. 2.26 s 6 …. 2.26 s 7 …. 2.26 Australian Consumer Law …. 1.54, 8.3, 8.9, 8.10, 8.14, 8.35, 8.70, 8.73, 9.1, 9.5, 9.25, 15.8 s 2(2) …. 9.14 s 4 …. 8.48, 8.49

s 18 …. 5.36, 5.39, 8.3, 8.9, 8.10, 8.14, 8.15, 8.35, 8.36, 8.37, 8.41, 8.42, 8.48, 8.49, 8.54, 9.1, 9.3, 9.24 s 232 …. 8.36, 8.73 s 236 …. 8.3, 8.10, 8.11, 8.36, 8.57, 8.70, 9.1, 9.2, 9.4, 9.6, 9.14 s 236(1) …. 9.3 s 237 …. 8.11, 8.36, 8.70, 8.76 s 251 …. 8.9 Australian National Registry of Emissions Units Act 2011 …. 3.57 Australian Prudential Regulation Authority Act 1998 …. 13.26 Australian Securities and Investments Commission Act 2001 …. 1.1, 1.14, 1.33, 1.34, 1.35, 1.36, 1.38, 1.39, 2.1, 2.4, 2.6, 2.7, 2.10, 2.12, 2.13, 2.14, 2.17, 2.20, 2.22, 2.49, 2.53, 2.55, 2.67, 2.75, 2.79, 2.82, 2.83, 2.92, 2.93, 2.100, 2.103, 3.1, 3.4, 3.38, 3.39, 3.40, 3.60, 4.45, 8.3, 8.4, 8.5, 8.35, 8.40, 8.41, 8.57, 9.1, 9.17, 9.19, 9.25, 9.28, 13.53, 15.9, 15.10, 15.12, 15.13, 15.20, 15.31, 16.23 Pt 2 …. 8.10 Pt 2, Div 2 …. 1.2, 1.18, 1.32, 1.45, 2.2, 2.10, 2.13, 2.49, 2.51, 2.60, 2.81, 2.93, 3.4, 3.17, 3.39, 3.52, 3.60, 4.35, 4.45, 8.40, 8.71, 8.74, 9.5, 15.8, 15.10, 15.11, 15.13, 15.27 Pt 2, Div 2 Subdiv BA …. 4.45, 15.14, 15.18 Pt 2, Div 2, Subdiv C …. 8.75, 9.3, 15.19 Pt 2, Div 2, Subdiv D …. 8.75, 9.3, 15.22, 15.24 Pt 2, Div 2, Subdiv E …. 8.75, 15.25 Pt 2, Div 2, Subdiv G …. 8.3, 8.40, 8.70, 9.2 Pt 2, Div 2, Subdiv GA …. 8.9, 9.25 Pt 2, Div 2, Subdiv GC …. 2.60, 6.71, 15.31 Pt 3 …. 2.22, 2.54, 2.59 Pt 3, Div 1 …. 2.50 Pt 3, Div 3 …. 2.48, 2.50, 2.52, 2.53, 2.54, 2.55, 2.57, 2.67, 2.70, 2.72,

2.81, 2.95 Pt 3, Div 4 …. 2.48, 2.58 Pt 3, Div 8 …. 2.22 Pt 9 …. 2.104 Pt 14 …. 2.105 s 1(1)(c) …. 2.104 s 1(2) …. 2.14, 2.67, 4.7 s 5(1) …. 2.50, 2.51, 8.40 s 8(1A) …. 2.12 s 9 …. 2.7, 2.15 s 11 …. 2.12, 2.13 s 11(4) …. 2.13 s 12 …. 2.10 s 12A …. 2.10, 2.12, 2.13, 2.49 s 12A(6) …. 2.13 s 12BA(2) …. 8.52, 9.14 s 12BAA …. 3.2, 3.39, 3.60, 8.14 s 12BAA(1) …. 3.60 s 12BAA(2) …. 3.60 s 12BAA(3) …. 3.60 s 12BAA(4) …. 3.60 s 12BAA(5) …. 3.60 s 12BAA(6) …. 3.60 s 12BAA(7) …. 3.60 s 12BAA(7)(a) …. 3.6, 3.8, 3.51, 4.45, 15.13 s 12BAA(7)(b) …. 3.60

s 12BAA(7)(d) …. 3.60 s 12BAA(7)(e) …. 3.60 s 12BAA(7)(f) …. 3.60 s 12BAA(7)(j) …. 3.60 s 12BAA(7)(k) …. 3.38, 3.60 s 12BAA(8) …. 3.60 s 12BAB …. 3.60, 4.45, 8.14, 8.40, 15.13, 15.27 s 12BAB(1)(g) …. 8.40 s 12BAB(5) …. 8.40 s 12BAB(7) …. 4.45, 15.13 s 12BAB(8) …. 4.45, 15.13 s 12BAB(9) …. 4.45, 15.13 s 12BB …. 8.48, 8.49 s 12BB(2) …. 8.49 s 12BC …. 15.27 s 12BC(3) …. 15.27 s 12BF(1) …. 15.14 s 12BF(2) …. 15.14 s 12BF(3) …. 15.15 s 12BG …. 15.14 s 12BG(1) …. 15.17 s 12BG(1)(b) …. 15.17 s 12BG(2) …. 15.17 s 12BG(3) …. 15.17 s 12BG(4) …. 15.17 s 12BH(1) …. 15.17

s 12BI(1) …. 15.16 s 12BI(1)(a) …. 15.14 s 12BI(1)(b) …. 15.14 s 12BK …. 15.16 s 12BL …. 15.15 s 12CA …. 14.78, 15.19 ss 12CA–12CB …. 16.23 ss 12CA–12CC …. 9.3 s 12CB …. 15.19 s 12CB(1) …. 15.21 s 12CB(2)(a) …. 15.21 s 12CB(2)(b) …. 15.21 s 12CB(2)(c) …. 15.21 s 12CB(2)(d) …. 15.21 s 12CB(2)(e) …. 15.21 s 12CB(4)(b) …. 15.19 s 12CC …. 14.78, 15.19, 16.23 s 12CC(1) …. 15.21 s 12DA …. 2.81, 4.45, 5.36, 5.39, 8.3, 8.9, 8.10, 8.11, 8.14, 8.15, 8.17, 8.35, 8.36, 8.37, 8.40, 8.42, 8.44, 8.47, 8.48, 8.49, 8.54, 8.69, 8.71, 9.1, 9.25, 9.28, 9.39, 14.7, 14.35, 15.11, 15.23, 16.23 ss 12DA–12DN …. 9.3 s 12DA(1A) …. 8.14 s 12DB …. 4.45, 15.23 s 12DC …. 4.45 s 12DE …. 4.45, 15.23 s 12DF …. 4.45, 9.24, 15.23

s 12DG …. 4.45, 15.23 s 12DH …. 4.45, 15.23 s 12DI …. 4.45, 15.23 s 12DJ …. 4.45, 15.23 s 12DK …. 4.45, 15.23 s 12DM …. 4.45, 15.23 s 12EB …. 15.26 s 12EB(1) …. 15.25 s 12EB(2) …. 15.25 s 12EC …. 15.26 s 12EC(3) …. 15.26 s 12ED …. 1.28, 15.27, 15.28, 15.29 s 12ED(1) …. 14.6, 15.28 s 12ED(2) …. 14.6, 15.28 s 12GB …. 2.81 s 12GC …. 8.72 s 12GD …. 2.93, 8.36, 8.74 s 12GF …. 8.3, 8.10, 8.11, 8.36, 8.42, 8.57, 8.69, 8.70, 9.1, 9.2, 9.4, 9.6, 9.14, 9.23, 9.39 s 12GF(1) …. 9.3, 9.14 s 12GF(1B) …. 9.25 s 12GF(2) …. 9.16, 9.20 s 12GF(4)(a) …. 9.17 s 12GF(4)(b) …. 9.17 s 12GH …. 8.69, 9.16 s 12GH(1) …. 8.69 s 12GH(2)(a) …. 9.16

s 12GH(2)(b) …. 9.16 s 12GH(3) …. 8.69 s 12GH(5) …. 8.69 s 12GI(4) …. 8.9 s 12GLA …. 2.96, 8.75 s 12GLB …. 2.96 s 12GLC …. 15.31, 15.32 s 12GLC(1) …. 15.33 s 12GLC(2) …. 15.33 s 12GLC(3) …. 15.33 s 12GM …. 2.95, 8.42, 8.76 s 12GN …. 2.96 s 12GND …. 15.14 s 12GNA …. 8.9 s 12GY …. 2.60, 15.34 s 12GYA …. 15.35 s 12GYB …. 15.35 s 12GYB(1) …. 15.35 s 12GYB(3) …. 2.60 s 13 …. 2.12, 2.48, 2.53, 2.68 s 13(1) …. 2.67 s 13(2) …. 2.67 s 13(3) …. 2.67 s 13(6) …. 2.67 s 14 …. 2.10, 2.67 s 19 …. 2.53, 2.70

ss 19–27 …. 2.53 s 19(2) …. 2.70, 2.76 s 19(2)(a) …. 2.70, 2.73 s 19(2)(b) …. 2.70 s 19(3) …. 2.70 s 19(3)(b) …. 2.70 s 21 …. 2.71 s 21(3) …. 2.53, 2.70 s 22 …. 2.53, 2.73 s 22(1) …. 2.71, 2.74 s 22(2) …. 2.71 s 23(1) …. 2.70, 2.74 s 24 …. 2.53 s 24(1) …. 2.75 s 24(2)(b) …. 2.75 s 25(1) …. 2.75 s 25(2) …. 2.75 s 28 …. 2.49, 2.50 s 28(c) …. 2.50 s 29 …. 2.48, 2.49 s 29(2A) …. 2.49 s 30 …. 2.50, 2.52 s 30(1) …. 2.51 s 30(2) …. 2.51 s 30A …. 2.50 s 31 …. 2.50, 2.51

s 31(1) …. 2.52 s 31(1)(g)–(m) …. 2.51 s 32A …. 2.50, 2.51, 2.52 s 32A(c)–(d) …. 2.51 s 33 …. 2.50, 2.51, 2.52 s 34 …. 2.52 s 35 …. 2.50, 2.55 s 36 …. 2.50, 2.55 s 36A …. 2.50, 2.55 s 37 …. 2.56 s 37(9) …. 2.57 s 37(10) …. 2.56 s 41 …. 2.58 s 43 …. 2.58 s 43(3) …. 2.58 s 47 …. 2.58 s 48 …. 2.58 s 49 …. 2.75, 2.77 s 49(3) …. 2.77 s 49(4) …. 2.77 s 50 …. 2.75, 2.94 s 50(c)–(d) …. 2.94 s 51 …. 2.65 s 58 …. 2.64 s 59(2) …. 2.65 s 63(1) …. 2.53, 2.71

s 63(3) …. 2.49, 2.71, 2.77 s 65(3) …. 2.53, 13.53, 13.58 s 68 …. 2.57, 2.59, 2.64, 2.70, 2.72 s 68(1) …. 2.53, 2.72, 2.76 s 68(2) …. 2.53, 2.72 s 68(2)–(3) …. 2.57 s 68(3) …. 2.53, 2.57, 2.72 s 69 …. 2.53, 2.54, 2.64 s 70 …. 2.77 s 84 …. 2.50 s 87 …. 2.50 s 92 …. 2.53 s 93AA …. 2.100, 7.27 s 95 …. 2.15 s 102 …. 2.16 s 102(1) …. 2.16 s 102(4) …. 2.16 s 127(1) …. 2.40 s 127(2) …. 2.40 s 127(4) …. 2.40 s 147 …. 2.7 s 172 …. 2.7 s 203 …. 2.7 s 232 …. 2.50 s 235A …. 2.7 s 236B …. 2.7

s 236F …. 2.7 s 243 …. 2.105 s 244 …. 2.22 s 792D …. 2.61 s 792E …. 2.61 s 821C …. 2.61 s 821D …. 2.61 s 904D …. 2.61 s 904E …. 2.61 s 912E …. 2.61 Australian Securities and Investments Commission Regulations 2001 …. 2.52 reg 2B …. 3.38, 3.60 reg 4 Form 1 …. 2.70 reg 5 …. 2.52 Australian Securities Commission Act 1989 …. 1.58, 1.59 s 8 …. 2.12 Banking Act 1959 …. 3.11, 4.28, 13.37, 13.54 Bankruptcy Act 1966 …. 14.69 Pt IV, Div 2 …. 13.52 Pt IV, Div 3 …. 13.52 Business Names Registration Act 2011 …. 2.13 Business Names Registration (Transitional and Consequential Provisions) Act 2011 …. 2.13 Carbon Credits (Carbon Farming Initiative) Act 2011 …. 3.57 Commission Act 2001 …. 2.1 Commonwealth Government Securities Legislation Amendment (Retail

Trading) Act 2012 …. 3.16 Commonwealth Inscribed Stock Act 1911 …. 3.16 Commonwealth of Australia Constitution Act 1901 s 51(xiii) …. 3.11 Companies Act 1862 s 16 …. 1.5 Competition and Consumer Act 2010 …. 1.4, 1.54, 2.54, 4.45, 8.37, 9.4, 11.2, 11.35, 15.10 Pt VIA …. 9.25 Pt XI, Div 2 …. 3.60 s 4D …. 11.35, 11.51 s 6 …. 8.38 s 45(2) …. 11.51 s 45D …. 11.35 s 46 …. 11.2 s 50 …. 11.35 s 75B …. 8.59 s 131 …. 3.60, 8.10, 8.14, 8.37, 8.41 s 131A …. 3.60 s 131A(1) …. 3.60 s 137B …. 9.25 Conciliation and Arbitration Act 1904 …. 11.31 s 141 …. 11.31 Constitution …. 1.60 s 51 …. 4.5 s 51(xiii) …. 4.28 s 51(xx) …. 1.58, 2.2

s 51(xxix) …. 4.5 s 51(xxxvii) …. 1.61, 2.2, 2.3 s 75(iii) …. 2.27 s 75(v) …. 2.27, 2.28 s 852A …. 10.36 Sch 2 …. 8.3, 9.1 Corporate Law Economic Reform Program Act 1999 …. 1.47, 1.48, 4.1, 4.6, 5.2, 5.7, 8.26 Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9 Act) …. 7.2, 7.26, 11.57, 13.21 Corporations Act 1989 s 17(1A) …. 4.6 s 18(2) …. 4.6 Corporations Act 2001 …. 1.1, 1.14, 1.25, 1.26, 1.27, 1.29, 1.33, 1.38, 1.52, 1.55, 1.61, 1.62, 2.1, 2.4, 2.6, 2.10, 2.12, 2.13, 2.17, 2.19, 2.22, 2.23, 2.31, 2.37, 2.41, 2.42, 2.47, 2.49, 2.50, 2.58, 2.62, 2.63, 2.75, 2.77, 2.79, 2.81, 2.82, 2.83, 2.85, 2.92, 2.93, 3.1, 3.3, 3.4, 3.7, 3.9, 3.36, 3.38, 3.40, 3.46, 4.1, 4.3, 4.4, 4.5, 4.15, 4.23, 4.27, 4.29, 4.31, 4.35, 4.45, 4.48, 5.3, 5.24, 5.26, 5.36, 5.37, 5.50, 5.56, 5.57, 6.6, 6.17, 6.29, 6.30, 6.35, 6.37, 6.42, 6.75, 7.2, 7.15, 8.2, 8.3, 8.4, 8.5, 8.14, 8.16, 8.35, 8.57, 8.71, 8.73, 9.1, 9.4, 9.5, 9.17, 9.19, 9.20, 9.25, 9.26, 9.28, 11.2, 11.6, 11.7, 11.9, 11.17, 11.22, 11.26, 11.30, 11.31, 11.36, 11.37, 11.38, 11.39, 11.42, 11.45, 11.51, 11.53, 11.56, 11.57, 12.1, 12.10, 12.17, 12.30, 12.37, 13.2, 13.8, 13.10, 13.17, 13.20, 13.25, 13.28, 13.37, 13.38, 13.49, 13.50, 13.52, 13.53, 13.57, 13.63, 13.64, 13.65, 13.72, 14.53, 14.56, 14.77, 14.82, 14.86, 15.13, 16.12, 16.15, 16.20, 16.23, 16.29, 17.25, 17.30, 17.36 Ch 2A …. 10.11, 10.25 Chs 2A–5C …. 1.3 Ch 2E …. 4.33 Ch 2L …. 3.10, 3.12, 4.2, 4.25, 4.31, 4.34, 5.22

Ch 2M …. 1.19, 4.29, 4.33, 5.13, 6.30, 14.75 Ch 5C …. 1.1, 2.95, 3.17, 3.20, 3.21, 3.33, 3.35, 6.4, 8.75, 8.76, 9.28, 14.84 Ch 6 …. 1.1, 1.47, 1.59, 2.37, 2.96, 3.12, 4.27, 4.34, 6.29, 6.64 Ch 6CA …. 6.29, 7.1, 7.2, 7.19, 8.2, 8.75, 8.76 Chs 6–6CA …. 3.3, 3.5, 3.14, 3.15, 3.17 Chs 6–6D …. 3.39 Ch 6A …. 1.1, 1.47, 2.96, 3.55 Ch 6B …. 1.1, 1.47, 2.96 Ch 6C …. 1.1, 1.47, 2.96 Ch 6CA …. 1.1, 1.3, 1.15, 1.19, 1.39, 2.13, 2.95 Ch 6D …. 1.1, 1.3, 1.15, 1.16, 1.18, 1.39, 1.47, 2.13, 2.95, 2.98, 3.2, 3.3, 3.5, 3.9, 3.10, 3.14, 3.15, 3.46, 3.51, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 4.22, 4.23, 4.24, 4.25, 4.27, 4.28, 4.32, 4.33, 4.34, 4.35, 4.49, 4.51, 5.2, 5.55, 5.59, 6.1, 6.2, 6.5, 6.6, 6.7, 6.8, 6.9, 6.16, 6.46, 7.2, 8.2, 8.3, 8.6, 8.7, 8.8, 8.9, 8.14, 8.15, 8.16, 8.19, 8.24, 8.31, 8.54, 8.75, 8.76, 9.1, 9.7, 9.8 Ch 7 …. 1.1, 1.2, 1.3, 1.20, 1.21, 1.26, 1.27, 1.39, 1.50, 1.59, 2.34, 2.36, 2.37, 2.96, 3.1, 3.3, 3.4, 3.5, 3.14, 3.15, 3.17, 3.35, 3.36, 3.37, 3.39, 3.40, 3.41, 3.42, 3.44, 3.47, 3.51, 3.52, 3.55, 3.59, 3.60, 4.4, 4.38, 4.45, 6.1, 6.2, 6.6, 6.7, 6.8, 6.9, 6.11, 6.24, 6.75, 7.2, 8.10, 8.40, 8.49, 8.61, 8.62, 8.72, 10.11, 10.12, 10.19, 10.20, 10.25, 10.32, 10.34, 10.36, 11.6, 11.33, 11.48, 11.53, 13.8, 13.12, 13.13, 13.16, 13.35, 13.40, 13.53, 13.56, 13.64, 13.72, 14.84, 14.87, 15.13, 16.6, 16.10, 16.18, 16.22, 17.21, 17.29, 17.37 Ch 8 …. 1.48, 1.50, 3.40 Pt 1.1 …. 6.29 Pt 1.1A …. 6.29 Pt 1.2, Div 2 …. 14.31, 14.33 Pt 1.2, Div 3 …. 13.8

Pt 1.2A …. 1.15, 1.19, 3.3, 3.5, 3.14, 3.15, 3.17, 4.25, 5.14, 6.50 Pt 2, Div 2 …. 2.48 Pt 2.4 …. 4.50 Pt 2.5 …. 8.62 Pt 2B.7 …. 4.33 Pt 2F.1 …. 12.28 Pt 2F.1A …. 11.31, 11.51 Pt 2M.3 …. 7.2 Pt 3, Div 1 …. 2.62 Pt 3, Sch 10BA …. 6.37 Pt 3.2 …. 14.84 Pt 5.1 …. 3.12, 4.27, 4.34 Pt 5.3A …. 4.27 Pt 5.7 …. 11.21 Pt 5.8 …. 11.21 Pt 5.8.2 …. 11.21 Pt 5.10 …. 11.21 Pt 6.7 …. 17.13 Pt 6D.2 …. 4.1, 4.2, 4.3, 4.6, 4.8, 4.10, 4.11, 4.12, 4.13, 4.16, 4.17, 4.18, 4.19, 4.20, 4.22, 4.23, 4.24, 4.26, 4.27, 4.28, 4.29, 4.30, 4.31, 4.35, 4.36, 4.37, 5.1, 5.2, 5.10, 5.13, 5.30, 5.40, 5.57, 6.30, 6.31, 6.71, 8.1, 8.15, 8.35 Pt 6D.2, Div 2 …. 1.16, 4.3, 4.10 Pt 6D.2, Div 3 …. 1.16, 4.3 Pt 6D.2, Div 4 …. 1.16, 5.4, 5.9 Pt 6D.2, Div 5 …. 1.16 Pt 6D.3 …. 1.16, 4.46, 4.48, 4.49, 8.15

Pt 6D.3, Div 1 …. 1.16 Pt 6D.4 …. 2.19 Pt 7.1, Div 2, s 761G(7) …. 6.17 Pt 7.1, Div 2, s 761GA …. 6.17 Pt 7.1, Div 3 …. 3.2, 3.39, 3.42, 3.60, 8.38 Pt 7.1, Div 3, Subdiv B …. 3.48, 3.58, 3.59 Pt 7.1, Div 4 …. 8.38 Pt 7.2 …. 1.21, 1.22, 10.1, 10.2, 10.6, 10.12, 10.18, 10.22, 10.23, 10.46, 11.9 Pts 7.2–7.5 …. 1.21 Pt 7.2, Div 3 …. 1.22, 13.67 Pt 7.2, Div 3, Subdiv C …. 2.13 Pt 7.2, Div 4 …. 1.22 Pt 7.2A …. 1.22 Pt 7.3 …. 1.21, 1.23, 10.1, 10.24, 10.25, 10.46 Pt 7.3, Div 2 …. 1.23 Pt 7.3, Div 2, Subdiv C …. 2.13 Pt 7.3, Div 3 …. 1.23 Pt 7.4 …. 1.21, 10.1, 10.36, 11.39 Pt 7.4, Div 1 …. 1.24, 10.17, 10.30, 10.36 Pt 7.4, Div1, Subdiv B …. 10.36 Pt 7.4, Div 2 …. 10.36 Pt 7.5 …. 1.21, 1.22, 10.1, 10.14, 10.17, 10.37, 10.42 Pt 7.5, Div 2 …. 10.37 Pt 7.5, Div 3 …. 1.22, 10.37, 10.38, 10.39, 10.42 Pt 7.5, Divs 3–6 …. 1.25 Pt 7.5, Div 4 …. 10.37, 10.39, 10.40, 10.41

Pt 7.5, Div 5 …. 10.42 Pt 7.5A …. 1.21, 1.25, 2.9, 10.44 Pt 7.5A, Div 2 …. 1.25, 10.45 Pt 7.5A, Div 3 …. 10.46 Pt 7.5A, Div 4 …. 10.46 Pt 7.5A, Div 5 …. 10.46 Pt 7.5A, Div 5, Subdiv A …. 2.45 Pt 7.5A, Div 6 …. 10.46 Pt 7.6 …. 2.13, 6.17, 8.54, 13.1, 13.64 Pts 7.6–7.9 …. 6.17, 6.35 Pt 7.6, Div 3 …. 1.27 Pt 7.6, Div 4 …. 1.27, 2.101 Pt 7.6, Div 5 …. 1.27, 13.40 Pt 7.6, Div 6 …. 1.27, 13.39, 13.40, 13.41, 13.47, 13.49 Pt 7.6, Div 8 …. 1.27, 2.102, 13.16, 13.40, 13.53, 13.65 Pt 7.6, Div 9 …. 13.65 Pt 7.6, Div 10 …. 13.66 Pt 7.6 Div 11 …. 1.27, 13.67, 13.68 Pt 7.6, Div 11, Subdiv B …. 13.67, 13.68 Pt 7.7 …. 1.29, 6.17, 8.3, 9.1, 13.49, 13.64, 14.1, 14.20, 14.21, 14.37, 14.38, 14.39, 14.40, 14.41, 14.42, 14.45, 14.47, 14.48 Pt 7.7, Div 7 …. 14.39 Pt 7.7A …. 1.30, 13.64, 14.63 Pt 7.7A, Div 2 …. 14.54 Pt 7.7A, Div 4, Subdiv B …. 14.64 Pt 7.8 …. 1.30, 6.4, 6.17, 13.64, 14.1, 14.20, 14.66, 14.70 Pt 7.8, Div 2 …. 1.30, 11.20, 14.65, 14.72

Pt 7.8, Div 2, Subdiv A …. 14.66, 14.67, 14.70 Pt 7.8, Div 2, Subdiv B …. 14.66, 14.71 Pt 7.8, Div 3 …. 1.30, 14.65, 14.73 Pt 7.8, Div 4 …. 14.74 Pt 7.8, Div 5 …. 1.30 Pt 7.8, Div 6 …. 1.30, 2.46, 14.75 Pt 7.8, Div 6, Subdiv B …. 14.76 Pt 7.8, Div 6, Subdiv C …. 14.76 Pt 7.8, Div 6, Subdiv D …. 14.76, 14.77 Pt 7.8, Div 7 …. 1.30 Pt 7.9 …. 1.15, 1.17, 1.18, 1.30, 2.13, 2.98, 3.46, 4.1, 4.3, 4.4, 5.6, 5.10, 6.1, 6.2, 6.4, 6.5, 6.6, 6.7, 6.10, 6.11, 6.12, 6.17, 6.26, 6.36, 6.39, 6.40, 6.41, 7.2, 8.1, 8.2, 8.3, 8.6, 8.7, 8.8, 8.9, 8.12, 8.14, 8.31, 8.32, 8.35, 9.1, 14.22, 14.36 Pt 7.9, Div 2 …. 1.17, 3.33, 6.3, 6.12, 6.42 Pt 7.9, Div 2, Subdiv B …. 6.50 Pt 7.9, Div 2, Subdiv C …. 1.17 Pt 7.9, Div 2, Subdiv D …. 6.42, 6.65 Pt 7.9, Div 3 …. 1.17 Pt 7.9, Div 3A …. 6.37 Pt 7.9, Div 4 …. 1.17 Pt 7.9, Div 4, Subdiv 4.2A …. 6.57 Pt 7.9, Div 5 …. 1.17, 6.64 Pt 7.9, Div 5A …. 6.5, 6.10 Pt 7.9, Div 6 …. 1.17, 6.5 Pt 7.9, Div 7 …. 1.17, 8.6, 8.31 Pt 7.9, Div 7, Subdiv A …. 8.31, 8.32

Pt 7.10 …. 1.18, 1.32, 1.37, 2.13, 2.95, 4.35, 4.43, 8.1, 8.3, 8.12, 8.39, 8.40, 8.69, 8.75, 8.76, 9.1, 9.5, 13.49 Pt 7.10, Div 2A …. 8.9, 9.25 Pt 7.10, Div 3 …. 1.38, 11.20, 17.1, 17.8, 17.9, 17.10, 17.11, 17.12, 17.13, 17.14, 17.17, 17.18, 17.19, 17.21, 17.22, 17.24, 17.26, 17.27, 17.28, 17.30, 17.32, 17.33, 17.36, 17.37, 17.39, 17.43, 17.44, 17.45, 17.46, 17.47, 17.48, 17.50 Pt 7.11 …. 1.47, 1.59, 3.1, 3.5, 3.17, 4.1 Pt 7.11, Div 4 …. 10.22 Pt 7.12 …. 1.47, 1.59, 4.1 Pt 7.12, Div 1 …. 2.43, 2.44 Pt 9.4 …. 4.51 Pt 9.4A …. 2.22, 2.99 Pt 9.4AA …. 7.26 Pt 9.4B …. 2.79, 2.85, 2.87, 2.99, 7.22, 7.26, 17.41 Pt 9.5 …. 8.3, 8.70, 9.2 Pt 9.12 …. 6.38 Pt 10.2 …. 4.4 Div 2, Subdiv 2 …. 6.57 s 3(3) …. 4.5 s 5 …. 4.5, 11.24 s 5(4) …. 4.5 s 5A(1) …. 3.55, 4.6 s 5A(3) …. 4.6, 4.28 s 5A(4) …. 3.55 s 9 …. 2.50, 3.1, 3.2, 3.7, 3.8, 3.10, 3.11, 3.13, 3.17, 3.18, 3.20, 3.21, 3.24, 3.28, 3.32, 3.36, 3.38, 4.22, 4.23, 4.28, 5.4, 5.13, 6.17, 6.24,

6.55, 7.13, 8.17, 8.19, 8.38, 9.7, 9.9, 9.14, 11.45, 13.33, 13.52, 14.86, 17.16, 17.21 s 9(a) …. 3.23 s 9(a)(i) …. 3.25 s 9(a)(ii) …. 3.25, 3.26, 3.28 s 9A …. 3.51, 4.29 s 11 …. 16.15 s 10 …. 11.17 s 11.2 …. 4.50 s 11.2(1) …. 4.50 s 11.2(2) …. 4.50 s 11.2(3) …. 4.50 s 11.2(5) …. 4.50 s 13 …. 14.79 s 13(c) …. 14.31, 14.33 s 14 …. 11.34 s 14(3) …. 11.34 s 15 …. 14.31, 14.33, 16.15 s 15(1)(a) …. 16.15 s 15(1)(c) …. 16.15 s 15(2) …. 16.15 s 18 …. 13.8 s 19 …. 6.10, 13.8 s 20 …. 13.8 s 21(3) …. 13.8 s 21(3)(e) …. 13.8 s 50 …. 3.11

s 50AA …. 4.12 s 51 …. 2.62 s 52 …. 2.63, 9.11, 14.64 s 52(1) …. 8.36 s 53 …. 2.50 s 66A …. 4.28, 6.29 s 79 …. 8.11, 8.13, 9.19, 9.20, 13.57 s 79(a) …. 9.19, 9.20 s 79(c) …. 9.19, 9.20 s 79(d) …. 9.19 s 82 …. 4.22, 6.24, 8.38 s 86 …. 2.51 s 92 …. 3.2 s 92(1) …. 3.13, 3.36, 3.55 s 92(2) …. 3.13 s 92(3) …. 3.3, 3.5, 3.13, 3.14, 3.15, 3.39 s 92(3)(a) …. 3.15 s 92(3)(b) …. 3.15 s 92(3)(c) …. 3.15 s 92(3)(d) …. 3.15 s 92(3)(d)(iii) …. 3.13 s 92(4) …. 3.3, 3.5, 3.13, 3.14, 3.15, 3.39, 6.7 s 111AC(1) …. 7.13 s 111AD …. 7.13 ss 111AE–111AJ …. 7.13 s 111AE(1) …. 7.13

s 111AE(2)–(3) …. 7.13 s 111AF …. 7.13 s 111AFA …. 7.13 s 111AG …. 7.13 s 111AI …. 4.25 s 111AJ(1) …. 7.13 s 111AS …. 5.13 s 111AT …. 5.13 s 111AV …. 5.13 s 113 …. 4.2, 4.33 s 113(1) …. 4.33 s 113(3) …. 4.33 s 113(4) …. 4.33 s 113(5) …. 4.33 s 115(2) …. 3.32 s 124 …. 12.11 s 124(1)(b) …. 3.8 s 140 …. 11.31, 11.38 s 140(1) …. 1.5, 11.38 s 165 …. 4.33 s 180(1) …. 12.31 s 182 …. 9.20 s 189 …. 8.28 s 206B …. 1.24, 10.36 s 206E …. 4.51 s 208 …. 9.20

s 209(2) …. 9.20 s 232 …. 11.51 s 236 …. 11.26 s 237 …. 11.26 s 254A(1)(a) …. 4.26 s 254E …. 5.50 s 260 …. 11.51 s 260D …. 9.20 s 283AA …. 4.2, 4.25, 4.34 s 283AA(3) …. 4.34 s 283AB …. 4.34 s 283AC …. 4.34 s 283BH …. 5.22 s 283BH(2) …. 5.22 s 283BH(3) …. 5.22 s 283DA …. 2.47 s 286 …. 2.49 s 311 …. 2.47 s 320 …. 11.51 s 340 …. 5.13 s 341 …. 5.13 s 351(1) …. 5.45 s 411(1) …. 4.27, 4.34 s 411(1A) …. 4.27, 4.34 s 422 …. 2.47 s 426 …. 2.47

s 438D …. 2.47 s 439A(3) …. 4.27 s 442E …. 2.47 s 445F(2) …. 4.27 s 533 …. 2.47 s 535 …. 2.47 s 601AH …. 11.27 s 601ED …. 3.22, 3.33, 12.37 s 601ED(1) …. 3.21, 3.33, 3.35 s 601ED(1)(a) …. 3.52 s 601ED(1)(b) …. 3.52 s 601ED(1)(c) …. 3.52 s 601ED(2) …. 3.33, 3.35 s 601ED(3) …. 3.33 s 601ED(5) …. 3.21 s 601FA …. 6.74 s 601FB(1) …. 6.15 s 601FC(1)(c) …. 14.55 s 601HG …. 2.47 s 601JC …. 2.47 s 601JE …. 2.47 s 601KA …. 6.64 s 601QA …. 3.33 s 602 …. 2.37 s 636 …. 4.27 s 655A …. 2.37

s 657C …. 2.62 s 657G …. 2.62 s 670A …. 5.36, 8.35 s 670B …. 8.70 s 670B(2) …. 9.22 s 673 …. 2.37 s 674 …. 1.19, 2.85, 2.99, 4.29, 5.13, 6.30, 7.3, 7.14, 7.15, 7.19, 7.20, 7.21, 7.22, 7.24, 7.27, 9.28 s 674(1) …. 7.13 s 674(2) …. 2.99, 7.13, 7.19, 7.22, 7.24, 7.25, 7.26 s 674(2)(c) …. 7.15 s 674(2A) …. 7.25 s 674(2B) …. 7.25 s 674(3) …. 7.13 s 675 …. 1.19, 2.85, 2.99, 7.18 s 675(2) …. 2.99, 7.19, 7.26 s 676 …. 7.14 s 676(2)(a) …. 7.14 s 676(2)(b) …. 7.14 s 676(2)(b)(i) …. 7.14 s 676(3) …. 7.14 s 677 …. 7.7, 7.15, 7.17 s 678 …. 7.19 s 700 …. 2.98, 3.2, 3.3, 3.5, 3.39, 4.4, 4.43 s 700(1) …. 4.6, 6.7 s 700(2) …. 4.9 s 700(3) …. 4.9, 4.32, 4.49, 8.24, 9.8, 9.11

s 700(4) …. 4.5 s 702 …. 4.4, 6.12 s 703(3) …. 4.27 s 704 …. 1.16 s 705 …. 2.98, 4.1, 5.2 s 706 …. 4.3, 4.8, 4.10, 4.11, 4.13, 4.17, 5.2 ss 706–707 …. 4.34 s 707 …. 4.3, 4.8, 4.10, 4.16, 4.17, 4.30, 5.2, 9.8 s 707(1) …. 4.8 s 707(2) …. 4.8, 4.10, 4.12, 4.16, 5.45 s 707(3) …. 4.8, 4.10, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.27, 4.30, 4.32, 5.10, 5.45 s 707(3)(b) …. 4.14 s 707(3)(b)(i) …. 4.30 s 707(4) …. 4.14 s 707(4)(b) …. 4.14 s 707(5) …. 4.8, 4.10, 4.16, 4.18, 4.30, 5.10, 5.45 s 707(5)(c)(i) …. 4.30 s 707(6) …. 4.16 s 708 …. 4.8, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 4.18, 4.20, 4.27, 5.1, 13.33 s 708(1) …. 4.18, 4.35, 4.36, 6.32, 8.42 s 708(1)–(7) …. 4.18 s 708(2) …. 4.18, 4.30 s 708(3) …. 4.18 s 708(4) …. 4.18, 5.4 s 708(5) …. 4.18

s 708(7) …. 4.18 s 708(8) …. 4.41, 4.43 s 708(8)(a) …. 4.19 s 708(8)(b) …. 4.19 s 708(8)(c) …. 4.20 s 708(8)(d) …. 4.20 s 708(9) …. 4.19 s 708(9B) …. 4.20 s 708(9C) …. 4.20 s 708(10) …. 4.9, 4.21, 4.41, 4.43 s 708(10)(a) …. 4.21 s 708(10)(b) …. 4.21 s 708(11) …. 4.41, 4.43 s 708(11)(a) …. 4.22 s 708(11)(b) …. 4.20, 4.22 s 708(12) …. 4.23 s 708(12)(a) …. 4.23 s 708(12)(b) …. 4.23 s 708(13)(a) …. 4.24 s 708(13)(b) …. 4.24 s 708(14) …. 4.25, 4.34 s 708(14A) …. 4.25 s 708(15) …. 4.26 s 708(16) …. 4.26 s 708(17) …. 4.15, 4.27 s 708(17A) …. 4.27

s 708(18) …. 4.27 s 708(19) …. 4.28 s 708(20) …. 4.28 s 708(21) …. 4.6, 4.28 s 708A …. 5.1, 5.13, 6.31 s 708AA …. 4.8, 4.10, 4.11, 4.17, 4.29, 5.1, 5.13, 6.30 s 708AA(2) …. 4.29, 4.30 s 708AA(3) …. 4.29 s 708AA(7) …. 4.29 s 708AA(9) …. 4.29 s 708A …. 4.8, 4.10, 4.13, 4.15, 4.17, 4.30, 4.34 s 709 …. 5.1, 5.2 s 709(1) …. 5.4, 5.5 s 709(1A)–(1C) …. 5.6 s 709(2) …. 5.7, 5.26 s 709(3) …. 5.26 s 709(4) …. 5.3, 5.8, 5.27 s 709(5) …. 5.8, 5.27 s 710 …. 1.16, 5.2, 5.3, 5.5, 5.9, 5.10, 5.13, 5.14, 5.16, 5.35, 5.36, 5.40, 5.52 ss 710–713 …. 5.25 ss 710–714 …. 8.20, 8.21 ss 710–715 …. 8.30 ss 710–716 …. 5.1 s 710(1) …. 5.10, 5.14, 6.53 s 710(1)(a) …. 5.10, 5.11 s 710(1)(b) …. 5.10, 5.11, 5.12

s 710(2) …. 5.12, 6.52 s 710(3) …. 5.11, 5.12, 5.35, 5.38, 6.52 s 711 …. 5.2, 5.3, 5.5, 5.9, 5.16, 5.40, 5.52, 9.10 s 711(1) …. 5.17 s 711(2) …. 5.18 s 711(3) …. 5.18 s 711(4) …. 5.18 s 711(5) …. 5.16, 5.19 s 711(6) …. 5.16, 5.20, 5.51 s 711(7) …. 5.16, 5.21, 5.45 s 712 …. 5.2, 5.3, 5.5, 5.24, 5.40, 5.52 s 712(3) …. 5.24 s 712(4) …. 5.24 s 712(5) …. 5.24 s 713 …. 5.2, 5.3, 5.5, 5.9, 5.10, 5.13, 5.15, 5.40, 5.52, 7.27 s 713(1) …. 5.14 s 713(2) …. 5.13, 5.14, 5.15 s 713(3) …. 5.13, 5.14 s 713(4) …. 5.13, 5.14 s 713(5) …. 5.13, 5.15 s 713(6) …. 5.13 s 713A …. 3.16, 5.6 ss 713A–713E …. 5.3 s 713A(2)–(20) …. 5.6 s 713A(2)–(20) …. 5.6 s 713A(13) …. 5.6

s 713A(21)–(23) …. 5.6 s 713A(24)–(27) …. 5.6 s 713B …. 5.6 s 713C …. 5.2, 5.6, 5.25 s 713D …. 5.2, 5.6, 5.25 s 713E …. 5.2 s 714 …. 5.2, 5.3, 5.26, 5.40, 5.52 s 714(1)(e) …. 5.45 s 714(2) …. 5.26 s 715 …. 5.2, 5.3, 5.27, 5.40, 5.52, 8.20, 8.21 s 715(1)(f) …. 5.45 s 715(1)(i) …. 5.27 s 715(2) …. 5.27 s 715(3) …. 5.27, 5.51 s 715A …. 5.1, 5.9, 5.26, 5.27, 5.55, 5.58 s 715A(1) …. 5.28 s 716 …. 5.12, 5.40, 9.10 s 716(1) …. 5.16, 5.20, 5.26, 5.27 s 717 …. 5.2, 5.40 s 718 …. 5.1, 5.2, 5.40, 5.42, 8.17 s 719 …. 5.1, 5.40, 5.52, 5.53, 5.56, 8.21 s 719(2) …. 5.54 s 719(3) …. 5.54 s 719(4) …. 5.55 s 719(5) …. 5.55 s 720 …. 5.45, 9.9, 9.10

s 721 …. 5.1, 5.2, 5.26, 5.40 s 721(2) …. 5.46 s 722 …. 5.1, 5.40, 5.47, 6.60 s 722(2) …. 5.47 s 723 …. 5.1, 5.40, 5.48 s 723(1) …. 5.46, 5.48, 8.18 s 723(2) …. 5.49, 6.62 s 723(3) …. 5.19, 5.47, 5.50, 6.61, 12.6 s 723(3)(c) …. 5.50 s 723(3)(d) …. 5.50 s 724 …. 5.1, 5.40, 5.49, 5.52, 5.57 s 724(1) …. 5.56 s 724(1)(b) …. 5.50 s 724(2) …. 5.47, 5.50, 5.56 s 724(3) …. 5.56 s 725 …. 5.1, 5.20, 5.48 s 725(1A) …. 5.51 s 725(3) …. 5.51 s 726 …. 4.1, 4.2, 4.32, 4.46, 4.47, 4.48 s 727 …. 4.1, 4.2, 4.46, 4.47, 4.48, 4.51, 5.2, 5.40 s 727(1) …. 4.48, 4.49, 5.1, 5.42, 8.18 s 727(2) …. 4.48, 5.1, 5.46 s 727(3) …. 4.48, 5.1, 5.40, 5.44 s 727(4) …. 4.48 s 728 …. 2.98, 4.44, 4.46, 4.51, 5.1, 5.2, 5.36, 5.40, 5.53, 5.58, 8.1, 8.6, 8.10, 8.14, 8.15, 8.16, 8.17, 8.18, 8.19, 8.24, 9.7, 9.28 s 728(1) …. 5.36, 5.52, 8.6, 8.15, 8.16, 8.22, 8.23, 8.24, 8.25, 8.26,

8.28, 8.30, 9.3, 9.7, 9.8, 9.9, 9.11, 9.12 s 728(1)(a) …. 8.19, 8.26, 8.29 s 728(1)(b) …. 8.20, 8.26, 8.29 s 728(1)(c) …. 8.21, 8.30 s 728(2) …. 5.36, 8.19 s 728(3) …. 5.36, 5.52, 8.6, 8.7, 8.8, 8.16, 8.22, 8.24, 8.25, 8.28, 8.30 s 729 …. 5.2, 5.12, 5.38, 5.40, 5.52, 8.6, 8.7, 8.8, 8.15, 8.16, 8.22, 8.24, 8.25, 8.26, 8.28, 8.29, 8.30, 8.70, 9.2, 9.3, 9.4, 9.5, 9.6, 9.7, 9.9, 9.10, 9.12, 9.24, 9.47 s 729(1) …. 5.36, 5.37, 8.16, 8.25, 9.3, 9.7, 9.9, 9.47 s 729(3) …. 5.40, 9.22 s 730 …. 5.40, 5.52, 8.30 s 730(7) …. 5.59 s 731 …. 5.2, 5.40, 8.8, 8.8, 8.25, 8.26, 8.30, 9.24, 14.42 ss 731–733 …. 8.15, 8.16, 8.25 s 732 …. 5.2, 5.40, 8.8, 8.8, 8.25, 8.27, 8.30 s 732(1) …. 9.24 s 732(2) …. 9.24 s 733 …. 5.2, 5.40, 8.8, 8.8 s 733(1) …. 8.25, 8.28, 9.24 s 733(3) …. 8.25, 8.28, 8.29, 9.9, 9.24 s 733(4) …. 8.25, 8.30, 9.24 s 734 …. 4.2, 4.35, 4.46, 4.47, 6.70 s 734(1) …. 4.18, 4.35, 4.36, 4.41, 4.48 s 734(2) …. 4.35, 4.37, 4.38, 4.39, 4.40, 4.41, 4.42, 4.48 s 734(2B) …. 4.35, 4.48 s 734(2)(b)(ii) …. 4.37

s 734(3) …. 4.37 s 734(4) …. 4.35, 4.37, 4.39, 4.40 s 734(5) …. 4.35, 4.37, 4.38, 5.1, 5.59 s 734(5)(a) …. 4.38 s 734(5)(b) …. 4.38 s 734(6) …. 4.35, 4.37, 4.38, 5.1, 5.59 s 734(7) …. 4.35, 4.37, 4.39, 4.42, 6.71 s 734(7)(a) …. 4.42 s 734(7)(b) …. 4.42 s 734(7)(c) …. 4.42 s 734(7)(d) …. 4.42 s 734(7)(e) …. 4.42 s 734(8) …. 4.35 s 734(9) …. 4.35, 4.37, 4.39, 4.41 s 735 …. 9.10 s 735(1) …. 9.9 s 736 …. 4.2, 4.46, 4.47, 4.48, 5.40, 14.86 s 736(1) …. 4.43, 4.48, 14.86 s 736(1B) …. 4.43, 4.48 s 736(2) …. 4.43, 14.86 s 737 …. 5.40 s 738 …. 4.43, 5.40, 14.86 s 739 …. 2.98, 4.40, 5.1, 5.57, 5.61 s 739(1) …. 2.98, 5.57, 5.61 s 739(1)(a) …. 5.58 s 739(1)(b) …. 5.58

s 739(1)(c) …. 5.59 s 739(1A) …. 5.60, 5.61 s 739(1A)(b) …. 5.59 s 739(1B) …. 5.59 s 739(2) …. 2.63, 2.98, 5.60 s 739(3) …. 2.98, 5.61 s 739(4) …. 5.61 s 739(5) …. 5.57 s 739(6) …. 5.59 s 741 …. 2.31, 3.9, 4.5, 4.7 s 741(1) …. 5.13 s 760A …. 1.50, 2.37, 13.56 s 761 …. 11.29 s 761A …. 1.15, 3.1, 3.2, 3.3, 3.5, 3.16, 3.41, 3.51, 6.5, 6.10, 8.38, 10.11, 10.18, 10.31, 10.45, 11.8, 13.3, 13.43, 17.10 s 761A(c) …. 6.5, 6.7 s 761A(d) …. 6.7 s 761A(e) …. 3.51 s 761B …. 3.43, 6.11 s 761C …. 13.8 s 761D …. 3.36, 3.37, 3.53, 17.10 s 761D(1) …. 3.36, 3.37 s 761D(2) …. 3.36 s 761D(3) …. 3.36, 3.37 s 761D(3)(a) …. 3.37 s 761D(3)(a)–(d) …. 3.37 s 761D(3)(b) …. 17.10

s 761D(3)(c) …. 3.37, 6.8 s 761D(4) …. 3.36, 3.37 s 761E …. 3.47, 6.15, 6.74 s 761E(2) …. 6.15 s 761E(4) …. 3.47, 6.15 s 761E(5) …. 6.15, 6.33 s 761E(6) …. 6.15 s 761EA …. 3.2, 3.59 s 761EA(2)(a) …. 3.38 s 761EA(2)(b)(i) …. 3.38 s 761EA(2)(b)(ii) …. 3.38 s 761EA(2)(c) …. 3.38 s 761EA(2)(d) …. 3.38 s 761EA(2)(e) …. 3.38 s 761EA(3) …. 3.38 s 761F …. 13.16 s 761G …. 3.2, 6.17, 10.37, 13.30, 13.33, 14.21, 14.29, 14.36, 14.54, 14.60, 14.86 s 761G(4) …. 6.18, 13.33 s 761G(4A) …. 6.18, 6.25, 13.33 s 761G(5) …. 6.17, 13.30, 13.31 s 761G(6) …. 6.17, 13.30, 13.32 s 761G(6A) …. 13.30 s 761G(7) …. 13.30, 13.33 s 761G(7)(a) …. 6.20 s 761G(7)(a)–(d) …. 6.18 s 761G(7)(b) …. 6.21

s 761G(7)(c) …. 6.22, 13.33 s 761G(7)(c)(i)–(ii) …. 13.33 s 761G(7)(ca) …. 6.22, 13.33 s 761G(7)(d) …. 6.24, 13.33 s 761G(7A) …. 6.22 s 761G(7A)–(7B) …. 13.33 s 761G(7B) …. 6.22 s 761G(9) …. 13.33 s 761G(10) …. 13.33 s 761G(11) …. 6.17 s 761G(12) …. 6.17, 6.21, 13.31, 13.33 s 761GA …. 6.17, 6.18, 6.23, 13.30, 13.33 s 762B …. 3.42, 6.11 s 763A …. 3.42, 3.47, 3.48 s 763A(1) …. 3.43, 3.60 s 763A(1)(b) …. 3.46, 3.48 s 763A(2) …. 3.43, 3.60 s 763A(3) …. 3.43, 3.60 s 763B …. 3.1, 3.44, 3.45, 3.60, 6.2 s 763B(b) …. 3.45 s 763C …. 3.1, 3.46, 3.48, 3.60, 6.2, 6.11, 13.68 s 763D …. 3.1, 3.47, 3.60, 6.2, 14.22 s 763D(2) …. 3.60 s 763D(2)(a)(i) …. 3.47 s 763D(2)(a)(ii) …. 3.47 s 763D(2)(b) …. 3.47

s 763E …. 3.41, 3.42, 3.43, 3.48, 3.49, 3.60, 6.11 s 763E(1)(b) …. 6.11 s 763E(2) …. 3.48 s 763E(2)(b) …. 6.11 s 764(1)(b) …. 6.10 s 764(1)(c) …. 3.53 s 764(1)(d)–(i) …. 3.54 s 764(1)(j) …. 3.55 s 764A …. 3.41, 3.42, 3.43, 3.46, 3.49, 3.50, 6.11 s 764A(1) …. 3.60 s 764A(1)(a) …. 3.6, 3.8, 3.37, 3.51, 4.44, 6.8, 8.38 s 764A(1)(b) …. 3.3, 3.52, 3.60 s 764A(1)(ba) …. 3.35, 3.52, 3.60, 10.23 s 764A(1)(c) …. 3.37, 6.8 s 764A(1)(d) …. 3.60 s 764A(1)(e) …. 3.60 s 764A(1)(f) …. 3.60 s 764A(1)(g) …. 3.60 s 764A(1)(k) …. 3.56, 3.60 s 764A(1)(ka) …. 3.57 s 764A(1)(kb) …. 3.57 s 765(1)(y) …. 3.47 s 765A …. 3.37, 3.41, 3.58, 13.68, 17.10 s 765A(1) …. 3.60 s 765A(1)(h) …. 3.38, 3.46, 3.47, 3.59, 3.60, 17.10 s 765A(2) …. 3.41, 3.58

s 766(4) …. 6.74 s 766A …. 1.27, 13.3, 13.5, 13.7 s 766A(1) …. 8.38 s 766A(1)(a) …. 13.4 s 766A(3) …. 13.3 s 766B …. 6.75, 13.3, 14.54 s 766B(1) …. 13.5 s 766B(1A) …. 6.75, 13.6 s 766B(3) …. 1.29, 14.22, 14.29, 14.60 s 766B(4) …. 1.29, 14.22 s 766B(5) …. 13.6 s 766B(6) …. 13.6 s 766B(7) …. 13. s 766C …. 6.74, 8.38 ss 766C–766D …. 13.3 s 766C(2) …. 8.38 s 766C(3) …. 8.38 ss 766C(3A)–766C(6) …. 8.40 s 766C(1) …. 13.7 s 766C(2) …. 13.7 s 766C(3) …. 13.7 s 766C(4) …. 4.45, 8.38, 15.13 s 766C(5) …. 1.20, 8.38 s 766C(6) …. 8.38 s 766D …. 16.6 s 766E …. 13.3

s 767A …. 1.22 s 767A(1) …. 10.7, 10.9, 11.6, 16.6, 17.10, 17.29 s 767A(2) …. 8.61, 11.6, 16.6, 16.10, 16.18, 16.22, 17.29 s 767A(2)(a) …. 10.12, 16.6 s 767A(2)(b)–(d) …. 10.12 s 768A …. 10.23 s 768A(1) …. 1.23, 10.23 s 768A(2) …. 10.23 s 769(2) …. 11.29 s 769A …. 8.62 s 769B …. 8.69, 9.7, 9.16, 16.8, 16.14, 17.21, 17.22 s 769B(1)(c) …. 8.69 s 769B(1)(a) …. 9.16 s 769B(1)(b) …. 9.16 s 769B(3) …. 8.69 s 769B(5)(a) …. 9.17 s 769B(5)(b) …. 9.17 s 769B(6) …. 8.69 s 769B(10) …. 8.52 s 769C …. 8.48, 8.49 s 777 …. 11.24, 11.27, 11.28 s 777(1) …. 11.29 s 791A …. 10.6, 10.11, 11.6 s 791B …. 10.6 s 791C …. 2.8, 10.12 s 791D(1) …. 10.11

s 791D(2) …. 10.11 s 791EA(2) …. 6.57 s 792A …. 10.13, 10.14, 10.15, 10.19, 11.9, 11.21, 11.40 s 792A(a) …. 10.16, 10.21, 11.8, 11.9 s 792A(b) …. 10.16 s 792A(c) …. 10.17 s 792A(d) …. 10.17 s 792A(e) …. 10.17, 10.38 s 792A(h) …. 10.17 s 792A(i) …. 10.17 s 792B …. 2.43, 10.14, 10.17 s 792C …. 2.48, 10.17 s 792D …. 10.17 s 792E …. 10.17 s 792F …. 10.17 s 792G …. 10.17 s 792I …. 10.17 s 793A …. 1.22, 11.8, 11.40 s 793A(1) …. 11.40 s 793A(1)–(2) …. 10.18 s 793A(3) …. 10.18 s 793A(4) …. 10.18 s 793B …. 10.18, 11.5, 11.24, 11.29, 11.31, 11.32 s 793B(1) …. 11.24 s 793B(2) …. 11.24 s 793B(2)–(3) …. 10.18

s 793C …. 10.18, 11.5, 11.24, 11.25, 11.26, 11.28, 11.29, 11.31, 11.33, 11.36, 12.2, 12.3, 12.8, 12.12, 12.16, 12.17, 12.19, 12.21, 12.22, 12.24, 12.26, 12.31, 12.33, 12.34, 12.35, 12.36 s 793C(1) …. 11.24 s 793C(2) …. 11.24, 12.10 s 793C(5) …. 11.28 s 793C(6) …. 11.28 s 793D …. 11.9 s 793E …. 2.8, 10.18 s 793E(3) …. 10.14 s 793E(4) …. 11.9 s 794A …. 2.8 s 794A(1) …. 10.19 s 794A(2) …. 10.19 s 794A(3) …. 10.19 s 794B …. 2.8 s 794D …. 10.19 s 794D(1) …. 10.19 s 794D(2) …. 10.19, 17.29 s 794D(3) …. 10.19 s 794D(4) …. 10.19 s 794D(6) …. 10.19 s 794E …. 10.19 s 795A …. 11.6 s 795A(1) …. 10.13 s 795B …. 2.8, 10.13, 10.18, 11.6, 11.26, 11.40 s 795B(1) …. 10.13

s 795B(1)(a)–(d) …. 11.40 s 795B(1)(c) …. 11.8 s 795B(1)(h) …. 11.6 s 795B(2) …. 10.13, 10.14, 10.18, 10.21, 10.37, 11.6, 11.24 s 795C …. 11.6 s 795D …. 10.10 s 796A …. 2.8, 10.20 s 796A(1) …. 10.20 s 796A(3) …. 10.20 s 796A(4) …. 10.20 ss 797B–797C …. 10.20 s 797B(d) …. 10.14 s 797C …. 2.8 s 797G …. 10.20 s 798A …. 11.9 s 798A(1) …. 10.13, 10.18 s 798A(2) …. 10.13 s 798A(2)(g) …. 11.26 s 798C …. 10.21 s 798C(2) …. 10.21 s 798C(3) …. 10.21 s 798C(4) …. 10.21 s 798C(7) …. 10.21 s 798E(1) …. 10.21 s 798E(2) …. 10.21 s 798F …. 11.7

s 798G …. 1.22, 2.9, 2.17, 2.22 s 798G(1) …. 11.7 s 798G(2) …. 11.7 s 798G(3) …. 2.9, 11.7 s 798G(4) …. 2.9, 11.7 s 798G(5) …. 11.7 s 798H …. 2.85, 11.7 s 798H(1) …. 11.7 s 798J …. 2.9 s 798J(5) …. 2.9 s 798K …. 2.22 s 820A …. 10.24 s 820B …. 10.24 s 820C …. 10.25 s 820D …. 10.25 s 820D(2) …. 10.25 s 821A …. 10.28 s 821A(aa) …. 10.29 s 821A(a) …. 10.29 s 821A(b) …. 10.30 s 821A(c) …. 10.30 s 821A(d) …. 10.30 s 821A(e)–(f) …. 10.30 s 821A(g)–(h) …. 10.30 s 821B …. 2.44, 10.30 s 821B(3) …. 10.27

s 821BA …. 10.30 s 821C …. 2.48, 10.30 s 821D …. 10.30 s 821D(3) …. 10.27 s 821E …. 10.30 s 821F …. 10.27 s 822A …. 1.23 s 822A(1)–(2) …. 10.31 s 822B …. 10.31 s 822C …. 10.31 s 822D–822E …. 10.31 s 822E …. 2.8, 10.31 s 823A(1) …. 10.32 s 823A(2)–(3) …. 10.32 s 823D(1) …. 10.32 s 823D(3) …. 10.32 s 823D(4) …. 10.32 s 823D(5) …. 10.32 s 823D(5)–(6) …. 10.32 s 823D(8) …. 10.32 s 823E …. 10.32 s 824A(1) …. 10.26 s 824A(2) …. 10.26 s 824B …. 2.8, 10.26 s 824B(1) …. 10.26 s 824B(2) …. 10.27, 10.30, 10.31

s 825A …. 2.8, 10.33, 10.34 s 825A(1) …. 10.34 s 825A(3) …. 10.34 s 825A(4) …. 10.34 ss 826B–826C …. 10.33, 10.35 s 826B(d) …. 10.27 s 826C …. 2.8, 10.35 s 826G …. 10.35 s 827A(1) …. 10.31, 10.34 s 827A(1)–(2) …. 10.26, 10.35 s 827A(2) …. 10.26 s 827D …. 10.29 s 849 …. 13.18, 14.33 s 850 …. 14.33 s 850B …. 10.36 s 850B(a) …. 11.39 s 850C …. 10.36 s 850D …. 10.36 s 850E …. 10.36 s 851 …. 13.18 ss 851B–851D …. 10.36 s 851F …. 10.36 s 852B …. 10.36 s 853A …. 10.36 ss 853A–853G …. 11.6 s 853B …. 11.6

s 853C …. 1.24, 10.36, 11.6 s 853C(2) …. 10.36 s 853C(3) …. 10.36 s 853D …. 10.36 s 853F …. 10.36 s 880A …. 10.37 s 881A …. 10.17, 10.37, 10.38 s 881B …. 10.13 s 881D(2) …. 10.13 s 882A(1) …. 10.38 s 882A(2) …. 10.13 s 883A …. 10.38 s 883B(1) …. 10.38 s 883B(2) …. 10.38 s 883B(3) …. 10.38 s 885B …. 10.38 ss 885B–885I …. 10.38 s 885C …. 10.38 s 885D …. 10.38 s 885E …. 10.38 s 887A …. 10.40 ss 888A–888E …. 10.40 s 888C …. 10.40 s 888D …. 10.40 s 888E …. 10.40 s 888H …. 10.41

s 888H(1) …. 10.41 s 888H(2) …. 10.41 s 888H(3) …. 10.41 s 889A …. 1.22 s 890A …. 1.22 s 892D …. 10.42 s 892E(1) …. 10.42 s 892E(2) …. 10.42 s 892F …. 10.42 s 892F(1) …. 10.42 s 892F(2) …. 10.42 s 900A …. 10.44 s 901A …. 2.17 ss 901A–901B …. 10.45 s 901B …. 2.9 s 901E …. 2.85, 10.45 s 901F …. 2.22 s 901G …. 10.45 s 901H …. 10.45 s 901K …. 2.9, 2.22, 10.45 s 901L …. 2.9, 10.45 s 902A …. 10.46 s 903A …. 2.22 s 903D …. 2.85 s 903E …. 2.22 s 903J …. 2.9

s 904A …. 10.46 s 904B …. 10.46 ss 904C–904E …. 10.46 s 904D …. 2.48 s 904F …. 2.8, 10.46 s 904G …. 10.46 s 905C …. 2.8 s 907D …. 2.31, 2.32, 2.36 s 911(2A)–(2E) …. 14.66 s 911A …. 1.27, 6.74, 13.2, 13.8, 13.13, 13.14 s 911A(1) …. 2.37, 13.2 s 911A(2) …. 13.9, 13.10, 13.37 s 911A(2)(a) …. 13.10 s 911A(2)(b) …. 13.10 s 911A(2)(ba) …. 13.10 s 911A(2)(c) …. 13.10 s 911A(2)(d) …. 10.10, 10.24, 13.10 s 911A(2)(ea) …. 13.10 s 911A(2)(ea)–(ec) …. 13.10 s 911A(2)(eb) …. 13.10 s 911A(2)(ec) …. 13.10 s 911A(2)(ed)–(eg) …. 13.10 s 911A(2)(f) …. 13.10 s 911A(2)(g) …. 13.10 s 911A(2)(h) …. 13.10 s 911A(2)(i)–(l) …. 13.10

s 911A(2)(j) …. 6.13 s 911A(2)(l) …. 2.19, 2.31 s 911A(2A)–(2E) …. 13.14 s 911A(3) …. 13.10 s 911A(4) …. 13.10 s 911B …. 1.27, 13.12, 13.37 s 911B(1) …. 13.12 s 911B(1)(a) …. 13.37 s 911B(1)(b) …. 13.37 s 911B(1)(c) …. 13.12, 13.37 s 911B(1)(d) …. 13.37 s 911B(1)(e) …. 13.37 s 911B(3) …. 13.12 s 911C …. 13.48 s 911C(a) …. 13.39 s 911C(b) …. 13.39 s 911C(c)–(d) …. 13.39 s 911D …. 13.14 s 911D(1) …. 13.13 s 911D(2) …. 13.13 s 912A …. 13.16, 13.23, 13.36, 13.53, 13.57, 13.58, 16.23 s 912A(1)(a) …. 13.16, 14.55 s 912A(1)(aa) …. 13.21, 13.22, 14.13 s 912A(1)(b) …. 13.24 s 912A(1)(b)–(c) …. 13.24 s 912A(1)(ca) …. 13.25

s 912A(1)(d) …. 13.26 s 912A(1)(e) …. 13.27 s 912A(1)(f) …. 13.27 s 912A(1)(g) …. 6.47, 13.28, 13.34 s 912A(1)(h) …. 13.28 s 912A(1)(j) …. 13.28 s 912A(2) …. 13.28, 13.34 s 912A(2)(a) …. 13.34 s 912A(2)(b) …. 13.34 s 912B …. 13.36 s 912B(1) …. 13.35 s 912B(2) …. 13.35 s 912B(3) …. 13.35 s 912C …. 2.48, 2.59, 13.36 s 912C(1) …. 13.36 s 912C(2) …. 13.36 s 912C(3) …. 13.36 s 912D …. 2.46, 13.36 s 912D(1)(b) …. 13.36 s 912D(1B) …. 13.36 s 912D(2) …. 13.36 s 912E …. 2.48 s 912E(1) …. 13.36 s 912E(2) …. 13.36 s 913A …. 13.16 s 913A(a) …. 13.16

s 913A(b) …. 13.16 s 913B …. 13.16 s 913B(1)(a) …. 13.16 s 913B(1)(b) …. 13.16 s 913B(1)(c) …. 13.16 s 913B(1)(ca) …. 13.16 s 913B(1)(d) s 913B(2) …. 13.16, 13.53 s 913B(2)–(4) …. 13.16 s 913B(3) …. 13.16, 13.53 s 913B(3)(b) …. 13.16 s 913B(4) …. 13.16 s 913B(5) …. 2.63, 13.16 s 913C …. 13.16 s 914A(1) …. 13.37 s 914A(3) …. 13.37 s 914A(4) …. 13.37 s 914A(5)(a)–(b) …. 13.37 s 914A(5A) …. 13.37 s 914A(6)–(7) …. 13.37 s 914A(8) …. 13.37 s 915A …. 2.101, 13.51 s 915A–915G …. 13.51 s 915B …. 2.101, 13.53, 13.58 s 915B(1) …. 13.52 s 915B(2) …. 13.52

s 915B(3)(a) …. 13.52 s 915B(3)(c)–(d) …. 13.52 s 915B(4) …. 13.52 s 915C …. 2.23, 2.63, 2.101, 13.53 s 915C(1)(a)–(aa) …. 13.53 s 915C(1)(b) …. 13.53 s 915C(1)(c)–(d) …. 13.53 s 915C(2) …. 13.53 s 915C(4) …. 2.63, 13.53, 13.54 s 915E …. 13.53 s 915F(1) …. 13.53 s 915F(2) …. 13.53 s 915G …. 13.53 s 915H …. 13.53 s 915I(1)(a) …. 13.54 s 915I(1)(b) …. 13.54 s 915I(2) …. 13.54 s 915I(3) …. 13.54 s 916A(1)–(2) …. 13.40 s 916A(3) …. 13.40 s 916A(4) …. 13.40 s 916B …. 13.41, 13.44 s 916B(4)–(5) …. 13.41 s 916B(5A) …. 13.41 s 916B(6) …. 13.41 s 916B(7) …. 13.41

s 916B(8) …. 13.41 s 916C(1) …. 13.42 s 916C(2) …. 13.42 s 916C(3) …. 13.42 s 916D(1) …. 13.43 s 916D(2)–(2A) …. 13.43 s 916D(3) …. 13.43 s 916E(1) …. 13.43 s 916E(2) …. 13.43 s 916F …. 2.46, 13.44, 13.65 s 916F(1)–(2) …. 13.44 s 916F(1A) …. 13.44 s 916F(3) …. 13.44 s 916F(4) …. 13.44 s 916G …. 13.45 s 916G(1) …. 13.45 s 916G(2) …. 13.45 s 916G(5) …. 13.45 s 917A(1) …. 13.47 s 917A(2) …. 13.47 s 917A(3) …. 13.47 s 917B …. 13.47 ss 917B–917E …. 13.49 s 917C …. 14.49 s 917C(2) …. 13.48 s 917C(3)–(4) …. 13.48

s 917C(3)(c) …. 13.47 s 917C(3)(c)(i) …. 13.48 s 917C(3)(c)(ii) …. 13.48 s 917C(3)(d) …. 13.48 s 917C(3)(e) …. 13.48 s 917C(4) …. 13.48 s 917D …. 13.48, 14.49 s 917E …. 13.47 s 917F …. 14.49 s 917F(1)–(2) …. 13.49 s 917F(3) …. 13.49 s 917F(4) …. 13.47, 13.49 s 917F(5) …. 13.49 s 917F(6) …. 13.49 s 917F(7) …. 13.49 s 920A …. 2.23 s 920A–920F …. 13.56, 16.14 s 920A(1) …. 13.57 s 920A(1)(a)–(ba) …. 13.57 s 920A(1)(bb)–(c) …. 13.57 s 920A(1)(d) …. 13.57 s 920A(1)(da)–(f) …. 13.57 s 920A(1)(e) …. 13.57 s 920A(1)(g)–(h) …. 13.57 s 920A(1) …. 13.57 s 920A(1A) …. 13.57

s 920A(2) …. 2.102, 13.58 s 920A(3) …. 13.58 s 920B(1) …. 13.56 s 920B(2) …. 13.59 s 920B(3) …. 13.56, 13.60 s 920B(i) …. 2.102 s 920C …. 13.56 s 920C(1) …. 13.56 s 920C(2) …. 13.56 s 920D(1)–(2) …. 13.60 s 920F …. 2.102 s 920F(1) …. 13.59 s 920F(2) …. 13.60 s 921A …. 13.63 s 921A(1)–(2) …. 13.63 s 921A(4) …. 13.63 s 922A …. 13.27, 13.65 s 922B(1)–(2) …. 13.65 ss 922C–922P …. 13.65 s 923A(2) …. 13.66 s 923B …. 13.66, 14.25 s 923B(1) …. 13.66 s 923B(3)(a) …. 13.66 s 923B(3)(b) …. 13.66 s 923B(3)(c)–(e) …. 13.66 s 924A …. 13.67

s 925A …. 13.2, 13.68, 13.71 s 925A(1) …. 13.68 s 925A(2) …. 13.68 s 925A(3) …. 13.68 s 925A(4) …. 13.68, 13.71 s 925A(5) …. 13.68 s 925B …. 13.68, 13.70, 13.71 s 925C …. 13.69, 13.71 s 925C(4) …. 13.69 s 925D …. 13.70 s 925E …. 13.71 s 925F …. 13.71 s 925G …. 13.71 s 925H …. 13.71 s 925I …. 13.70 s 926A …. 2.31, 2.32, 2.36 s 926B …. 6.17 s 926B(1)(c) …. 13.33 s 940B …. 14.21 s 940C …. 14.21 s 941A …. 14.21 s 941B …. 14.21 s 941C …. 14.22 s 941C(1) …. 14.22 s 941C(2) …. 14.22 s 941C(3) …. 14.22

s 941C(4) …. 14.22 s 941C(6) …. 14.22 s 941C(7) …. 14.22 s 941C(8) …. 14.22 s 941D(1) …. 14.23 s 941D(2) …. 14.23 s 941D(3) …. 14.23 s 941D(4) …. 14.23 s 941E …. 14.24 s 941F …. 14.24 s 942(f) …. 14.23 s 942(g) …. 14.23 s 942(i) …. 14.23 s 942B …. 14.25 ss 942B–942C …. 13.18, 14.13 s 942B(2)(a) …. 14.22 s 942B(2)(a)–(b) …. 14.25 s 942B(2)(c) …. 14.25 s 942B(2)(d) …. 14.25 s 942B(2)(e) …. 14.22, 14.23, 14.25 s 942B(2)(e)–(f) …. 13.18 s 942B(2)(f) …. 14.22, 14.23, 14.25 s 942B(2)(g) …. 14.25 s 942B(2)(h) …. 14.22, 14.25 s 942B(2)(i) …. 14.23, 14.25 s 942B(2)(j) …. 14.25

s 942B(2)(k) …. 14.25 s 942B(3) …. 14.25 s 942B(5) …. 14.25 s 942B(6) …. 14.25 s 942B(8) …. 14.25 s 942C …. 14.26 s 942C(2)(a) …. 14.22 s 942C(2)(c) …. 14.22, 14.26 s 942C(2)(f) …. 14.22, 14.26 s 942C(2)(f)–(g) …. 13.18 s 942C(2)(g) …. 14.22, 14.26 s 942C(2)(i) …. 14.22 s 942E …. 14.27 s 943A(1) …. 14.28 s 943A(2) …. 14.28 s 943D …. 14.28 s 943E …. 14.28 s 943F …. 14.28 s 945A …. 14.54 s 945B …. 14.58 s 946A …. 14.30 s 946A(1) …. 14.30 s 946A(2) …. 14.30 s 946AA …. 14.31 ss 946AA–946B …. 14.31 s 946B(1) …. 14.25, 14.31

s 946B(3) …. 14.31 s 946B(3A) …. 14.31 s 946B(5) …. 14.31 s 946B(6) …. 14.31 s 946B(7) …. 14.31 s 946C(1) …. 14.32 s 946C(2) …. 14.32 s 946C(3) …. 14.32 s 947B …. 13.20, 14.31, 14.33 ss 947B–947C …. 14.13 s 947B(2)(a) …. 14.33 s 947B(2)(b) …. 14.33 s 947B(2)(c) …. 14.33 s 947B(2)(d) …. 14.33 s 947B(2)(d)–(e) …. 14.31, 14.32 s 947B(2)(e) …. 14.33 s 947B(2)(g) …. 14.33 s 947B(3) …. 14.33 s 947B(5) …. 14.33 s 947C …. 13.20, 14.31, 14.34 s 947C(2)(d) …. 14.34 s 947C(2)(e) …. 14.34 s 947C(2)(e)–(f) …. 14.31, 14.32 s 947C(2)(f) …. 14.34 s 947C(3) …. 14.34 s 947D …. 14.32, 14.33

s 947D(1) …. 14.35 s 947D(2)(a) …. 14.35 s 947D(2)(b)–(c) …. 14.35 s 947D(3) …. 14.35 s 949A …. 14.22, 14.36, 14.48, 14.49 s 949A(2) …. 14.29, 14.36 s 949A(3) …. 14.36 s 949A(4) …. 14.36 s 949A(5) …. 14.36 s 949B …. 14.48, 14.49 s 951A …. 14.37 s 951B …. 2.19, 2.31, 2.36 s 951B(1) …. 14.38 s 951B(2) …. 2.36 s 951B(3) …. 14.38 s 951C …. 6.17 s 951C(1)(c) …. 13.33 s 952B …. 14.41, 14.48 s 952C(1) …. 14.40 s 952C(3) …. 14.40 s 952C(4) …. 14.40 s 952D(1) …. 14.41, 14.41, 14.42 s 952D(1)–(2) …. 14.41 s 952D(2) …. 14.41 s 952E(1) …. 14.42 s 952E(2) …. 14.42

s 952E(3) …. 14.42 s 952E(4) …. 14.42 s 952E(5) …. 14.42 s 952E(6) …. 14.42 s 952F …. 14.44 s 952F(2) …. 14.43 s 952F(3) …. 14.43 s 952F(4) …. 14.43 s 952G …. 14.44 s 952G(2) …. 14.44 s 952G(3) …. 14.44 s 952G(4) …. 14.44 s 952G(5) …. 14.44 s 952G(6) …. 14.44 s 952G(7) …. 14.44 s 952G(8)–(10) …. 14.44 s 952H …. 14.45 ss 952I–952J …. 14.46 s 952K …. 14.46 s 952L …. 14.46 s 952M …. 14.46 s 953A …. 8.3, 8.10, 8.35, 9.1 s 953A(1) …. 14.48 s 953B …. 14.47, 14.48, 14.49, 14.50 s 953B(2) …. 14.49, 14.51, 14.52 s 953B(3) …. 14.49

s 953B(3)–(3A) …. 14.49 s 953B(3)(a) …. 14.49 s 953B(3)(b) …. 14.49 s 953B(3A) …. 14.49 s 953B(4) …. 14.49 s 953B(5) …. 14.51 s 953B(6) …. 14.51 s 953C(1) …. 14.52 s 953C(2) …. 14.52 s 960A …. 14.54 s 960B …. 14.54, 14.59 s 961 …. 14.54 s 961B …. 14.35, 14.58 s 961B(1) …. 14.55, 14.56 s 961B(2) …. 14.56 s 961B(2)(a) …. 14.56 s 961B(2)(a)–(f) …. 14.56 s 961B(2)(b) …. 14.56 s 961B(2)(c) …. 14.56 s 961B(2)(d) …. 14.56 s 961B(2)(e) …. 14.56 s 961B(2)(f) …. 14.56 s 961B(2)(g) …. 14.56 s 961B(3)–(4) …. 14.57 s 961C …. 14.56 s 961E …. 14.56

s 961G …. 14.56, 14.58 s 961H …. 14.33, 14.58 s 961J …. 14.56, 14.59 s 961K …. 2.85, 14.59 s 961L …. 14.59 s 961Q …. 2.85, 14.59 s 962A …. 14.60 s 962A(3) …. 14.60 s 962A(4)–(5) …. 14.60 s 962CA …. 14.62 s 962E(1) …. 14.60 s 962E(2) …. 14.60 s 962F …. 14.61, 14.62 s 962G …. 14.61 s 962H …. 14.61 s 962J …. 14.61 ss 962K–962L …. 14.62 s 962K(1) …. 14.62 s 962K(2) …. 14.62 s 962L …. 14.62 s 962L(1) …. 14.62 ss 962M–962N …. 14.62 s 962P …. 2.85, 14.63 s 962S …. 2.85 s 963A …. 14.64 ss 963A–963D …. 14.64

ss 963B–963E …. 14.64 s 963B(1)(d)(ii) …. 14.64 s 963B(1)(e) …. 14.64 s 963C(e)(ii) …. 14.64 s 963E …. 2.85, 14.64 s 963F …. 2.85, 14.64 s 963G …. 2.85 ss 963G–963H …. 14.64 s 963J …. 2.85, 14.64 s 963K …. 2.85, 14.64 s 963L …. 14.64 s 964 …. 14.64 s 964A …. 2.85, 14.64 s 964D …. 2.85 ss 964D–964E …. 14.64 s 964E …. 2.85 s 964F …. 14.64 s 964G …. 14.64 s 965 …. 2.85, 14.63 s 981A(1) …. 14.66 s 981A(2) …. 14.66 s 981A(3) …. 14.66 s 981B …. 14.67, 14.68, 14.69, 14.70, 14.72, 14.76 s 981B(1)(a) …. 14.67 s 981B(1)(b) …. 14.67 s 981B(1)(c) …. 14.67

s 981B(1)(c)–(d) …. 14.67 s 981B(2) …. 14.67 s 981C …. 14.67, 14.68 s 981D …. 14.69 s 981E …. 14.70 s 981F …. 14.70 s 981G …. 14.70 s 981H(1) …. 14.70 s 981H(3) …. 14.70 s 982A(1) …. 14.71 s 982A(2) …. 14.71 s 982B …. 14.71, 14.72, 14.76 s 982B(1) …. 14.71 s 982B(2) …. 14.71 s 982C …. 14.71 s 982C(1) …. 14.71 s 982C(2) …. 14.71 s 982D …. 14.71 s 983A …. 2.96, 14.72 ss 983A–983E …. 14.72 s 983A(2) …. 14.72 s 983A(3) …. 14.72 s 983B …. 14.72 s 983C …. 14.72 s 983D …. 14.72 s 983E(1) …. 14.72

s 983E(1)(c) …. 14.13 s 983E(2) …. 14.72 s 984B …. 14.73 s 984B(1) …. 14.73 s 984B(2) …. 14.73 s 985B(1) …. 14.74 s 985B(2) …. 14.74 s 985B(3) …. 14.74 s 985C(2) …. 14.74 s 985E …. 2.85 s 985H …. 2.85 s 985J …. 2.85 s 985K …. 2.85 s 985L …. 2.85 s 985M …. 2.85 s 987A(2) …. 14.75 s 988A(1) …. 14.76 s 988B …. 14.76 s 988E …. 14.76 s 989B …. 14.76 s 989D …. 14.76 s 990A …. 14.77 ss 990B–990H …. 14.77 s 990B(6) …. 14.77 s 990B(1)–(2) …. 14.77 s 990C …. 14.77

s 990F …. 14.77 s 990G …. 14.77 s 990I …. 14.77 s 990J …. 14.77 s 990K …. 2.47 s 990K(1) …. 14.77 s 990K(2) …. 14.77 s 990L …. 2.47 s 991A …. 1.34, 4.45, 14.78 s 991A(1) …. 14.78 s 991A(2) …. 14.78 s 991A(3) …. 14.78 s 991B …. 14.79 s 991B(1) …. 14.79 s 991B(2) …. 11.21, 14.79 s 991B(3) …. 14.79 s 991C(a) …. 14.80 s 991C(b) …. 14.81 s 991C(c) …. 14.82 s 991D …. 14.83 s 991E …. 11.18, 14.84 s 991E(1) …. 11.18, 14.84 s 991E(1)(d) …. 11.18 s 991E(3) …. 14.84 s 991E(4) …. 14.84 s 991E(5) …. 14.84

s 991E(6) …. 14.84 s 991E(7) …. 14.84 s 991F …. 14.85 s 991F(1) …. 14.85 s 991F(2) …. 14.85 s 991F(3) …. 14.85 s 991F(4) …. 14.85 s 992A …. 6.4, 6.72, 14.86 s 992A(1) …. 6.72, 14.86 s 992A(3) …. 6.72, 14.86 s 992A(3A) …. 14.86 s 992A(3A)–(3B) …. 14.86 s 992A(4) …. 14.86 s 992AA …. 6.4, 6.72, 14.86 s 992AA(2) …. 14.86 s 992B …. 2.19, 2.31, 2.36, 14.86 s 992B(2) …. 2.36 s 992C …. 6.17 s 992C(1)(c) …. 13.33 s 995 …. 8.36, 8.44 s 996 …. 8.19 s 997 …. 16.7 s 997(7) …. 16.9 s 998 …. 16.12 s 998(1) …. 16.12, 16.15 s 998(5) …. 16.15

s 998(3) …. 16.12, 16.15 s 999 …. 8.60 s 1000 …. 8.64, 8.66 s 1002A …. 17.10, 17.16 s 1002B(2)(a) …. 17.25 s 1002G …. 17.10, 17.13, 17.16, 17.25, 17.26, 17.28, 17.30, 17.32 s 1008 …. 8.29 s 1008(4) …. 8.29 s 1009 …. 8.29 s 1009(3) …. 8.29 s 1010A …. 1.17, 6.2, 6.3, 6.5 s 1010B …. 1.17, 6.5, 6.27 s 1010B(1) …. 6.10 s 1010B(2) …. 6.10 s 1011 …. 8.26 s 1011A …. 6.26 s 1011A(1) …. 6.26 s 1011A(2) …. 6.26 s 1011B …. 6.13, 6.33 s 1012(8A) …. 6.29 s 1012A …. 6.12, 6.14, 6.15, 6.26, 6.27, 6.34, 8.14 s 1012B …. 6.12, 6.15, 6.26, 6.27, 6.34 s 1012B(3)(a)(i) …. 6.15 s 1012B(3)(a)(ii) …. 6.15 s 1012B(3)(a)(iii) …. 6.15 s 1012B(4) …. 6.15

s 1012B(6) …. 6.31 s 1012B(8) …. 6.31 s 1012C …. 6.12, 6.16, 6.26, 6.27, 6.34, 6.53, 6.68 s 1012C(6) …. 6.16 s 1012C(8) …. 6.16 s 1012C(9) …. 6.16 s 1012D …. 6.12, 6.27, 6.28, 6.29 s 1012D–1012G …. 6.12 s 1012D(1) …. 6.13, 6.15, 6.29 s 1012D(2B) …. 6.29 s 1012D(3) …. 6.29 s 1012D(5) …. 6.29, 6.31 s 1012D(6) …. 6.29 s 1012D(7) …. 6.29 s 1012D(8) …. 6.31 s 1012D(9A) …. 6.29 s 1012D(9B) …. 6.29 s 1012D(9J) …. 6.29 s 1012D(10) …. 6.29 s 1012DAA …. 6.27, 6.28, 6.30 s 1012DAA(2) …. 6.30 s 1012DAA(2)(f) …. 6.30 s 1012DAA(3) …. 6.30 s 1012DAA(7) …. 6.30 s 1012DAA(9) …. 6.30 s 1012DA …. 6.12, 6.27, 6.28, 6.31

s 1012DA(2) …. 6.31 s 1012DA(6)(c)(i) …. 6.31 s 1012DA(8)(d)(i) …. 6.31 s 1012E …. 6.12, 6.27, 6.28, 6.32, 6.69, 8.6 s 1012E(2) …. 6.67 s 1012E(5) …. 6.32 s 1012E(8) …. 6.32 s 1012E(9) …. 6.32 s 1012F …. 6.12, 6.27 s 1012G …. 6.12, 6.27, 6.34, 6.45, 8.31 s 1012IA …. 14.64 s 1012J …. 6.42 s 1012K …. 6.11 s 1013A …. 6.13, 6.33, 8.31 s 1013A(3) …. 6.33 s 1013A(3A) …. 6.33 s 1013B …. 6.42, 6.45, 8.32, 9.4 s 1013C …. 6.42, 8.32, 9.4 s 1013C(1) …. 6.56, 6.57 s 1013C(1)(b) …. 6.42 s 1013C(2) …. 6.45, 6.51, 6.52, 6.53 s 1013C(2)(b) …. 6.53 s 1013C(3) …. 5.28, 6.42 s 1013D …. 6.42, 6.45, 6.46, 6.51, 6.53, 6.54, 6.56, 6.57 s 1013D(1)(a) …. 6.45 s 1013D(1)(b) …. 6.45

s 1013D(1)(c) …. 6.45, 6.46, 6.51 s 1013D(1)(d) …. 6.45 s 1013D(1)(e) …. 6.45 s 1013D(1)(f) …. 6.45 s 1013D(1)(g) …. 6.45, 6.47 s 1013D(1)(h) …. 6.45 s 1013D(1)(i) …. 6.45, 6.48 s 1013D(1)(j) …. 6.45 s 1013D(1)(k) …. 6.45 s 1013D(1)(l) …. 6.45, 6.49 s 1013D(1)(m) …. 6.45 s 1013D(2A) …. 6.45, 6.49 s 1013D(4) …. 6.49 s 1013E …. 6.42, 6.51, 6.53, 6.54, 6.56, 6.57 s 1013F …. 6.29, 6.42, 6.45, 6.51, 6.52, 6.54 s 1013F(2)(f) …. 6.54 s 1013FA …. 6.42, 6.45, 6.51, 6.55 s 1013FA(3) …. 6.55 s 1013G …. 6.42, 8.32, 9.4 s 1013H …. 6.42, 6.50 s 1013I …. 6.42, 6.50 s 1013J …. 6.42, 6.50 s 1013K …. 6.42, 6.50, 6.53 s 1013L …. 6.35, 6.56, 6.57 s 1014E …. 6.12, 6.27, 8.32, 9.4 s 1014I …. 8.10, 8.12

s 1015B …. 6.38, 6.42, 6.58 s 1015C …. 6.35, 8.33 s 1015D …. 6.58 s 1015D(3) …. 6.56, 6.57 s 1015E …. 6.35 s 1016A …. 6.34, 6.59 s 1016B …. 6.58 s 1016C …. 6.61 s 1016D …. 6.61 s 1016E …. 6.61 s 1016E(2) …. 6.61, 6.62 s 1017A …. 6.3, 6.66, 8.31 s 1017B …. 6.3, 6.29 ss 1017BA–1017BE …. 6.3 s 1017C …. 6.3, 6.29 s 1017D …. 6.3, 6.29, 6.64 s 1017D(8) …. 6.29 s 1017DA …. 6.3 s 1017E …. 6.3, 6.60, 6.61 s 1017E(2A) …. 6.60 s 1017E(2C) …. 6.60 s 1017E(3) …. 6.60 s 1017E(4) …. 6.60 s 1017F …. 6.3, 6.5, 11.19, 6.63 s 1017F(2) …. 6.63 s 1017F(4) …. 6.63

s 1017F(5A) …. 6.63 s 1017F(5B) …. 6.63 s 1017F(8) …. 6.63 s 1017G …. 6.3, 6.47, 6.67 s 1017H(1) …. 6.37 s 1017H(2) …. 6.37 s 1018A …. 6.3, 6.68, 6.70 s 1018A(1) …. 6.67, 6.68, 6.70, 6.71 s 1018A(2) …. 6.67, 6.68, 6.70, 6.71 s 1018A(3) …. 6.71 s 1018A(4) …. 6.70, 6.71 s 1018A(5) …. 6.68 s 1018A(6) …. 6.68 s 1018B …. 6.3, 6.68, 6.69 s 1019A …. 6.3, 6.48 s 1019A(1)(a) …. 6.64 s 1019B …. 6.3, 6.64, 14.32 ss 1019C–1019K …. 6.4 s 1020A …. 6.4 ss 1020AB–1020AF …. 16.31 s 1020B …. 6.4, 16.31 s 1020B(1) …. 16.31 s 1020B(2) …. 16.31 s 1020B(3)(a) …. 16.31 s 1020B(3)(b) …. 16.31 s 1020B(4) …. 16.31

s 1020C …. 6.4 s 1020D …. 6.4 s 1020E …. 2.98 s 1020E(11) …. 6.67 s 1020F …. 2.19, 2.31, 2.36, 6.4 s 1020F(3) …. 2.36 s 1020G …. 6.4, 6.17 s 1020G(1)(c) …. 13.33 s 1021B(1) …. 8.32 s 1021C …. 8.31 s 1021D …. 8.6, 8.7, 8.31, 8.32, 8.33 s 1021D(1)(c)(i) …. 8.33 s 1021D(1)(c)(ii) …. 8.33 s 1021D(2)(c) …. 8.33 s 1021D(3) …. 8.33 s 1021E …. 8.7, 8.31, 8.32, 8.33 s 1021E(1) …. 8.34 s 1021E(2) …. 8.34 s 1021E(3) …. 8.33 s 1021E(4) …. 6.53, 8.33, 8.34 s 1021E(5) …. 8.33 s 1021F …. 8.31 s 1021FA …. 8.31 s 1021FB …. 8.31 s 1021G …. 8.31 s 1021H …. 8.31, 8.32

s 1021I …. 8.31 s 1021J …. 8.31 s 1021K …. 8.31 s 1021L …. 8.31 s 1021M …. 8.31 s 1021N …. 8.31 s 1021O …. 8.31 s 1021P …. 8.31 s 1022 …. 8.54 s 1022A …. 8.1, 8.10, 8.14, 8.35, 8.70, 9.2 s 1022A(1) …. 6.67 s 1022A(1)(a)–(c) …. 9.4 s 1022A(1)(c) …. 8.31 s 1022B …. 8.7, 9.4, 9.5, 9.6, 9.13 s 1022B(1)(a) …. 9.4 s 1022B(1)(aa) …. 9.4 s 1022B(1)(ab) …. 9.4 s 1022B(1)(ac) …. 9.4 s 1022B(1)(b) …. 9.4 s 1022B(1)(c) …. 8.6, 8.8, 8.34, 9.3, 9.4, 9.24 s 1022B(1)(c)(i) …. 9.13 s 1022B(1)(c)(ii) …. 9.13 s 1022B(1)(d) …. 9.4 s 1022B(1)(e) …. 9.4 s 1022B(2) …. 8.6, 8.8, 9.13, 9.24 s 1022B(2)(c) …. 9.3

s 1022B(2)(d) …. 9.3 s 1022B(3)–(5) …. 9.3, 9.13 s 1022B(3)(b)(i) …. 9.13 s 1022B(3)(b)(ii) …. 9.13 s 1022B(5) …. 9.13 s 1022B(7) …. 6.53, 8.8, 8.34, 9.24 s 1030 …. 4.14 s 1041A …. 2.85, 4.44, 16.3, 16.5, 16.6, 16.7, 16.8, 16.9, 16.12, 16.18, 16.20, 16.23 ss 1041A–1041D …. 8.64, 16.20, 16.19, 16.20 ss 1041A–1041G …. 16.28 s 1041B …. 2.85, 4.44, 11.21, 16.10, 16.11, 16.12, 16.13, 16.14, 16.18, 16.20, 17.34 s 1101B(1) …. 11.33, 16.13, 16.15 s 1041B(1A) …. 16.14, 16.15 s 1101B(2) …. 11.33 s 1041B(2)(a) …. 11.21, 16.15 s 1041B(2)(b) …. 16.16 s 1041B(3) …. 16.15 s 1041B(4) …. 16.15 s 1041C …. 2.85, 4.44, 16.17, 16.17, 16.18, 16.20 s 1041C(1) …. 16.17 s 1041C(2) …. 16.17 s 1041D …. 2.85, 4.44, 16.18, 16.20 s 1041E …. 4.44, 8.12, 8.13, 8.58, 8.59, 8.60, 8.61, 8.62, 8.63, 8.69, 9.3, 9.25, 13.47, 16.7, 16.17, 16.18, 16.20, 16.21, 16.22, 16.27 ss 1041E–1041G …. 16.26

ss 1041E–1041H …. 9.26, 16.27 ss 1041E–1041I …. 16.21 s 1041E(1) …. 8.12, 8.62 s 1041E(1)(a) …. 8.62 s 1041E(1)(b)(i) …. 8.62 s 1041E(1)(b)(ii) …. 8.62 s 1041E(1)(b)(iii) …. 8.62 s 1041E(1)(c) …. 8.62 s 1041E(2) …. 8.62 s 1041E(3) …. 8.62 s 1041F …. 4.44, 8.12, 8.13, 8.69, 8.58, 8.64, 8.65, 8.66, 9.3, 16.21, 16.24, 16.27 s 1041F(1) …. 8.12 s 1041F(1)(a) …. 8.67 s 1041F(1)(a)–(b) …. 16.24 s 1041F(1)(c) …. 16.24 s 1041G …. 4.44, 8.12, 8.13, 8.58, 8.69, 9.3, 16.21, 16.25, 16.27 s 1041G(1) …. 8.12 s 1041H …. 2.81, 4.44, 5.36, 8.3, 8.9, 8.10, 8.11, 8.14, 8.17, 8.31, 8.32, 8.35, 8.36, 8.37, 8.38, 8.42, 8.44, 8.47, 8.48, 8.49, 8.54, 9.1, 9.3, 9.4, 9.6, 9.15, 9.25, 9.28, 9.28, 9.39, 13.50, 14.7, 14.35, 16.21, 16.23, 16.27 s 1041H(1) …. 8.39 s 1041H(2) …. 8.38 s 1041H(3) …. 8.14 s 1041I …. 4.44, 8.3, 8.11, 8.12, 8.13, 8.36, 8.42, 8.57, 8.58, 8.60, 8.63, 8.69, 8.70, 9.1, 9.2, 9.14, 9.20, 9.23, 9.24, 9.26, 9.39, 16.27 s 1041I(1) …. 9.3, 9.20, 9.26, 16.27

s 1041I(1B) …. 9.25 s 1041I(4) …. 16.27 s 1041IH …. 8.9, 8.10, 8.14, 8.15, 8.38 s 1041IH(1) …. 8.38 s 1041K …. 8.10, 8.14 s 1042A …. 17.8, 17.9, 17.10, 17.16, 17.17, 17.19, 17.29 s 1042B …. 17.14 s 1042C …. 7.14, 17.8, 17.48 s 1042C(1)(a) …. 17.24, 17.25 s 1042C(1)(b) …. 17.24, 17.26 s 1042C(1)(b)(i) …. 17.24 s 1042C(1)(b)(ii) …. 17.26 s 1042C(1)(c) …. 17.24, 17.27 s 1042D …. 17.8, 17.17, 17.27 s 1042E …. 17.29 s 1042F …. 17.28 s 1042G …. 17.21 s 1042G(1) …. 17.21 s 1042G(1)(a) …. 17.16, 17.21 s 1042G(1)(b) …. 17.21 s 1042G(1)(c) …. 17.21 s 1042G(1)(d) …. 17.21 s 1042G(2) …. 17.21 s 1042H …. 17.33 s 1042H(1) …. 17.22 s 1042H(1)(a) …. 17.22

s 1042H(1)(b) …. 17.22 s 1042H(1)(c) …. 17.22 s 1042H(1)(d) …. 17.22 s 1042H(2) …. 17.22 s 1043A …. 1.38, 2.85, 17.9, 17.10, 17.11, 17.12, 17.13, 17.14, 17.17, 17.18, 17.21, 17.24, 17.25, 17.27, 17.28, 17.30, 17.32, 17.33, 17.41, 17.42, 17.50 s 1043A(1) …. 17.9, 17.13, 17.21, 17.22, 17.27, 17.28, 17.29, 17.30, 17.31, 17.32, 17.33, 17.34, 17.35, 17.36, 17.37, 17.38, 17.39, 17.40, 17.41, 17.42, 17.43, 17.48 s 1043A(1)(c) …. 17.28, 17.33, 17.41 s 1043A(1)(d) …. 17.28, 17.30, 17.33, 17.41 s 1043A(2) …. 17.27, 17.29, 17.30, 17.32, 17.37, 17.38, 17.39, 17.41, 17.42, 17.48 s 1043A(3) …. 17.37 s 1043B …. 17.31, 17.38, 17.41 s 1043C …. 17.10, 17.38, 17.41 s 1043C(1)(a)–(b) …. 17.32 s 1043C(1)(c) …. 17.32 s 1043C(2)(a) …. 17.32 s 1043C(2)(b) …. 17.32 s 1043D …. 17.38, 17.41 s 1043E …. 17.38, 17.41 s 1043F …. 17.21, 17.33, 17.36, 17.38, 17.41 ss 1043F–1043G …. 17.8 s 1043G …. 17.22, 17.33, 17.38, 17.41 s 1043G(1) …. 17.22 s 1043G(2) …. 17.22, 17.33

s 1043H …. 17.28, 17.34, 17.38, 17.41 ss 1043H–1043J …. 17.36 s 1043I …. 17.34, 17.35, 17.41 ss 1043I–1043J …. 17.8, 17.38 s 1043J …. 17.34, 17.35, 17.41 s 1043K …. 11.20, 17.8, 17.36, 17.38, 17.41 s 1043L …. 17.43, 17.44, 17.48 s 1043L(1) …. 17.43 s 1043L(2) …. 17.49 s 1043L(3) …. 17.40, 17.45, 17.46, 17.47 s 1043L(4) …. 17.46, 17.47 s 1043L(5) …. 17.47, 17.49 s 1043L(5)(a) …. 17.47 s 1043L(5)(b) …. 17.47 s 1043L(6) …. 17.44, 17.47 s 1043L(7) …. 17.48 s 1043L(8)–(9) …. 17.49 s 1043M …. 17.41, 17.48 s 1043M(1) …. 17.38, 17.41 s 1043M(2)(a) …. 17.39 s 1043M(2)(b) …. 17.21, 17.22, 17.32, 17.40 s 1043M(3)(a) …. 17.39 s 1043M(3)(b) …. 17.40 s 1043N …. 17.32, 17.39, 17.40, 17.41 s 1043O …. 17.50 s 1044A …. 8.9, 8.64

s 1044B …. 8.9 s 1075A …. 2.19, 2.31, 2.36 s 1077(a) …. 4.43 s 1078(1) …. 4.43 s 1082 …. 4.43 s 1101A …. 2.22 s 1101B …. 2.96, 4.51, 8.72, 10.18, 10.31, 11.7, 11.28, 11.29, 11.33, 11.34, 12.12, 12.16, 12.31, 12.34, 12.35, 12.36, 12.37, 12.38, 13.28, 13.64, 13.72, 14.87, 16.28, 16.31 s 1101B(1)(a) …. 12.35 s 1101B(1)(b) …. 12.35 s 1101B(1)(d) …. 12.10 s 1101B(4) …. 11.33, 12.38 s 1101B(4)(a) …. 11.33, 13.64 s 1101B(4)(b) …. 11.33 s 1101B(4)(c) …. 11.33 s 1101B(4)(d) …. 11.33 s 1101B(4)(e) …. 11.33 s 1101B(4)(e)–(f) …. 13.64 s 1101B(4)(f) …. 11.33 s 1101B(4)(g) …. 11.33, 13.64 s 1101B(4)(h) …. 11.33, 13.64 s 1101B(4)(i) …. 11.33 s 1101B(4)(i)–(j) …. 13.64 s 1101B(4)(j) …. 11.33 s 1101B(7) …. 11.33 s 1101B(8) …. 13.64

s 1101B(11) …. 11.33 s 1101B(12) …. 13.64 s 1114 …. 11.33 s 1260(1)(b) …. 16.12 s 1274AA …. 1.24, 10.36 s 1289 …. 2.47 s 1308A …. 16.15 s 1311 …. 2.81, 8.60, 8.63, 8.64, 16.8, 16.14 s 1311(1) …. 6.70, 7.19, 8.12, 17.37 s 1312 …. 4.47, 8.22, 8.63, 8.64, 14.21, 14.30, 16.31 s 1313 …. 2.83 s 1313A …. 16.20 s 1314 …. 8.22 s 1316 …. 8.22 s 1317 …. 2.77 s 1317B …. 13.55, 13.62, 2.22 s 1317C …. 2.22 s 1317C(gcb) …. 2.22 s 1317C(gd) …. 2.22 s 1317C(gda) …. 2.22 s 1317D(3) …. 2.22 s 1317DAB …. 2.99, 7.26 s 1317DAC …. 2.22, 7.26 s 1317DAD …. 7.26 s 1317DAF(4)–(5) …. 7.26 s 1317DAF(5) …. 2.99

s 1317DAG …. 2.99 s 1317DAH …. 7.26 s 1317DAI …. 2.22 s 1317DAJ(1)–(2) …. 7.26 s 1317E …. 2.85, 2.86, 11.7, 17.41 s 1317E(1) …. 14.63, 17.41 s 1317E(1)–(2) …. 7.22, 16.19, 17.41 s 1317F …. 7.22, 16.18, 16.19, 16.20, 17.41 s 1317G …. 2.91, 7.25, 17.41 s 1317G(1) …. 2.91 s 1317G(1A) …. 16.19 s 1317G(1A)–(1B) …. 7.22, 17.41 s 1317G(1C)–(1D) …. 11.7 s 1317G(1E) …. 14.63 s 1317GA …. 14.61, 14.62, 14.63 s 1317HA …. 7.24, 7.25, 9.39, 9.46, 16.19, 17.41, 17.42, 17.43, 17.44, 17.45, 17.46, 17.47 s 1317HA(1) …. 17.42 s 1317HA(1)–(2) …. 16.19 s 1317HA(2) …. 17.42 s 1317HB …. 11.7 s 1317HB(3)–(4) …. 11.7 s 1317J …. 2.86 s 1317J(1) …. 17.41 s 1317J(3A) …. 16.19 s 1317K …. 16.19, 17.41 s 1317L …. 2.87, 7.24, 16.19, 17.41

s 1317M …. 2.85 s 1317N …. 2.85 s 1317N(1) …. 16.19, 17.41 s 1317N(2) …. 16.19, 17.41 s 1317P …. 2.85 s 1317R(1)(a) …. 2.77, 2.78 s 1317R(1)(b) …. 2.77, 2.78 s 1317R(5) …. 2.78 s 1317S …. 7.24, 9.26, 16.14, 16.15, 16.27 s 1318 …. 9.26 s 1318(4) …. 9.26 s 1322 …. 5.50, 6.61, 12.10 s 1322(4) …. 5.50 s 1323 …. 2.50, 2.56, 2.96 s 1324 …. 2.93, 8.36, 8.47, 8.60, 8.71, 8.72, 8.73, 8.74, 10.36, 12.37, 11.30, 13.64, 13.72, 14.87, 16.29, 16.31 s 1324(1) …. 2.93, 8.71, 8.73, 8.74, 12.37, 16.29 s 1324(2) …. 2.93, 8.71 s 1324(4) …. 8.73, 16.29 s 1324(8) …. 8.73 s 1324(10) …. 2.93, 8.74 s 1324A …. 7.21 s 1324B …. 2.96, 4.51, 7.21, 8.75, 11.7 s 1325 …. 7.27, 8.36, 8.42, 8.60, 8.76, 9.46, 11.7 s 1325(1) …. 4.51 s 1325(2) …. 2.95, 8.76 s 1325(5) …. 8.76

s 1325A …. 2.22, 2.96 s 1325B …. 2.22 s 1325C …. 2.22 s 1330 …. 2.75, 2.96 s 1332 …. 2.87 s 1349 …. 13.53, 13.58 s 1349(4)–(5) …. 2.57, 2.73 Sch 3 …. 8.64, 16.14, 17.37 Corporations Agreement 2002 …. 2.5 Corporations Amendment (Financial Advice Measures) Act 2016 …. 14.64 Corporations Amendment (Financial Market Supervision) Act 2010 …. 10.3, 10.17, 12.1 Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 …. 13.20, 14.53 Corporations Amendment (Future of Financial Advice) Act 2012 …. 14.53 Corporations Amendment (No 1) Act 2010 …. 2.55, 16.14 Corporations Amendment (No 5) Regulations 2010 …. 6.37, 6.56 Corporations Amendment (Register of Relevant Providers) Regulation 2015 Corporations Amendment Regulation 2012 (No 10) …. 14.64 Corporations Amendment Regulation 2013 (No 3) …. 13.4 Corporations Amendment Regulations 2005 (No 5) …. 13.33, 14.66 Corporations Amendment (Short Selling) Act 2008 …. 16.30 Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 …. 3.16 Corporations Legislation Amendment Act 1991 …. 17.1, 17.13, 17.30 Corporations Legislation Amendment Regulations (No 2) 2011 …. 6.56

Corporations Legislation Amendment (Derivative Transactions) Act 2012 …. 10.44 Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 …. 1.50, 13.33, 14.31 Corporations Regulations 2001 …. 3.4, 5.6, 6.41, 6.42, 6.56, 6.57, 16.31 Pt 7.9 …. 6.7, 16.31 Pt 7.9, Div 2 …. 6.42 Pt 7.9, Div 2A …. 6.7, 6.42 Pt 7.9, Div 2B …. 6.42 Pt 7.9, Div 2C …. 6.41 Pt 7.9, Div 3 …. 6.60 Pt 7.9, Div 4 …. 6.1, 6.42 Pt 7.9, Div 4, Subdiv 4.2C …. 6.56 Pt 7.9, Div 4A …. 6.42 Pt 7.9, Div 5A …. 6.60 Pt 7.9, Div 5B …. 6.63 Pt 7.9, Div 6 …. 6.63 Div 7.2A.1 …. 11.7 Div 7.2A.2 …. 11.7 reg 1.0.02 …. 3.1, 4.4, 6.7, 6.56 reg 1.0.20 …. 6.20 reg 5C.11.01 …. 3.32, 9.28 reg 5C.11.01(1)(b) …. 3.32 reg 5C.11.01(1)(c) …. 3.32 reg 5C.11.01(1)(d) …. 3.32 reg 5C.11.05A …. 3.33 reg 6CA.1.01 …. 7.18

reg 6D.2.01 …. 4.4 reg 6D.2.02 …. 4.24 reg 6D.2.03 …. 4.20 reg 6D.2.04 …. 5.25 reg 6D.2.05 …. 5.25 reg 6D.2.06 …. 5.25 reg 6D.5.01 …. 4.4, 6.7 reg 6D.5.02 …. 4.20 reg 7.1.04 …. 3.36 reg 7.1.04D …. 6.15, 6.33, 6.74 regs 7.1.05–7.1.05H …. 3.58, 3.60 reg 7.1.06 …. 3.38, 3.47, 3.60, 17.10 reg 7.1.06(1) …. 3.59 reg 7.1.06(2)(a) …. 3.59 reg 7.1.06(3)(a) …. 3.59 reg 7.1.06(3)(b)(i) …. 3.59 reg 7.1.07 …. 3.46 reg 7.1.07A …. 3.46 reg 7.1.07F …. 3.47 reg 7.1.07G …. 3.47 reg 7.1.08 …. 3.47 reg 7.1.09 …. 1.23, 10.23 regs 7.1.11–7.1.17 …. 6.17 regs 7.1.11–7.1.28 …. 6.17 reg 7.1.17B …. 6.20 reg 7.1.18 …. 6.20

regs 7.1.18–7.1.27 …. 13.33 reg 7.1.19 …. 6.20 reg 7.1.22 …. 6.20 reg 7.1.22A …. 6.20 reg 7.1.26 …. 6.20 reg 7.1.28 …. 6.22 reg 7.1.29 …. 13.4 regs 7.1.29–7.1.33H …. 13.4 reg 7.1.29A …. 13.4 reg 7.1.30 …. 13.4 reg 7.1.30–7.1.33B …. 13.4 reg 7.1.31 …. 13.4 reg 7.1.32 …. 13.4 reg 7.1.33 …. 13.4 reg 7.1.33A …. 13.4 reg 7.1.33B …. 13.4 reg 7.2.07 …. 1.22, 10.18, 11.40 reg 7.2.08 …. 10.18 regs 7.2.11–7.2.12 …. 10.13 reg 7.3.05 …. 1.23, 10.31 reg 7.3.06 …. 10.31 reg 7.3.10 …. 10.26 reg 7.3.11 …. 10.26 reg 7.4.01 …. 1.24, 10.36 regs 7.5.24–7.5.71 …. 10.40 regs 7.5.72–7.5.81 …. 10.40

reg 7.5.80 …. 10.40 reg 7.6.01 …. 9.28 reg 7.6.01(1)(e) …. 13.11 reg 7.6.01(1)(ea) …. 13.11 reg 7.6.01(1)(f) …. 13.11 reg 7.6.01(1)(g) …. 13.11 reg 7.6.01(1)(m) …. 13.11 reg 7.6.01(1)(n) …. 13.14 reg 7.6.01(1)(o) …. 6.75 reg 7.6.01(1)(s) …. 6.75 reg 7.6.01B …. 13.10 reg 7.6.02(1)–(2) …. 13.34 reg 7.6.02(3)–(4) …. 13.34 reg 7.6.02AAA …. 13.35 reg 7.6.02AAA(1) …. 13.35 reg 7.6.02AAA(3) …. 13.35 reg 7.6.02AB …. 6.17, 6.22, 13.33 regs 7.6.02AB–7.6.02AF …. 6.17 reg 7.6.02AC …. 6.17, 6.22, 13.33 reg 7.6.02AD …. 6.17, 6.25, 13.33 reg 7.6.02AE …. 6.17, 6.24 reg 7.6.02AF …. 6.17, 6.22 reg 7.6.02AG …. 13.14 reg 7.6.03 …. 13.16 reg 7.6.04 …. 2.46, 13.37 reg 7.6.04(1)(a) …. 13.26

reg 7.6.04(1)(b) …. 13.27, 13.65 reg 7.6.04(1)(c) …. 13.65 reg 7.6.04(1)(d) …. 13.27 reg 7.6.04(1)(e) …. 13.46 reg 7.6.04(1)(f) …. 13.46 reg 7.6.04(1)(g) …. 13.46 reg 7.6.04(1)(h) …. 13.46 reg 7.6.05 …. 13.27 reg 7.6.08(1) …. 13.41 reg 7.7.02 …. 14.22 reg 7.7.02(2) …. 14.22 reg 7.7.03 …. 14.25 regs 7.7.03A–7.7.04 …. 14.25 reg 7.7.09(1) …. 14.31 reg 7.7.09(3) …. 14.31 reg 7.7.10 …. 14.31 reg 7.7.11 …. 14.33 reg 7.7.14 …. 14.36 regs 7.7A.05–7.7A.07 …. 14.57 regs 7.7A.12–7.7A.12D …. 14.64 reg 7.7A.12D …. 14.64 reg 7.7A.12E …. 14.64 reg 7.7A.12EA …. 14.64 regs 7.7A.12F–7.7A.12I …. 14.64 reg 7.8.01 …. 14.67 reg 7.8.02(1) …. 14.68

reg 7.8.02(2)–(5) …. 14.68 reg 7.8.02(6) …. 14.68 reg 7.8.02(7) …. 14.68 reg 7.8.03 …. 14.69 reg 7.8.03(4) …. 14.69 reg 7.8.03(5) …. 14.69 reg 7.8.03(6) …. 14.69 reg 7.8.03(6)(a)–(c) …. 14.69 reg 7.8.03(6)(c) …. 14.69 reg 7.8.03(6)(d) …. 14.69 reg 7.8.03(7) …. 14.69 regs 7.8.04–7.8.05 …. 14.70 reg 7.8.06 …. 14.70 reg 7.8.07 …. 14.73 reg 7.8.07(8) …. 14.73 reg 7.8.07(9) …. 14.73 reg 7.8.08 …. 14.74 reg 7.8.11 …. 14.76 reg 7.8.13 …. 14.76 reg 7.8.16 …. 14.77 reg 7.8.17 …. 11.21, 14.79 reg 7.8.18 …. 14.79, 14.80 reg 7.8.18(1) …. 11.21, 14.80, 14.81 reg 7.8.18(2) …. 14.80 reg 7.8.18(3) …. 11.21, 14.80 reg 7.8.18(4) …. 11.21, 14.80, 14.81, 14.85

reg 7.8.18(5) …. 14.82 reg 7.8.19 …. 14.83 reg 7.8.20(1) …. 14.84 reg 7.8.20(2) …. 14.84 reg 7.8.20(3) …. 14.84 reg 7.8.20(4) …. 14.84 reg 7.8.20(5) …. 14.84 reg 7.8.21(1) …. 14.85 reg 7.8.21(2) …. 14.85 reg 7.8.21A …. 6.72, 14.86 reg 7.8.22 …. 6.72 reg 7.8.22A …. 6.72 reg 7.8.23 …. 6.72 reg 7.8.24 …. 6.72, 14.86 reg 7.8.25 …. 6.72 reg 7.9.02A …. 6.35 reg 7.9.02B …. 6.35 reg 7.9.07A …. 6.15, 6.33 reg 7.9.07B …. 6.45 reg 7.9.07D …. 6.12, 6.27 reg 7.9.07E …. 6.12, 6.27, 6.29 reg 7.9.07F …. 6.12, 6.27 reg 7.9.07FA …. 6.12, 6.27 reg 7.9.07FB …. 6.12, 6.26, 6.27, 6.29 reg 7.9.07J …. 6.33 reg 7.9.08 …. 6.60

reg 7.9.08A …. 6.60 reg 7.9.11E …. 6.57 reg 7.9.11X …. 6.57 reg 7.9.14C …. 6.49 reg 7.9.15A …. 6.45 reg 7.9.15B …. 6.45 reg 7.9.15C …. 6.45 reg 7.9.15DA …. 6.36, 6.58 reg 7.9.15DB …. 6.58 reg 7.9.15DC …. 6.58 reg 7.9.15H …. 6.34 reg 7.9.16A …. 6.32 reg 7.9.16N …. 6.45 reg 7.9.61AA …. 6.37 reg 7.9.61D …. 6.63 reg 7.9.62 …. 6.63 reg 7.9.63A …. 6.63 regs 7.9.63B–7.9.63G …. 6.63 reg 7.9.64 …. 6.64 regs 7.9.64A–7.9.70 …. 6.64 reg 7.9.98 …. 14.66 reg 7.9.100 …. 16.31 reg 7.11.01 …. 3.1 reg 7.18(1) …. 14.80 reg 12.8.03 …. 4.4 Sch 10A, Pt 5A …. 6.57

Sch 10A, Pt 5C …. 6.56 Sch 10BA …. 6.37 Sch 10C …. 6.57 Sch 10E …. 6.56 Crimes Act 1914 …. 1.62 Pt 1AA …. 2.55 Criminal Code Act 1995 …. 1.62, 2.82, 4.48, 7.19, 7.20, 8.23, 16.14, 16.15 Pt 2.5 …. 7.20 s 2.1 …. 2.82, 4.48 s 3.1(a) …. 4.48 s 3.2 …. 7.19, 16.14, 16.15 s 5.2 …. 8.23, 16.14 s 5.2(1) …. 4.48 s 5.4 …. 16.14 s 5.6 …. 7.19 s 5.6(1) …. 4.48, 8.23 s 6.1 …. 14.21, 14.30, 14.40 s 6.1(1)(a) …. 4.48 s 6.1(1)(b) …. 4.48 s 9.2 …. 4.48 s 11.2 …. 7.20, 8.13, 8.24, 8.32 s 11.2(1) …. 8.7, 8.24 s 11.2(2) …. 8.24 s 11.2(3) …. 8.24 s 11.2(4) …. 8.24 s 11.2(5) …. 8.24

s 11.2(6) …. 8.24 s 12.3 …. 7.20 s 13.3(a) …. 8.34 Sch, Pt 2.4 …. 9.19 Sch, s 11.2 …. 9.19 Director of Public Prosecutions Act 1983 …. 2.84 Evidence Act 1995 s 118 …. 2.53 s 119 …. 2.53 s 140 …. 16.19, 17.41 s 140(1) …. 2.88 Fair Work (Registered Organisations) Act 2009 s 164 …. 11.31 Federal Court of Australia Act 1976 Pt IVA …. 9.29, 9.30, 9.33, 9.34, 9.38 s 33C …. 9.29, 9.34 s 33C(1)(a) …. 9.30 s 33H …. 9.33 s 33J …. 9.36 s 33L …. 9.34 s 33M …. 9.34 s 33N …. 9.33, 9.34 s 33P …. 9.34 s 33V …. 9.37 s 33X …. 9.36 s 33X(4) …. 9.37

s 33Y …. 9.36 s 33ZB …. 9.36 s 33ZF …. 9.38 Financial Corporations Act 1974 …. 4.22, 6.24, 13.33 Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 …. 2.100 Financial Sector Reform (Amendments and Transitional Provisions) Act (No 1) 1999 …. 3.6 Financial Sector (Shareholdings) Act 1998 …. 10.36 Financial Services Reform Act 2001 …. 1.2, 1.45, 1.48, 1.50, 2.31, 3.36, 4.4, 4.14, 4.15, 6.6, 6.9, 6.40, 7.2, 9.26, 11.6, 11.33, 16.15, 17.1 s 793B …. 11.39 Financial Services Reform Amendment Act 2003 …. 2.31, 2.36 Freedom of Information Act 1982 …. 1.62, 2.30 s 11 …. 2.30 Futures Industry Act 1986 …. 1.43 Income Tax Assessment Act 1936 s 264 …. 2.51 Insurance Act 1973 …. 13.10 Insurance Contracts Act 1984 …. 2.13 Judiciary Act 1903 …. 11.37, 12.14 s 39A …. 2.27 s 39B …. 2.27, 2.94 s 44 …. 2.27 Legislative Instruments Act 2003 …. 2.32, 11.7 s 13(1)(a) …. 2.52 Life Insurance Act 1995 …. 2.13, 3.32, 4.28

s 16B …. 3.32 Managed Investments Act 1998 …. 3.17 National Consumer Credit Protection Act 2009 …. 2.13 National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 …. 2.13 Ombudsman Act 1976 …. 2.29 Payment Systems (Regulation) Act 1998 …. 3.47 Privacy Act 1988 …. 1.62 s 14 …. 2.30 Public Governance, Performance and Accountability Act 2013 …. 2.12 Retirement Savings Accounts Act 1997 …. 2.13, 3.54, 13.32 Securities Industry Act 1980 s 1278 …. 17.1 Securities Industry Act 1981 …. 1.57 Superannuation Guarantee (Administration) Act 1992 …. 14.20, 14.53 Superannuation Industry (Supervision) Act 1993 …. 2.13, 6.24, 13.10, 13.32, 13.33, 14.64 s 52(2)(c) …. 14.55 Superannuation (Resolution of Complaints) Act 1993 …. 2.13, 3.32, 4.22 Tax Agent Services Act 2009 …. 13.6 Telecommunications (Interception and Access) Act 1979 …. 16.8, 16.14, 16.17, 16.18, 17.37 Trade Practices Act 1974 …. 1.4, 1.32, 1.45, 1.54, 3.40, 8.46, 9.1, 11.2, 11.51 s 51A …. 8.49 s 52 …. 8.42, 8.44, 8.46, 8.49, 8.52, 9.15, 9.20, 15.11 s 52(1) …. 9.20

s 53(a) …. 9.18 s 75B …. 9.19 s 82 …. 8.42, 9.4 s 84(1) …. 8.69 s 87B …. 2.100 s 96(3)(b) …. 8.59 s 155 …. 2.54 Workplace Relations Act 1996 …. 3.54

National Scheme Legislation Corporations Act 1989 …. 1.58, 1.59 s 82 …. 1.59 Corporations Law …. 12.9, 12.11 s 777 …. 12.8, 12.11, 12.24, 12.29 ss 1001A–1001D …. 7.2 s 1031(7) …. 12.9 s 1094 …. 12.24 s 1114 …. 14.87 Corporate Law Reform Act 1994 …. 7.2 Fair Trading Act 1987 s 42 …. 15.11

Uniform Companies Act Uniform Companies Act 1961–62 …. 1.40, 1.55, 1.56

Co-Operative Scheme Legislation Companies Act 1981 …. 1.57 Companies Code 1981 …. 1.59

Securities Industry Code s 78 …. 11.51 s 128 …. 17.10, 17.13, 17.14, 17.19, 17.29, 17.32

Australian Capital Territory Fair Trading (Australian Consumer Law) Act 1992 …. 8.10 s 11 …. 8.10

New South Wales Civil Liability Act 2002 …. 9.25 Civil Procedure Act 2005 Pt 10 …. 9.29 s 157 …. 9.29 s 161 …. 9.33 s 162 …. 9.36 s 164 …. 9.34 s 165 …. 9.34 s 166 …. 9.34 s 166(1)(d) …. 9.34 s 166(2) …. 9.33 s 167 …. 9.34 s 173 …. 9.37 s 175 …. 9.36 s 175(4) …. 9.37 s 176 …. 9.36 s 179 …. 9.36 s 183 …. 9.38

Companies (Acquisition of Shares) Act 1981 …. 1.57 Companies (Amendment) Act 1971 …. 1.42 Companies (NSW) Code Pt VII …. 2.54 s 537 …. 13.18 Corporations Law 1990 s 1002 …. 17.1 Evidence Act 1995 s 140 …. 16.19, 17.41 Fair Trading Act 1987 Pt 3 …. 8.10 s 32 …. 8.10 Futures Market Act 1979 …. 1.43 Futures Market (Amendment) Act 1982 …. 1.43 Grain Marketing Act 1991 s 5(2) …. 4.6 Securities Act 1970 s 70 …. 14.18, 16.12 s 75A …. 17.1, 17.16 Securities Industry Act 1970 …. 1.41 s 4 …. 8.59 s 58(1)(b) …. 14.9 s 70 …. 14.18, 16.12 s 73 …. 8.60, 8.61, 8.67 Securities Industry Act 1975 …. 1.41 s 31 …. 12.30

s 42 …. 12.30, 12.35 s 42(1) …. 12.35 s 42(2) …. 12.35 s 97(1)(b) …. 14.9 s 112 …. 17.1 Securities Industry (NSW) Code 1981 s 14 …. 12.35, 12.36 s 14(1) …. 12.35 s 42 …. 12.19, 12.30, 12.36 s 124 …. 16.12

Northern Territory Consumer Affairs and Fair Trading Act Pt 4 …. 8.10 s 31 …. 8.10

Queensland Fair Trading Act 1989 Pt 3 …. 8.10 s 4A …. 8.10 s 94 …. 8.60

South Australia Fair Trading Act 1987 Pt 3 …. 8.10 s 18 …. 8.10 Securities Industry (SA) Code s 42 …. 11.27

s 42(2) …. 12.23 s 60(1)(b) …. 13.18

Tasmania Australian Consumer Law (Tasmania) Act 2010 …. 8.10 s 10 …. 8.10 Evidence Act 2001 s 140 …. 16.19, 17.41 Judicial Review Act 2000 …. 11.27

Victoria Companies Act 1896 s 47 …. 1.40 Companies Code (Vic) s 320 …. 12.28 Corporations (Commonwealth Powers) Act 2001 …. 2.4 s 1(2) …. 2.4 Evidence Act 2008 s 140 …. 16.19, 17.41 Fair Trading Act 1999 Pt 2 …. 8.10 s 13 …. 8.10 Mining Companies Act 1871 …. 1.40 Securities Industry (Victoria) Code s 14 …. 16.28 Securities Industry Act 1975 …. 8.61, 13.8 s 31 …. 12.17, 12.18, 12.30

s 32 …. 13.8 Supreme Court Act 1986 Pt 4A …. 9.29 s 33C …. 9.29 s 33H …. 9.33 s 33J …. 9.36 s 33L …. 9.34 s 33M …. 9.34 s 33N …. 9.34 s 33P …. 9.34 s 33V …. 9.37 s 33X …. 9.36 s 33X(4) …. 9.37 s 33Y …. 9.36 s 33ZB …. 9.36 s 33ZF …. 9.38 s 33ZG …. 9.38

Western Australia Companies Act 1961 s 44 …. 12.6 Companies Code …. 11.30 s 12 …. 11.30 s 537 …. 11.30 Companies (Cooperative) Act 1943 Pt VI …. 3.32 Corporations (Western Australia) Act 1990 …. 1.60

Fair Trading Act 2010 …. 8.10 s 24 …. 8.10 Securities Industry (WA) Code …. 11.30 s 42 …. 11.27, 12.21

United Kingdom Bubble Act 1720 (6 Geo 1, c 18) …. 1.40 s 18 …. 1.40 Companies Act 1862 …. 1.40 Criminal Justice Act 1983 s 52 …. 17.37 Joint Stock Companies Act 1844 (7 & 8 Vict, c 110) …. 5.2 Financial Services and Markets Act 2000 …. 16.23 s 91 …. 16.23 s 118(5) …. 16.13 s 118(6) …. 16.17 Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2015 …. 16.23 Prevention of Fraud (Investments) Act 1958 s 13 …. 8.64, 8.68

United States of America 15 USC 77k …. 8.26 15 USC 78u-4(e)(1) …. 9.54 Cal Corp Code s 24150 …. 1.40 Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 …. 10.43

Glass-Steagall Act 1933 …. 1.40 Insider Trading and Securities Fraud Enforcement Act 1988 s 20A …. 17.42 Investment Advisers Act 1940 s 206 …. 16.27 Private Securities Litigation Reform Act 1995 …. 9.35, 9.54 s 101 …. 9.54 Securities Act 1933 …. 1.40 §11 …. 8.49 §11(c) …. 8.26 §11(3)(A) …. 8.26 §12(2) …. 8.26 Securities Exchange Act 1934 …. 1.40 s 9(a)(1)(B)–(C) …. 16.16 s 10(b) …. 16.1, 16.11, 16.16, 17.7, 17.12 r 10b-5 …. 14.36, 16.27 s 11A …. 10.16 s 14(e) …. 16.1 s 19(c) …. 11.9 s 19(g) …. 11.26

ASIC Market Integrity Rules ASIC Market Integrity Rules (ASX Market) Pt 3.6 …. 17.36

Abbreviations AAT AAT Act ACCC ACL ADI ADJR Act AFS licence APRA ASC ASIC ASIC Act ASX CA CAMAC CASAC CCA CCLSR CDI CDPP CIS CLERP CLERP Act CLERP Bill CLERP 9 Act CS facility FATA

Administrative Appeals Tribunal Administrative Appeals Tribunal Act 1975 (Cth) Australian Competition and Consumer Commission Australian Consumer Law Authorised deposit-taking institution Administrative Decisions (Judicial Review) Act 1977 (Cth) Australian financial services licence Australian Prudential Regulation Authority Australian Securities Commission Australian Securities and Investments Commission Australian Securities and Investments Commission Act 2001 (Cth) Australian Securities Exchange Limited Corporations Act 2001 (Cth) Corporations and Markets Advisory Committee Companies and Securities Advisory Committee Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)) Centre for Corporate Law and Securities Regulation, The University of Melbourne CHESS Depository Interest Commonwealth Director for Public Prosecutions Collective investment scheme Corporate Law Economic Reform Program Corporate Law Economic Reform Program Act 1999 (Cth) Corporate Law Economic Reform Program Bill 1998 Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth) Clearing and settlement facility Foreign Acquisitions and Takeovers Act 1975 (Cth)

FCT FIRB FOI Act FSG FSI FSR Act FSR Bill GFC GN IOSCO ISC LR MDP MIR NCSC NGF OTC PDS PJC RG SEC SEGC SFSG SoA TPA UCA

Federal Commissioner of Taxation Foreign Investment Review Board Freedom of Information Act 1982 (Cth) Financial Services Guide Financial System Inquiry Financial Services Reform Act 2001 (Cth) Financial Services Reform Bill Global Financial Crisis Takeovers Panel Guidance Note International Organization of Securities Commissions Insurance and Superannuation Commission Listing Rule (of the ASX) Market Disciplinary Panel Market Integrity Rules National Companies and Securities Commission National Guarantee Fund Over the counter Product Disclosure Statement Parliamentary Joint Committee on Corporations and Financial Services ASIC Regulatory Guide Securities and Exchange Commission, United States of America Securities Exchange Guarantee Corporation Supplementary Financial Services Guide Statement of Advice Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) Uniform Companies Acts (passed by Australian states 1961– 1962)

Contents Preface Table of Cases Table of Statutes Abbreviations

PART 1

INTRODUCTION

CHAPTER 1

REGULATING SECURITIES AND MARKETS

CHAPTER 2

ADMINISTRATION OF THE SECURITIES AND FINANCIAL SERVICES LAWS

CHAPTER 3

DEFINING FINANCIAL PRODUCTS

PART 2

ISSUERS

CHAPTER 4

REGULATION OF SECURITIES OFFERINGS

CHAPTER 5

CONDUCTING A REGULATED SECURITIES OFFER

CHAPTER 6

OFFERING MANAGED INVESTMENTS, DERIVATIVES AND OTHER FINANCIAL PRODUCTS

CHAPTER 7

CONTINUOUS DISCLOSURE

CHAPTER 8

LIABILITY FOR DEFECTIVE DISCLOSURE

CHAPTER 9

INVESTOR CLAIMS FOR DEFECTIVE DISCLOSURE

PART 3

MARKETS

CHAPTER 10

MARKET INFRASTRUCTURE PROVIDERS

CHAPTER 11

OVERVIEW OF REGULATION OF THE SECURITIES MARKETS AND THE REGULATION OF MARKET PARTICIPANTS

CHAPTER 12

ENFORCEABILITY OF THE ASX LISTING RULES

PART 4

INTERMEDIARIES

CHAPTER 13

AUSTRALIAN FINANCIAL SERVICES LICENSING

CHAPTER 14

FINANCIAL SERVICES LICENSEES AND THEIR CLIENTS

CHAPTER 15

CONSUMER PROTECTION

PART 5

MARKET CONDUCT

CHAPTER 16

MARKET MISCONDUCT, PROHIBITED CONDUCT AND SHORT SELLING

CHAPTER 17

INSIDER TRADING

Index

[page 1]

Part 1 Introduction

[page 3]

Chapter 1 REGULATING SECURITIES and MARKETS Introduction Why Regulate Securities and Financial Product Markets? Need for specialist regulation Underlying principles Current Regulatory Framework Institutional arrangements Regulating issuers Regulating market infrastructure Regulating intermediaries Market conduct regulation Evolution of the Current Framework Early developments in substantive regulation Second wave of reform: Wallis Inquiry, CLERP and FSR Third wave of reform: post-GFC Transition to a National Regulatory System Position until 1980 Corporations Law scheme 1991 Failure of the Corporations Law scheme Corporations Act 2001 (Cth)

1.1 1.4 1.6 1.8 1.13 1.14 1.15 1.21 1.26 1.32 1.39 1.40 1.44 1.51 1.55 1.56 1.58 1.60 1.61

INTRODUCTION 1.1 This book is primarily about the regulation of Australian securities markets and of the various entities (issuers, intermediaries, market operators, traders and investors) involved in those markets. The securities markets are an important subset of the broader financial

markets, through which those with capital to invest are matched by the market to those who [page 4] require capital for productive purposes.1 This matching occurs through the creation and issue of financial instruments, the distribution of those instruments to investors through the primary market, and the creation of liquidity through the resale of those instruments in the secondary market. The particular focus of this book is on financial instruments created and issued by commercial or financial sector entities, that are acquired primarily for investment (as distinct from risk management) purposes and that are customarily traded through established exchanges. Most obviously, this includes traditional ‘securities’ — that is, shares and debentures — issued by companies and listed for quotation by the Australian Securities Exchange (ASX), the main securities exchange in Australia. It also includes some other financial instruments that have or may have these characteristics but are not securities in this traditional sense; most notably, listed managed investments,2 hybrid instruments, and certain instruments classified by law as derivatives (such as options and warrants). While the focus is on securities markets, elements of the regulatory framework discussed in the book apply to other financial markets as well. In addition to exchange traded markets in securities and derivatives, these include primary markets in unlisted instruments and over-the-counter (OTC) markets in government and semi-government bonds, corporate debt, foreign exchange, carbon products, and derivatives such as currency options, forward rate agreements, interest rate options and interest rate swaps. These include what are commonly referred to as ‘FICC’ markets — that is, fixed interest, currency and commodities markets. In common with all other mature market-based economies, Australia has in place an extensive and detailed legal and regulatory framework within which the creation, distribution and trading of financial instruments takes place. This framework both facilitates and regulates these activities. It facilitates the operation of markets by providing the legal infrastructure

within which private parties contract with each other in those markets. It regulates the operation of markets by various means, including by licensing market operators and intermediaries, imposing (proscriptive and prescriptive) conduct rules on entities dealing in the market, and mandating disclosure of certain information to the market. [page 5] The main purpose of securities and markets regulation in Australia is not to eliminate risk associated with the performance of individual investments or with the viability of individual market participants. Rather, its role has been described as being ‘to promote market confidence and to ensure the development of a transparent and well-informed securities market where every participant has equal access to information and participates on a level playing field’.3 The Australian system begins with the basic premise that all types of investment products should be freely available to both retail and wholesale investors. Where government intervenes in the market through regulation it is primarily in the areas of conduct and disclosure. Regulation expressly prohibits various forms of market misconduct (including dishonest, misleading or deceptive conduct, market manipulation and insider trading). In both wholesale and retail markets, market operators are required to be licensed, as are securities intermediaries (including brokers, dealers, advisers and collective investment scheme (CIS) operators). Intermediaries that provide financial services to retail clients are subject to an additional layer of consumer protection and mandatory disclosure requirements. Entities offering financial products (including securities) to retail investors are subject to mandatory pre-sale disclosure requirements and are required to keep markets informed through compliance with continuous disclosure requirements. The cornerstones of the Australian legal and regulatory framework are the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The Corporations Act contains both Australia’s company law and its financial markets law. As the principal company law statute, the Corporations Act

provides for the formation, governance and termination of companies and registered managed investment schemes. As the financial markets statute, the Corporations Act also includes the laws relating to takeovers (Chs 6, 6A and 6B); information about ownership of listed entities (Ch 6C); continuous disclosure (Ch 6CA); fundraising (Ch 6D); and financial services and markets (Ch 7). The ASIC Act provides for the formation and operation of the Australian Securities and Investments Commission (ASIC), the Commonwealth regulatory agency that acts both as registrar of companies and as the consumer protection and market integrity regulator in the areas of company law, securities law, takeovers and financial markets. The ASIC Act also includes the unconscionable conduct and consumer protection provisions that apply to the financial sector generally. These statutes are supplemented by the relevant general law, the (formal and informal) regulatory requirements imposed by ASIC in the exercise of its various regulatory functions, and the ‘self-regulatory’ requirements imposed by the ASX and other market operators on market participants and by participants on themselves. 1.2 In most jurisdictions, it is customary to refer to the subject matter covered in this book under the general heading ‘securities regulation’. While this is (largely) appropriate in the Australian context also, it is nevertheless important to recognise [page 6] that many of the matters discussed in this book extend and apply beyond the boundaries of traditional understandings of securities regulation. This is so because of two unique features of the Australian model of financial sector regulation. The first is the so-called ‘twin peaks’ regulatory structure (adopted in 1998) which splits responsibility for financial sector regulation between two separate agencies: ASIC (consumer protection and market integrity) and the Australian Prudential Regulation Authority (APRA) (prudential regulation). The twin peaks model is discussed in Chapter 2 below; its effect is that ASIC is not just a securities regulator

but also regulates other financial markets and other aspects of the financial sector. The second is the functional approach to regulation taken by the Financial Services Reform Act 2001 (Cth) (FSR Act), which repealed the predecessor securities industry and futures industry laws and enacted what is now Ch 7 of the Corporations Act. The FSR Act is discussed in 1.50 below. The intention of the FSR Act was to regulate by reference to the function of the financial arrangement in question, rather than its institutional or legal form. The FSR Act set out to create ‘a single licensing regime for financial sales, advice and dealings in relation to financial products [and] consistent and comparable financial product disclosure’: see [1.3] of the Explanatory Memorandum to the Financial Services Reform Bill. Under this functional approach, securities are seen as one category of ‘financial products’ as defined, of which there are many others. Accordingly, many parts of the securities laws contained in Ch 7 of the Corporations Act and Pt 2 Div 2 of the ASIC Act also extend and apply to other financial products (including other forms of listed and unlisted financial investments, and financial arrangements used for risk management) not traditionally thought of as being properly or naturally the subject of securities regulation. 1.3 That said, the content and organisation of this book reflect the traditional concerns and coverage of securities regulation. Part I is introductory in nature and describes the conceptual underpinnings of securities and markets regulation, the constitutional foundation and governmental administration of Australia’s securities and financial services laws, and the scope of regulation. Part II focuses on the regulation of issuers: that is, the commercial and financial sector entities that create and issue instruments into the primary markets. Here a crucial but not absolute distinction is drawn between those aspects of law that apply to issuers qua issuers and that are thought of as part of securities regulation, and those that apply to issuers as operating entities and that are thought of as part of company law and corporate governance. The former, in particular Chs 6CA (continuous disclosure), 6D (offers of securities) and 7 (offers of financial products other than securities) of the Corporations Act, are dealt with in this book, while the latter, in particular Chs 2A–5C of the Corporations Act, are not.4

Part III deals with the law and regulation of market operators, including most notably the ASX and its various subsidiaries, which between them operate the [page 7] ASX’s primary, secondary and derivative market services and provide clearing and settlement (CS) facilities for those and other markets. Part IV looks at market intermediaries, and in particular at the licensed financial services providers who act as brokers, dealers or advisers in the securities markets. Part V deals with aspects of the regulation of markets for securities and other financial products. It includes a discussion of Australian consumer protection law as it applies to transactions in relation to financial products and services. It also considers the regulation of the conduct of traders in secondary markets, including prohibitions on various forms of market misconduct and manipulation, and insider trading.

WHY REGULATE SECURITIES AND FINANCIAL PRODUCT MARKETS? 1.4 Why regulate securities and markets separately? Australia has in place robust business integrity laws, including in the Competition and Consumer Act 2010 (Cth) (CCA) (formerly the Trade Practices Act 1974 (Cth) (TPA)), that operate to regulate commercial activities on an economy-wide basis. These laws include conduct regulation (such as criminal sanctions for fraud and prohibitions on anti-competitive behaviour) and disclosure regulation (such as general prohibitions on false and misleading statements contained in fair trading laws).5 Given that these laws are already in place, what is it about securities markets that justify special regulatory arrangements, not only in Australia but all around the world? 1.5 In earlier editions of this book, the authors discussed the need for securities regulation as arising from the impalpable nature of securities themselves. Financial instruments of the kind traded on financial markets

are a form of intangible property: what the law classifies as a thing (or chose) in action. What the holder of the instrument acquires is not a piece of tangible property (like an oil painting, for example) or something that is used or consumed, but rather a set of future rights or entitlements under the terms of the instrument itself that are delivered over time. The value of the instrument at any given time is the present value of the future benefits to be conferred on the holder — generally in the form of income or capital distributions from a commercial or financial enterprise. A share in a registered company is a good example of the impalpable nature of a security. As a matter of law, a share is treated as a chose in action because it is a set of claims owned by a shareholder against the company that issued the share: the claims relate to dividends, voting, return of capital and other matters. The classic description of a share is that of Farwell J in Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 at 288: A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s 16 of the Companies Act 1862 [see now Corporations Act s 140(1)]. The contract contained in the articles of

[page 8] association is one of the original incidents of the share. A share is not a sum of money settled … but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.

The merits of the intangible claim, such as a share, cannot be assessed by inspection, as with land or goods. The impalpable nature of securities and other financial instruments, and their character as property consisting of future entitlements, are thought to create particular impediments to the effective functioning of the market for those instruments that do not arise in the market for tangible goods. The law responds to these perceived impediments by imposing special requirements and conditions on the various entities (issuers, intermediaries, market operators and traders) involved in securities and related markets, both primary and secondary.

Need for specialist regulation 1.6 In 1996, the Financial System Inquiry chaired by Mr Stan Wallis (Wallis Inquiry) was asked by the Commonwealth Government to consider whether integrity and disclosure regulation of financial markets should be left to general economy-wide arrangements, or required more sophisticated or focused regulation. The Wallis Inquiry was established by the Treasurer in 1996 to consider the effect of deregulation of the financial system after the Campbell Committee and Martin Review in the early 1980s.6 Among other things, it was asked to make recommendations ‘on the nature of the regulatory arrangements that will best ensure an efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial stability, prudence, integrity and fairness’.7 The Wallis Inquiry concluded that specialist regulation of financial markets in general, and securities markets in particular, was justified in two areas: financial market integrity and retail consumer protection. In relation to financial market integrity, the members of the Wallis Inquiry reported that: Market integrity regulation aims to promote confidence in the efficiency and fairness of markets. It seeks to ensure that markets are sound, orderly and

[page 9] transparent. Financial market prices can be sensitive to information, and this raises the potential for misuse of information. For this reason, regulators around the world impose specific disclosure requirements (such as prospectus rules) and conduct rules (such as prohibitions on insider trading) on financial market participants. The complexity of financial products and markets, their intrinsic risks — including those due to limited information — and the detailed knowledge required to deliver efficient regulation in this area argue strongly for continued specialised regulatory arrangements.8

The Wallis Inquiry also concluded that there was a case for specialist regulation to protect retail consumers of financial products and financial services, aimed at ensuring that consumers have adequate information, are treated fairly and have adequate avenues for redress. The key (but not examined) justification advanced by the Wallis Inquiry for retail consumer protection is the complexity of financial products. The members of the Wallis Inquiry observed that:

First, the complexity of financial products increases the probability that financially unsophisticated consumers can misunderstand or be misled about the nature of financial promises, particularly their obligations and risks. This, combined with the potential consequences of dishonour, has led most countries to establish a disclosure regime for financial products that is considerably more intense than disclosure rules for most nonfinancial products. Secondly, financial complexity also increases the incidence of misunderstanding and dispute. Given this, and the high cost of litigation, a number of countries have imposed specific regulation of financial sales and advice and established low-cost industry complaints schemes or tribunals for resolving disputes.9

1.7 In 2014 the second Financial System Inquiry (Murray Inquiry), chaired by Mr David Murray, revisited the need for specialist regulation of the financial sector, including securities markets. Its starting point for examining the role of government in the financial system was the philosophy of regulation set out by the Wallis Inquiry.10 The Murray Inquiry considered that: Insights provided by academic research and practical experience since [the Wallis Inquiry] have advanced the Inquiry’s understanding of the financial system. Critically, their new understanding has reduced the Inquiry’s confidence in the inherent efficiency and stability of financial markets and increased its understanding of the financial system as a complex, adaptive network.11

The Murray Inquiry concluded that the financial system requires sectorspecific regulation for two reasons: 1.

More so than in other sectors, the financial system has the ability to create or amplify economic shocks because of its use of leverage, its complexity and its interconnectedness with the rest of the economy. [page 10]

2.

The significant harm to consumers that may result from complex financial decisions, or from dishonest or predatory practices, requires specialist regulation to promote fair treatment.12

The Murray Inquiry emphasised the need for a financial system that ‘operates in an efficient and resilient manner and treats participants fairly’.13 Efficiency relates to the capacity of the financial system to allocate ‘scarce financial and other resources for the greatest possible

benefit’ to the economy, and encompasses operational efficiency, allocative efficiency and dynamic efficiency. Resilience ‘refers to the financial system’s capacity to adjust to both the normal business cycle and a severe economic shock’. Fair treatment ‘occurs where participants act with integrity, honesty, transparency and non-discrimination’. This requires financial firms to: … place a high degree of importance on treating customers fairly. This includes providing consumers with clear information about risks; competent, good-quality financial advice that takes account of their circumstances; and access to timely and low-cost alternative dispute resolution and an effective judicial system.14

Within this framework, the Murray Inquiry set out the following general principles for policy makers in financial regulation:15 Determining when to intervene Intervention should be considered where it would improve the efficiency, resilience or fairness of the financial system, but only introduced if its benefit is judged to outweigh the costs to the economy as a whole. Unless there is a clear public interest, policy makers should give competitive markets the opportunity to adjust to market signals and allow established legal remedies to be enforced rather than pre-emptively regulating. Delivering efficiency Policy makers should seek to remove distortions to the efficient allocation of funds and risks in the economy, and reduce unnecessary regulatory burdens. Policy makers should seek to encourage competition by removing unnecessary barriers to domestic and international competition. Policy settings should seek to encourage innovation by being technologically and competitively neutral in design. Delivering resilience Private sector risk-taking should be supported, allowing both success and failure. Policy makers should seek to prevent a build-up of systemic risk. They should have systems in place to manage failing financial institutions in an orderly

[page 11] manner that protects the financial system’s critical functions and maintains financial stability while minimising risk to taxpayers. Delivering fair treatment Consumers should generally bear responsibility for their financial decisions, but should

be able to expect financial products and services to perform in the way they are led to believe they will. Policy makers should be aware of, and design regulatory frameworks that take into account, behavioural biases.

Underlying principles 1.8 Modern securities regulation has evolved to respond to perceived impediments to the effective functioning of securities markets. Underlying its concerns and design are three broad principles, each of which is subject to varying degrees of contestation by lawyers, regulatory theorists and economists: neoclassical, institutional and behavioural. The first principle is that interlocking goals of investor protection, market efficiency and systemic stability are important in the context of financial markets. The second principle is that these goals are most likely to be realised when participants in markets act with integrity and there is adequate disclosure to facilitate the making of informed judgments in that market (that is, that integrity and adequate disclosure are necessary if not sufficient conditions for achieving the goals of investor protection, market efficiency and systemic stability). The third principle is that market integrity and adequate disclosure would not be achieved without regulatory intervention, for reasons of market failure.

Goals of securities regulation 1.9 The triple goals of investor protection, market efficiency and systemic stability have been identified by the International Organization of Securities Commissions (IOSCO) as the three key objectives of securities regulation. IOSCO is a multilateral forum for standard-setting and cooperation between national securities regulators; its published views represent the high-level consensus position of over 100 regulatory agencies which between them regulate more than 90% of global securities markets. IOSCO’s Objectives and Principles of Securities Regulation (IOSCO Principles) were published in 1998 and revised in 2003 and again in 2010. The IOSCO Principles identify as the three key objectives of securities regulation: 1.

protecting investors;

2.

ensuring that markets are fair, efficient and transparent; and

3.

reducing systemic risk.

To achieve these objectives, IOSCO adopts 38 Principles that set out, at a high level, how national regulatory regimes should be arranged to achieved these objectives. The Principles relate to nine areas, or categories, of securities regulation: 1.

the regulator;

2.

self-regulation; [page 12]

3.

enforcement of securities regulation;

4.

co-operation in regulation;

5.

issuers;

6.

auditors, credit rating agencies and other service providers;

7.

collective investment schemes;

8.

market intermediaries; and

9.

secondary markets.

1.10 Where the broad objectives of securities regulation articulated by IOSCO are not met, markets may fail to fulfil their economic function of allocating resources and risk efficiently, and opportunities for (socially harmful) abuse and exploitation of individuals arise. Accordingly, there is both an economic and a social cost to market failure, and securities regulation in Australia has long reflected these dual concerns. Reporting to the Commonwealth Parliament in the wake of the so-called ‘Poseidon boom’16 of the late 1960s, the Rae Committee argued that there was ‘cause for concern and for legislative action’ in relation to the securities markets ‘on the grounds of fairness and commercial morality, and in the interests of economic efficiency’.17 The dual concerns expressed by the Rae Committee reflect public

interest theories of regulation that are based on two hypotheses. The first is ‘the hypothesis of market failure calling for corrective action on the part of the state due to its detrimental effects on social welfare’. The second is: … the ‘benevolence hypothesis’ according to which legislators, regulators and administrators are disinterested maximisers of social welfare, and any costs imposed by regulation on the economy are thought to be associated entirely with achieving some welldefined social objective.18

In recent years various critiques of these hypotheses have emerged, most notably among law and economics scholars who have developed various economic theories of regulation that challenge the belief that market failure gives rise to problems in markets that can be fixed by government intervention: see below.

Integrity and information 1.11 The second broad principle underlying most types of securities regulation is that the broad goals of investor protection, market efficiency and systemic stability identified above cannot be achieved unless two conditions exist in securities markets. The first condition is that participants in securities markets (both primary and secondary) act with integrity. The second condition is that participants have available to them sufficient information to make informed judgments about the products and services offered into that market. This principle is stated by the Wallis Inquiry as [page 13] being that ‘financial markets cannot function effectively unless participants act with integrity and there is adequate disclosure to facilitate informed judgements’.19 This basic premise explains the emphasis on the twin pillars of conduct regulation and mandatory disclosure in modern securities regulation. More recently, the assumption that investors will make economically rational choices based on full information has been challenged by behavioural economics, and insights from this area have become

increasingly influential on regulators both in Australia and the United Kingdom. For example, in its Strategic Outlooks for 2014–15, ASIC signalled its intention to explore insights from behavioural economics and conduct consumer testing to improve understanding of how investors and financial consumers perceive risk and make choices. The impact of behavioural economics on financial regulation is discussed in Chapter 15.

Case for regulation 1.12 The third broad principle underlying securities regulation is that, for reasons of market failure, integrity and adequate disclosure will not occur in securities markets without regulatory intervention by government. While it is generally (but not universally) accepted that, for markets to function efficiently, participants must act with integrity and there must be adequate disclosure to facilitate informed judgments, there is less consensus on how these two conditions are best achieved. In particular, there is an ongoing debate about whether regulation is necessary to achieve the adequate level of integrity and disclosure in securities markets, or whether that is better achieved through other means (for example, market forces or private law enforcement mechanisms). Among those who accept the need for regulation, there is vigorous debate about the form that regulation should take. First, there is a choice to be made between explicit governmental regulation (in the form of primary legislation made by the parliament, subordinate legislation made by the Executive, and policies and standards promulgated by regulatory agencies) and other forms, such as self-regulation, quasi-regulation and co-regulation. Where governmental regulation is proposed, there are further choices to be made as to the appropriate type and intensity of regulatory intervention. Welfare economics takes the view that regulation is necessary: … where there is a monopoly and potential abuse of market power; where there is incomplete information or there are information asymmetries between buyers and sellers; where goods or services are ‘public goods’; and where there are impacts (externalities or spillovers) on third parties that are not reflected in market prices.20

The prevailing view of policy-makers is that the last three types of market failure exist to a significant degree in financial markets.21

Information asymmetries exist between issuers and their insiders (such as directors), and investors. Information [page 14] and public confidence in capital markets are ‘public goods’, for which no individual investor has adequate incentive to pay, but which benefit all investors. Misallocation of resources through capital markets produces externalities in the form of, say, missed opportunities for economic growth, or losses that diminish investors’ ability to provide for their own retirement and place demands on public resources. Securities regulation is often explained and analysed in economic terms as a more or less efficient response to these (and other) perceived instances of market failure. Indeed, in the last two decades economic analysis has become the predominant epistemological framework for academic study of securities regulation.

CURRENT REGULATORY FRAMEWORK 1.13 This part provides a broad overview of the pattern of financial markets and investment products regulation in Australia today. Regulation has been described as taking four basic forms: 1.

regulation of markets: which includes provisions governing the establishment of markets and provisions governing misconduct, such as the prohibition against insider trading;

2.

regulation of CS facilities: which includes requirements for both the initial approval and ongoing operation of CS facilities, such as satisfactory provisions for the transfer, registration and settlement of transactions;

3.

regulation of intermediaries: including initial licensing criteria as well as ongoing business conduct requirements such as disclosure of benefits and conflicts of interest; and

4.

regulation of the disclosure of product information: requirements on product issuers and promoters to supply potential investors with sufficient information to permit investors to make informed

decisions.22 In the areas the subject of this book, regulation focuses primarily on the activities of four main constituencies of the market — issuers, intermediaries, market operators and traders.

Institutional arrangements 1.14 Like government generally, financial services regulation in Australia exhibits three main functions: the making of law, administration of that law and resolution of disputes under that law. The law is found mainly in the Corporations Act; in the ASIC Act; and in regulations made under those Acts. Administration of the legislation is the responsibility of the Commonwealth Treasurer and ASIC. The resolution of disputes is confided to the Federal Court and the Supreme Courts of the states and the Northern Territory, with other courts having some powers to apply the securities legislation. In addition, private exchanges have a role to play in regulating market participants. [page 15] The main body of substantive law about securities and markets is in the Corporations Act. However, the Corporations Act does not operate as a code, and a full understanding of securities law in Australia calls for acquaintance with not only the Corporations Act and judicial decisions interpreting it but also with the general law governing contracts, trusts, torts and the interpretation of statutes. The current Corporations Act (which is a Commonwealth Act applying of its own force throughout Australia) commenced on 15 July 2001, replacing predecessor state-based legislation. The move from state-based to Commonwealth regulation of securities and markets is explained in 1.55–1.62 below. The Australian system regulates both wholesale and retail markets, but imposes additional (mostly disclosure-related) requirements on issuers, intermediaries and market operators who deal with retail clients. The distinction between wholesale and retail markets is not only made by

reference to the type of product or service being offered (as is the case in some other jurisdictions). Instead it depends on the nature of the person to whom the financial product or service is being offered. As a general rule, a person is treated as a retail participant unless they fall into one of the express categories of wholesale participants provided for in the Corporations Act. Speaking broadly, a person is treated as wholesale where the value of the product or service acquired exceeds a set amount (generally $500,000), is acquired for use in connection with a business that is not a small business, or is acquired by a sophisticated or professional investor as defined. Professional investors for this purpose include financial services licensees, bodies regulated by APRA such as banks and insurance companies, listed companies and their related bodies corporate, and institutional and private investors with at least $10 million funds under management.23

Regulating issuers 1.15 Among other things, the securities laws impose requirements and restrictions on issuing entities in relation to the offer and issue of securities and other financial products. ‘Financial product’ is broadly defined and, subject to certain express carve-outs, includes any facility through which, or through the acquisition of which, a person makes a financial investment. This includes all types of financial instruments traded on the various securities markets, including securities, interests in managed investment schemes and derivatives. The issuing entities that are subject to these requirements include ordinary commercial and trading companies that issue shares and debentures to fund their operations, as well as financial sector entities (such as investment banks, investment companies, fund managers and superannuation trustees) that create different types of investment vehicles and structures and issue other forms of interests in them. The main regulatory requirements imposed on issuers relate to disclosure. In the case of financial sector entities, these mandatory disclosure requirements may operate in addition to licensing and other requirements that apply to them as financial services providers: see Chapter 13 below.

[page 16] In terms of structure, the regulatory system as it applies to issuers is bifurcated. Entities that issue securities as defined in Corporations Act s 761A are subject to the disclosure and related requirements in Ch 6D of the Corporations Act. For this purpose, securities includes shares and debentures, as well as options and rights to acquire shares or debentures by way of issue. Entities that issue other types of financial products, such as derivatives, warrants, interests in managed investment schemes and structured products, are subject to the disclosure and related requirements in Pt 7.9 of the Corporations Act. In both cases, the mandatory disclosure requirements apply where the financial instruments in question are offered (directly or indirectly) for issue to retail investors. In addition to statutory controls on the conduct of such offers, issuers of both categories of financial instruments may be subject to ongoing continuous disclosure requirements under Corporations Act Ch 6CA, if they are ‘disclosing entities’ as defined in Corporations Act Pt 1.2A.

Offering securities 1.16 Chapter 6D of the Corporations Act, entitled ‘Fundraising’, regulates the offer of company securities to retail investors. Part 6D.2 Div 2 sets out when an offer of securities ‘needs disclosure to investors’: Corporations Act s 704. In broad terms, an offer of securities for issue needs disclosure to investors unless it comes within one of the recognised statutory exemptions, which include small scale private offers and offers made to sophisticated investors, professional investors or persons associated with the issuer. An offer of securities for sale will need disclosure to investors (unless exempt) if it amounts to an indirect issue of the securities, or a direct or indirect off-market sale by a person who controls the issuer. Where an offer needs disclosure to investors under Pt 6D.2 Div 2, then depending on the circumstances of the offer that disclosure will take the form of a prospectus, a short form prospectus, a profile statement or an offer information statement: Corporations Act Pt 6D.2 Div 3. The nature and extent of the disclosure required in each type of document is

prescribed by Pt 6D.2 Div 4. The main form of disclosure document (used, for example, in connection with an initial public offering, or IPO) is the full prospectus. In addition to certain specific mandatory disclosures (for example, dealing with the nature and extent of any interests those involved in the offer have in the offer), the prospectus must include ‘all the information that investors and their professional advisers would reasonably require to make an informed assessment of’, among other things, the rights and liabilities attaching to the securities offered, and the assets and liabilities, financial position and performance, profits and losses and prospects of the issuer: Corporations Act s 710. However, this information must be included only to the extent it is reasonable for investors and their professional advisers to expect to find the information in the prospectus (which may exclude, for example, information about trade secrets) and only if the issuer, its directors or its named underwriter or advisers knew the information or ought reasonably to have obtained it by making enquiries (for example, through a structured ‘due diligence’ process). Further, the information must be worded and presented in a clear, concise and effective manner. Part 6D.2 Div 5 controls the procedure for offering securities by way of a regulated offer. Various steps are involved. They include preparing the required disclosure [page 17] document; lodging the document with ASIC; making the offer by distribution of the disclosure document attached to the application form; curing any defects in the disclosure document that arise during the offer period through supplementary disclosure; holding application money on trust until the offer is completed; and issuing the securities. Controls on advertising the offer and on securities hawking are imposed by Pt 6D.3 Div 1. More broadly, Pt 6D.3 contains the (numerous) prohibitions, liabilities and remedies that the law imposes in connection with regulated offers. Importantly, these include provisions imposing criminal and civil liability on issuers and their directors in connection with non-complying offers and defects in the disclosure documents provided to investors.

The laws regulating offers of securities are discussed in Chapters 4 and 5.

Offering other financial products 1.17 Part 7.9 of the Corporations Act, entitled ‘Financial Product Disclosure and Other Provisions Relating to Issue, Sale and Purchase of Financial Products’, regulates the offer of financial products other than securities. Along with a vast array of financial products not covered in this book — such as bank deposits, superannuation products and risk insurance products — this category includes the listed managed investments, derivatives and structured products listed for quotation on the ASX. Part 7.9 applies in relation to financial products issued or to be issued in the course of a business of issuing financial products, and does not apply in relation to debentures, stocks or bonds issued or proposed to be issued by a government: Corporations Act ss 1010A and 1010B. Part 7.9 Div 2 contains a mandatory disclosure requirement that applies in connection with certain offers of financial products for issue or sale. As with the securities laws, the disclosure obligation is only triggered in connection with offers of financial products for sale where the sale amounts to an indirect issue or a direct or indirect off-market sale by a controller. In these cases, and where financial products are offered for issue, the offeror may be required to prepare and provide a disclosure document in the form of a Product Disclosure Statement (PDS). However, a PDS is only required if the recipient of the offer is a ‘retail client’ as defined. Even where the offerees include retail clients, the offer may be exempted from the PDS requirements under one of the numerous statutory exemptions, for example, for rights issues or for small scale private offers of interests in managed investment schemes. The requirements relating to the preparation and content of PDSs are contained in Pt 7.9 Div 2 Subdiv C of the Corporations Act. Special (truncated) content requirements apply for PDSs for particular financial products, such as interests in ‘simple’ managed investment schemes as defined. For other financial products the legislation prescribes the disclosure of particular matters, including risks associated with acquiring the product, along with a general requirement to include ‘any other

information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product’. Information need only be included to the extent that it is ‘reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information’ in the PDS, and if it is actually known to certain people (including the [page 18] issuer and its advisers) named in the legislation. Unlike prospectuses, PDSs are not required to be lodged with ASIC, unless they relate to listed managed investments. Part 7.9 Div 2 also includes arrangements for updating or correcting disclosure during the course of the offer through the issue of supplementary PDSs, and contains certain procedural requirements related to different types of offers. Some issuers of financial products are subject to ongoing disclosure obligations under Pt 7.9 Div 3 of the Corporations Act. Part 7.9 Div 4 imposes restrictions on advertising that apply in connection with offers, while Div 5 puts in place a ‘cooling-off’ period for certain products. Division 6 is entitled ‘Miscellaneous’ and includes restrictions on short selling. Division 7 contains the enforcement provisions which (among other things) impose civil liability on the issuer for defective disclosure. The disclosure requirements for offers of financial products are discussed in Chapter 6.

Wholesale offers 1.18 Generally speaking, the mandatory disclosure obligations in Ch 6D (for securities) and Pt 7.9 (for other financial products) of the Corporations Act do not apply where the offer is restricted to the wholesale market. However, this is not to say that such offers are wholly unregulated. General prohibitions on engaging in misleading or deceptive conduct or other forms of market misconduct may apply under Pt 7.10 of the Corporations Act and Pt 2 Div 2 of the ASIC Act. In such circumstances, the issuer is not under a positive obligation to make

disclosure but, if it does, it must ensure that its disclosure is accurate and complete. In particular, it must ensure that it does not engage in ‘halftruths’, or remain deliberately silent in circumstances giving rise to a reasonable expectation that silence would be broken if a particular state of affairs existed. The liability of issuers for defective disclosure in connection with wholesale offers is discussed in Chapter 8.

Continuous disclosure 1.19 Issuers of securities and other financial products may also be subject to continuous disclosure requirements, if they are ‘disclosing entities’ as that expression is defined in Pt 1.2A of the Corporations Act. A disclosing entity is an entity that has issued ED (enhanced disclosure) securities. In broad terms this includes listed companies and managed investment schemes; unlisted companies and managed investment schemes that have conducted regulated offers with the result that they have 100 or more shareholders or interest holders in the relevant class; and debenture issuers. The significance of being a disclosing entity is that the issuer must comply with the continuous disclosure requirements in s 674 (for listed entities) or s 675 (for unlisted entities) and must prepare financial statements and reports required under Ch 2M of the Corporations Act half-yearly as well as annually. In return, the prospectus or PDS requirements are modified to reduce the level of disclosure required in connection with a further issue of securities or interests. Entities subject to the continuous disclosure requirements are obliged by Ch 6CA of the Corporations Act to disclose information about specified events or matters [page 19] to the market operator (for listed entities) or ASIC (for unlisted entities) as they arise. In the case of entities listed on the ASX, the disclosure obligation is contained in s 674 and is an obligation to notify the ASX of information in accordance with ASX Listing Rule 3.1. The Listing Rule

provides that ‘once an entity is or becomes aware of information concerning it that a reasonable person would expect to have a material effect on the price or value of its securities, it must immediately tell ASX that information’. However, the entity is not required to disclose the information if three conditions are met. The first is that a reasonable person would not expect the information to be disclosed; the second is that the information is confidential and the ASX has not formed the view that the information has ceased to be confidential; and the third is that the information is exempt in character. Information is exempt in character if any one or more of the following applies: it would be a breach of law to disclose the information; the information concerns an incomplete proposal or negotiation; the information comprises matters of supposition or is insufficiently definite to warrant disclosure; the information is generated for the internal management purposes of the entity; or the information is a trade secret: ASX Listing Rule 3.1A. The disclosure obligation on unlisted disclosing entities arises under s 675 when the entity becomes aware of information that is not generally available and that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity. Continuous disclosure is examined in Chapter 7.

Issuer licensing 1.20 Among other things, Ch 7 of the Corporations Act creates a licensing regime for financial intermediaries: see 1.26 below. In most cases, a person who carries on a business of providing financial services (as defined) must hold an Australian financial services licence (AFS licence) issued by ASIC authorising it to provide those services. A person is treated as providing a financial service if, among other things, they deal in a financial product (including a security), and the statutory definition of ‘dealing’ includes issuing such a product. Despite this, a company that issues securities in itself is not usually required to hold an AFS licence in order to conduct the issue (although it may be required to hold an AFS licence if it engages in other regulated conduct in relation to the offer, such as providing financial product advice). This is because, with one important exception, the definition of

‘dealing’ expressly excludes any transaction entered into by a body corporate that relates only to its own securities. The exception is for what might be described as ‘investment companies’ — that is, companies that carry on a business of investment in securities, interests in land or other investments and that in the course of carrying on that business invest funds subscribed by the public made on terms that the funds subscribed would be invested in this way: Corporations Act s 766C(5). These investment companies may be required to hold an AFS licence in certain circumstances. Issuers of other types of financial products may be required to hold an AFS licence. For example, the operator of a registered managed investment scheme (known as the [page 20] ‘responsible entity’) must hold such a licence. The licensing requirement is discussed in Chapter 13 below.

Regulating market infrastructure 1.21 The second important part of the regulatory framework for securities and markets is the regulation of operators of financial markets, and of operators of CS facilities. Prior to commencement of Ch 7 of the Corporations Act in 2002, different types of financial markets, and different CS facilities, had been differently regulated. Chapter 7 adopts a more consistent regulatory framework across both exchange-based and OTC markets, and between markets in different types of financial instruments. The market regulation regime is contained in Pts 7.2–7.5 of the Corporations Act. Part 7.2 provides for licensing of financial market operators; Pt 7.3 provides for licensing of CS facility operators; Pt 7.4 prohibits ‘unacceptable control situations’ and the involvement of disqualified individuals in licensees; and Pt 7.5 establishes compensation

regimes for licensed markets through which participants provide services to retail clients. Part 7.5A of the Corporations Act deals with the regulation of derivative transactions and derivative trade repositories. The rules reflect the commitments made at the Group of 20 (G20) Summit in 2009 to (i) reporting of transaction information relating to OTC derivatives to trade repositories that maintain a database of those transactions; (ii) clearing of standardised OTC derivatives through central counterparties; and (iii) execution of standardised OTC derivatives on exchanges or electronic trading platforms, where appropriate. The objectives of these reforms included enhancing transparency of transaction information available to regulators and the public, promoting financial stability and supporting the detection and prevention of market abuse.

Financial market operators 1.22 Operators of financial markets must be licensed by the Commonwealth Treasurer under Pt 7.2 of the Corporations Act, and must comply with the general and specific obligations imposed on the holder of an Australian market licence under the Act. A financial market is a facility through which ‘offers to acquire or dispose of financial products are regularly made or accepted’, or through which ‘offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in the making of offers to acquire or dispose of financial products, or the acceptance of such offers’: see Corporations Act s 767A and ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, March 2002. Certain conduct is expressly excluded from the definition of operating a financial market, including ‘a person making or accepting offers or invitations to acquire or dispose of financial products on the person’s own behalf, or on behalf of one party to the transaction only’, and the conduct of treasury operations between related bodies corporate. [page 21]

The responsibility for licensing markets rests with the Commonwealth Treasurer, a power that is exercised on the advice of ASIC.24 Market licensees are subject to a number of statutory obligations contained in Pt 7.2 Div 3 of the Corporations Act. Among other things a licensee must, to the extent that it is reasonably practicable to do so, do all things necessary to ensure that the market is a fair, orderly and transparent market. It must have adequate arrangements for operating the market, including arrangements for handling conflicts between the commercial interests of the licensee and the need for the licensee to ensure that the market is fair, orderly and transparent, and for monitoring and enforcing compliance with the market’s operating rules. It must have sufficient financial, technological and human resources to operate the market properly. It is also required to notify ASIC of certain events and matters as they arise, and to assist ASIC in the exercise of its regulatory functions. The market’s operating rules must deal with certain prescribed matters, including access to the market, eligibility criteria and ongoing requirements for participants, arrangements for market disruption, terms of financial products and trading, listing of entities (where appropriate), and the resolution of disputes between participants: Corporations Act s 793A and Corporations Regulations reg 7.2.07. Importantly, Pt 7.2 Div 3 allows for the operating rules to be enforced by ASIC, the market operator, the operator of the market’s CS facility, and any person aggrieved by a failure to comply with the rules. Changes to the rules must be notified to ASIC, and the Minister has power to disallow changes to an Australian market’s operating rules within 28 days of the notification. Part 7.2 Div 4 of the Corporations Act sets out the criteria for granting a market licence, and allows the Treasurer to impose conditions on the licence. A licence may be varied, suspended or cancelled in certain circumstances. The legislation also includes special arrangements for dealing with situations where the market operator itself or a related body corporate is listed on the market it operates. Supervision of the markets is the responsibility of ASIC, under Pt 7.2A of the Corporations Act.25 Pursuant to s 798G, ASIC makes market integrity rules that deal with the activities or conduct of licensed markets, of persons in relation to licensed markets, and of persons in relation to

financial products traded on financial markets. Market operators and participants must comply with those rules, and ASIC is responsible for the real-time monitoring of that compliance. If the financial market is one through which participants provide financial services to retail clients, the market must have in place approved compensation arrangements under Pt 7.5 of the Corporations Act. For financial markets operated by members of the Securities Exchange Guarantee Corporation nominated under Corporations Act s 890A, the National Guarantee Fund established under s 889A of the Act is the applicable compensation arrangements. For other market operators, ‘approved compensation arrangements’ under Pt 7.5 Div 3 are permitted. [page 22]

Clearing and settlement facility operators 1.23 Part 7.3 of the Corporations Act regulates the operation of a CS facility in the jurisdiction. A CS facility is ‘a facility that provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other that arise from entering into the transactions’ and are of a kind prescribed by regulations: Corporations Act s 768A(1). The prescribed obligations are obligations arising from contracts to transfer securities, interests in registered and wholesale managed investment schemes, derivatives, government bonds, foreign exchange contracts, debentures or repurchase agreements: Corporations Regulations reg 7.1.09. Examples given in the legislation of CS facilities include ‘a facility that provides a regular mechanism for stockbrokers to pay for the shares they buy and to be paid for the shares they sell, and for records of those transactions to be processed to facilitate registration of the new ownership of the shares’ and ‘a facility that provides a regular mechanism for registering trade in derivatives on a futures market and that enables the calculation of payments that market participants owe by way of margins’. Certain conduct is expressly excluded from the definition of operating a CS facility, including an authorised deposit-taking institution (ADI) acting in the ordinary course of its banking business, and a person acting on their own behalf or on behalf of one party to a transaction only.

The operator of a CS facility must hold a CS facility licence issued by the Commonwealth Treasurer.26 The arrangements for licensing are set out in Pt 7.3 Div 3, including for the grant of a licence, the imposition of licence conditions, and variation, suspension and cancellation of licences. In recognition of the importance of the efficient functioning of CS facilities to the stability of the financial system as a whole, special powers to assess compliance, make reports and give directions are conferred on the Minister, ASIC and the Reserve Bank of Australia by Pt 7.3 Div 2 of the Corporations Act. A CS facility licensee must comply with various statutory obligations contained in Pt 7.3 Div 2 of the Corporations Act. Among other things a licensee must, to the extent that it is reasonably practicable to do so, comply with applicable standards and do things necessary to reduce systemic risk and ensure that the facility’s services are provided in a fair and effective way. It must have adequate arrangements for supervising the facility, including arrangements for handling conflicts between the commercial interests of the licensee and the need for the licensee to ensure the facility’s services are provided in a fair and efficient way, and for enforcing compliance with the facility’s operating rules. It must have sufficient financial, technological and human resources to operate the facility properly and to provide the required supervisory arrangements. It is also required to notify ASIC and the Reserve Bank of certain events and matters as they arise, and to assist ASIC and the Reserve Bank in the exercise of their respective regulatory functions. The facility’s operating rules must deal with certain prescribed matters, including the terms on which the CS services are provided, matters relating to risk, access [page 23] to the facility, rules for participants, and the handling of defaults: Corporations Act s 822A and Corporations Regulations reg 7.3.05. Part 7.3 Div 2 allows for the operating rules to be enforced by ASIC, the facility operator, the operator of the financial market that utilises the facility, and any person aggrieved by a failure to comply with the rules. Changes to the

rules must be notified to ASIC, and the Minister has power to disallow changes to a facility’s operating rules within 28 days of the notification.

Limits on involvement with licensees 1.24 In addition to requiring operators of financial markets and CS facilities to be licensed, the regulatory system imposes restrictions on who can exercise control over those licensees. The restrictions are twofold. First, an ‘unacceptable control situation’ is not permitted in relation to a licensee named in reg 7.4.01 of the Corporations Regulations as a ‘widely held market body’, which includes the ASX. Generally speaking, an unacceptable control situation exists in relation to a widely held market body if a person’s voting power in that body exceeds 15%. This effect of Pt 7.4 Div 1 is that acquiring a voting stake in a widely held market body that exceeds 15% requires the approval of the Minister. Second, involvement in a licensee by a disqualified person is not allowed. An individual is disqualified if ASIC has made a declaration to that effect under s 853C, the individual is disqualified from managing a corporation under s 206B, or if the individual is on the register of disqualified officers maintained by ASIC under s 1274AA. Such a person is not permitted to act as a director, secretary or senior manager of a licensee or the holding company of a licensee, or to hold more than 15% of the total voting power in the licensee or its holding company.

Derivative transactions and derivative trade repositories 1.25 Part 7.5A of the Corporations Act deals with derivatives transactions and derivative trade repositories. Under Div 2, ASIC is empowered to make rules dealing with, among other matters, execution requirements, reporting requirements, and clearing requirements relating to derivative transactions in derivatives covered by a Ministerial determination made under the Act. Under Divs 3–6, ASIC is given the function of supervising licensed derivative trade repositories. The regulation of market infrastructure providers is discussed in Chapters 10–12.

Regulating intermediaries 1.26 The third important part of the securities and markets regulatory framework is the regulation of financial services providers under Ch 7 of the Corporations Act. Some issuers of financial products (particularly fund management companies and investment banks) are treated as financial services providers and are therefore subject to the licensing and conduct requirements contained in the Act: see 1.19 above. These requirements also apply to those firms and individuals who operate as ‘intermediaries’ in the markets, including (in particular) brokers, dealers and advisers. As at 30 June 2015, there were 5918 financial services businesses licensed [page 24] by ASIC.27 However, not all financial services licensees are market intermediaries, as the licensing regime also covers (among others) the insurance and superannuation industries.

Licensing requirement 1.27 The pattern of Ch 7 is to require that those carrying on a business of providing financial services in the jurisdiction be licensed by ASIC to do so, unless one of the express statutory exceptions to the licensing requirement applies: Corporations Act s 911A. This is so regardless of whether the services are provided to wholesale or retail clients, or both. A person provides a financial service if they provide financial product advice, deal in a financial product, make a market for a financial product, operate a registered managed investment scheme, or provide a custodial or depository service: Corporations Act s 766A. A person who provides a financial service on behalf of a principal engaged in such a business must be properly authorised on behalf of the principal to do so: Corporations Act s 911B. The licensing regime is established under Pt 7.6 Div 4 of the Corporations Act, and administered by ASIC. Different classes of licence are issued, depending on the particular financial services to be provided. Applicants for a licence must meet the various licensing criteria set down

by ASIC, and licences are issued subject to various conditions. Use of expressions such as ‘stockbroker’, ‘sharebroker’ or ‘futures broker’ is permitted only if expressly authorised under the licence. ASIC has power to vary, suspend or cancel a licence in certain circumstances. Failure to hold a licence when one is required is a criminal offence. Also, agreements with unlicensed persons relating to the provision of financial services can be unenforceable in certain circumstances, under Pt 7.6 Div 11 of the Act. AFS licensees are subject to a number of general statutory obligations under Corporations Act Pt 7.6 Div 3. These include obligations to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly; to have in place adequate arrangements for the management of conflicts of interest; and to maintain the resources and competence to provide the services. A licensee must comply with the licence conditions and the financial services laws, and take reasonable steps to ensure that its representatives do so also. If its clients include retail clients it must have an internal dispute resolution system and be a member of an external dispute resolution scheme that meets statutory requirements, and put in place appropriate compensation arrangements. A licensee is also subject to various information requirements, under which it is required to report certain matters to ASIC. Divisions 5 and 6 of Pt 7.6 regulate licensees’ (internal and external) representatives, including through allowing representatives external to a licensee to be appointed as ‘authorised representatives’ to provide financial services on its behalf. Licensees are made responsible for any conduct of their representatives that relates to the provision of a financial service, on which a client could reasonably be expected to [page 25] rely and did in fact rely. Where a person is a representative of more than one licensee, that responsibility is allocated between the licensees in the manner set out in the Act. ASIC and the courts have power to ban or disqualify persons from providing financial services, under Pt 7.6 Div 8 of the Act.

General law obligations of intermediaries 1.28 The relationship between financial intermediaries (such as brokers and advisers) and their clients is governed by established general law principles. The relationship is founded in contract, supplemented by various duties and obligations arising out of the specific nature of the relationship between the client and the intermediary. For example, brokers are subject to general law obligations to act in accordance with instructions and to undertake transactions at the best possible price. Where the intermediary acts as the client’s agent, the law of agency applies. Financial intermediaries may, depending on the circumstances, owe fiduciary duties to their clients.28 Where this is so the intermediary is not permitted to act in situations where there is a real sensible possibility that its personal interests or duty to another person may conflict with its duty to the client, or to profit from its position, without the informed consent of the client. An intermediary will also owe to its client a duty to use reasonable care and skill in the discharge of its functions. The extent of its duty depends upon the extent of responsibility assumed by the intermediary and of the client’s reliance. For example, the duty of a broker may be to execute instructions with reasonable care and skill, but will not necessarily extend to an obligation to warn or advise the client in relation to the trade. The intermediary’s general law duty of care is supplemented, in the case of contracts for the supply of financial services to ‘consumers’ as defined, by an implied warranty that the services will be rendered with due care and skill contained in ASIC Act s 12ED.

Financial services disclosure 1.29 AFS licensees that provide financial services to retail clients (as defined) are subject to certain mandatory disclosure requirements under Pt 7.7 of the Corporations Act. Depending on the nature of the service and the circumstances in which it is provided, the licensee or its representative may be required to give the client a Financial Services Guide (FSG) that contains certain prescribed information about the licensee or representative, the nature of the service to be provided, and the basis on

which the licensee or representative is to be remunerated for the provision of the service. [page 26] Additional disclosure requirements apply where the financial service in question is financial product advice provided to a retail client. The Corporations Act distinguishes between general advice and personal advice: Corporations Act s 766B(3) and (4). Where general advice is provided to a retail client, a ‘general advice warning’ may be required. Additional disclosure in the form of a Statement of Advice may also be required.

Conduct rules 1.30 Parts 7.7A and 7.8 of the Corporations Act contains a number of conduct and other rules that apply to AFS licensees and their representatives. The Future of Financial Advice (FoFA) rules, contained in Div 2, apply in relation to the provision of personal financial product advice to retail clients, and include obligations relating to the provision of the advice, including obligations to act in the best interests of the client, to give appropriate advice, to warn the client if advice is given on the basis of incomplete information, and to give priority to the client’s interests in the event of a conflict. They also include restrictions on various forms of conflicted remuneration, including the payment of commissions by product issuers to providers in certain circumstances. Divisions 2 and 3 of Pt 7.8 prescribe how moneys and other property received from clients are to be held and dealt with. Divisions 5 and 6 impose reporting requirements on licensees, including obligations to keep financial records, prepare financial statements and appoint auditors. Division 7 contains ‘other rules about conduct’, including a prohibition on licensees engaging in unconscionable conduct, and a requirement on licensees dealing on licensed markets to give priority to client orders, to deal through the market, to keep records of dealing instructions, and to disclose if they are acting as principal in dealings with non-licensees. It also restricts a licensee from jointly acquiring a financial product with, or

providing credit to, an employee. Part 7.9 contains a generalised restriction, not limited in its application to licensees, on securities hawking.

Exchange operating rules 1.31 Financial intermediaries that act (either on their own behalf or on behalf of clients) in licensed markets are bound, as a matter of contract, by the operating rules of the market. For example, in the case of the ASX, the operating rules that apply to affiliates and participating organisations include the ASX Operating Rules, ASX Clear Operating Rules, ASX Settlement Operating Rules and ASX 24 Operating Rules.29 The operating rules provide for the admission (and expulsion) of participants, and impose detailed and specific obligations on them in relation to their on-exchange trading activities. The laws governing intermediaries are discussed in Chapters 13 and 14. [page 27]

Market conduct regulation 1.32 The fourth important part of the regulatory framework is market conduct regulation. This is regulation directed at how investors and others conduct themselves in markets and in relation to financial products and financial services. Provisions of general application, contained in Pt 2 Div 2 of the ASIC Act and Pt 7.10 of the Corporations Act, operate to impose minimum standards of conduct on those involved in financial markets, that function to protect the individual market participants as well as the integrity of those markets overall. The unconscionable conduct and consumer protection provisions in Pt 2 Div 2 of the ASIC Act were introduced into the predecessor legislation following the recommendations of the Wallis Inquiry in 1998: see 1.45 below. The Wallis Inquiry had recommended that responsibility for consumer protection in relation to the financial sector be transferred from the Australian Competition and Consumer Commission (ACCC), which had exercised that function under the then TPA, to ASIC. Accordingly, Pt

2 Div 2 of the ASIC Act was enacted to mirror the corresponding provisions of the TPA, which continue to apply to the rest of the economy and remain under the administration of the ACCC. Part 7.10 of the Corporations Act proscribes various types of conduct in relation to financial markets, financial products and financial services. This includes market manipulation, false trading, the making of false representations, dishonest conduct, and misleading or deceptive conduct. It also prohibits insider trading: that is, trading or tipping on the basis of non-public information that, if it were public, would reasonably be expected to have a material effect on the price or value of particular securities and other financial instruments.

Dishonest, misleading or deceptive conduct 1.33 The regulatory framework contains a number of rules of general application that prohibit dishonest, misleading or deceptive conduct in relation to financial products and financial services. A person is prohibited by the ASIC Act from engaging, in trade or commerce, in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. The Corporations Act prohibits conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive. Breach of the prohibitions on misleading or deceptive conduct gives rise to civil liability. The Corporations Act also expressly prohibits a person, in the course of carrying on a financial services business in Australia, from engaging in dishonest conduct in relation to a financial product or financial service.

Unconscionable conduct 1.34 The ASIC Act prohibits a person, in trade or commerce, from engaging in certain unconscionable conduct in relation to financial services. Unconscionable conduct has been held, on its ordinary and natural interpretation, to mean ‘doing [page 28]

what should not be done in good conscience’.30 The purpose of these provisions is to protect vulnerable people from predatory behaviour. There is a separate prohibition on unconscionable conduct that applies specifically to AFS licensees, in Corporations Act s 991A.

Consumer protection 1.35 The ASIC Act also contains various consumer protection provisions that relate to the way in which financial products and services are marketed. The Act prohibits false advertising and certain other undesirable selling practices, such as bait advertising and referral selling. It also implies warranties as to reasonable care and fitness for purpose into contracts for the provision of financial services, and limits the extent to which providers can contract out of, or limit their liability in respect of, the Act.

Unfair contract terms 1.36 Provisions introduced into the ASIC Act in 2010 render void any unfair term included in a contract that is a standard form consumer contract, where that contract is either a financial product, or contract for the supply or possible supply, of services that are financial services. Unfairness is a statutory concept and the legislation provides a list of examples of unfair terms; however, the regime will not operate to make void terms that define the main subject matter of the contract or set the upfront price.

Market misconduct 1.37 Part 7.10 of the Corporations Act prohibits, among other things, various forms of market misconduct: that is, conduct that might impact on the free and transparent operation of financial markets. Several sections are directed at the integrity of trading in financial products on a financial market operated in Australia. Conduct that is prohibited in relation to financial products traded on financial markets includes market manipulation (that is, engaging in transactions that have or are likely to have the effect of creating or maintaining an artificial price for such trading), as well as acts or omissions that have or are likely to have the effect of creating a false or misleading appearance of active trading or a

false or misleading appearance with respect to the market or price, and fictitious or artificial trading that results either in a price being maintained, inflated or depressed, or in fluctuations in price. In addition, the legislation prohibits the circulation or dissemination for gain of any statement or information to the effect that the price for trading in financial products on a financial market operated in this jurisdiction will, or is likely to, rise or fall, or be maintained, because of an act that contravenes the misconduct provisions. Part 7.10 also includes provisions that apply to dealings in financial products generally (that is, not just on financial markets). The first applies where a person makes a statement, or disseminates information, that is false in a material particular or is materially misleading if the information or statement is likely to induce people [page 29] to apply for financial products or to dispose of or acquire financial products, or to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market. Such conduct contravenes the law if, when the person makes the statement or disseminates the information, they do not care whether the statement or information is true or false, or they know, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading. The second makes it illegal to induce someone to deal in financial products by making or publishing a statement, promise or forecast if the person knows, or is reckless as to whether, the statement is misleading, false or deceptive; by a dishonest concealment of material facts; or by recording or storing information that the person knows to be false or misleading in a mechanical, electronic or other device.

Insider trading 1.38 Insider trading is prohibited by Pt 7.10 Div 3 of the Corporations Act. In broad terms, Corporations Act s 1043A prohibits two types of conduct by persons in possession of inside information — trading and tipping. Information is ‘inside information’ for this purpose if it is not

generally available, and if a reasonable person would expect the information (if it were generally available) to have a material effect on the price or value of particular financial instruments of a kind covered by the law. Financial instruments covered by the insider trading law include securities, derivatives, interests in managed investment schemes, government bonds and any other financial products able to be traded on a financial market. The prohibitions in s 1043A apply whenever someone is in possession of insider information, and knows (or ought reasonably to know) both that the information is not generally available and that it is price sensitive. This is so regardless of how the person came into possession of that information, and whether or not the person is an ‘insider’ in the ordinary sense (that is, a person with an antecedent connection to the entity to which the information relates). While a person is in this position, the person must not (whether as principal or agent) trade in or procure another person to trade in the relevant financial instrument. This is known as the trading offence. The law also prohibits the person from communicating information relating to financial products that can be traded on a financial market to another person whom they know or ought to know will trade on the information. This is known as the tipping offence. The legislation contains various carve-outs and exceptions, and specifies that certain conduct does not contravene the prohibitions. This includes trading that occurs within firms where those in possession of the inside information are separated from the trader by a ‘Chinese wall’, or information barrier. The conduct regulation provisions of the Corporations Act and the ASIC Act are discussed in Chapters 15, 16 and 17. [page 30]

EVOLUTION OF THE CURRENT FRAMEWORK 1.39 The previous part explains, in broad terms, the current regulatory

framework for securities and financial markets in Australia. The relevant laws have been substantially amended and expanded in recent years, with the result that almost all of the legislative provisions discussed in this book were enacted after 1998. The unconscionable conduct and consumer protection provisions in the ASIC Act commenced in 1999, and the unfair contracts provisions in 2010. The laws relating to fundraising by the issue of company securities (Ch 6D of the Corporations Act) commenced in their current form in 2000. The continuous disclosure laws (Ch 6CA of the Corporations Act) and financial services and markets laws (Ch 7 of the Corporations Act) commenced in 2002. Each of these areas of law has been further revised or refined since its commencement. The remainder of this chapter explains the evolution of the current framework. The fact that most of the current legislation post-dates 1998 might suggest that governmental regulation of securities and financial markets in Australia is an entirely modern phenomenon, but this is not correct. Mandatory disclosure laws covering securities issuers, and limited regulation of financial intermediaries, pre-date the formation of the Commonwealth in 1901. Collective investments have been regulated since the 1950s. Takeovers regulation and the securities intermediaries and markets laws date from the late 1960s and early 1970s. Futures markets regulation commenced in the 1980s. While the current laws are demonstrably ‘new’, they clearly build on and refine those earlier regulatory regimes. There are two distinct strands to the development of securities and markets regulation in Australia. The first relates to developments in substantive regulation (that is, the rules and restrictions that are applied to different parts of and participants in the markets). Key milestones include the investor protection reforms of the 1890s (which followed the land and mining booms of the 1880s); the introduction in the 1970s of takeovers and securities industry laws (following the Poseidon boom of the late 1960s and the work of the Eggleston and Rae Committees); the introduction of futures industry laws in the mid-1980s; the restructure of all of those laws in the late 1990s under, first, the Corporate Law Economic Reform Program (CLERP) and, at the end of the century, after the Wallis Inquiry; and the changes made or proposed in the aftermath of the global financial crisis (GFC) of 2008. The second relates to the

constitutional arrangements for securities regulation, and involves the incremental move from a wholly state-based regulatory framework for securities and markets regulation (up until the 1960s) to a wholly national one (by 2001). Key milestones here were the enactment of (largely) uniform companies legislation by each of the states in the 1960s; the establishment of the Interstate Corporate Affairs Commission in 1974; the commencement of the Commonwealth–State co-operative scheme for corporations and securities regulation and the establishment of the National Companies and Securities Commission in 1981; the commencement of the Corporations Law and the establishment of the Australian Securities Commission (ASC) in 1991; and the referral of powers by the states and territories to the Commonwealth in 2001 that allowed for the enactment of Commonwealth [page 31] legislation covering companies and financial services. These key developments are explained briefly below.

Early developments in substantive regulation 1.40 By the time of Federation in 1901, each of the Australian states had in place limited regulatory regimes covering the formation and promotion of public companies and the activities of share brokers. In part this regulation had been adopted from English law; however, there were some significant local innovations (particularly in Victoria). Legislative intervention in the securities industry and securities markets dates back to the earliest stages of English commercial law — Professor Loss has identified statutes regulating brokers in the City of London that date back to the 13th century.31 The Bubble Act of 1720, which occupies a central place in the development of company law, was an early form of securities regulation, directed at: … persons who contrive or attempt such dangerous and mischievous undertakings or projects, under false pretences of public good, do presume … to open books for public subscriptions, and draw in many unwary persons to subscribe therein towards raising great

sums of money, whereupon the subscribers or claimants under them do pay small proportions thereof.32

The Bubble Act sought to limit those who could raise capital through the issue of securities, by requiring a Royal Charter — an early form of what is sometimes referred to as merit or ‘blue sky’ regulation.33 By the middle of the 19th century, following the recommendations of a select committee of the English Parliament established under the chairmanship of Gladstone, mandatory disclosure (in the form of a prospectus) for new issues of securities by joint stock companies was in place. The mandatory disclosure requirement was carried forward into the first ‘modern’ companies statutes, consolidated in the English Companies Act 1862 and subsequently adopted by the Australian colonial parliaments.34 The boom and bust of the latter part of the 19th century saw some important developments in securities regulation, particularly in Victoria. Stock exchanges had been formed in Sydney (1871), Hobart (1882), Melbourne and Brisbane (1884), Adelaide (1887) and Perth (1889), and levels of market participation were high. [page 32] The Mining Companies Act 1871 (Vic) had ‘introduced a stricter regulatory regime for mining companies in Victoria than that which applied to trading companies’ operating under the general companies statute; most notably the regime included more extensive mandatory disclosure requirements.35 When markets collapsed in the 1890s, there were calls for colonial legislatures to respond. Legislation adopted in Victoria in 1896 introduced several far-reaching investor protection mechanisms, including a prohibition on misleading statements in prospectuses.36 These additional investor protection mechanisms were applied to mining companies from 1910, and were subsequently adopted in a number of states. On Federation, the regulation of companies and securities remained a matter for the states, rather than the new Commonwealth Government, a

position confirmed by the High Court in Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330. Over the next 50 years or so, the pattern of regulation remained fairly constant. Relatively few companies operated across state boundaries and, as noted, separate stock exchanges existed in each of the state capitals. Although the collapse of world stock markets in 1929 had led to the introduction of a comprehensive system of national securities regulation in the United States (including the enactment of the Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934, and the formation of the Securities and Exchange Commission), there was no such response in Australia. The Australian Associated Stock Exchanges (AASE) was formed as a loose association of the local stock exchanges in 1937, but development of the markets was curtailed by the Second World War during which open market trading in listed companies was limited by government. During this period perhaps the most significant development in securities regulation was that which occurred in 1955, when the Victorian companies legislation was amended to regulate the offer of non-corporate collective investments such as unit trusts.37 The first major wave of substantive reform in Australian securities and markets law occurred in the late 1960s and early 1970s. By the 1960s Australian capital markets had developed significantly and were increasingly national in character. [page 33] In August 1967 the Standing Committee of Attorneys-General of the States appointed a Company Law Advisory Committee under the chairmanship of Richard Eggleston (the Eggleston Committee), to: … enquire into and report on the extent of the protection afforded to the investing public by the existing provisions of the Uniform Companies Acts and to recommend what additional provisions (if any) are reasonably necessary to increase that protection.

The Eggleston Committee released seven interim reports between 1969 and 1972 dealing with, respectively: accounts and audit; disclosure of substantial shareholdings and takeover bids; investigation provisions of the Uniform Companies Act; misuse of confidential information, dealings in

options and disclosure by directors; fundraising by corporations; offers to the public; share hawking; and registration of charges. The most enduring of the Eggleston Committee’s work was its enunciation of certain core principles for the regulation of company takeovers, discussed in 1.37 above. Otherwise, though, much of its work was overtaken by the events of the so-called Poseidon boom of 1969 and the work of the Senate Select Committee on Securities and Exchange, established in March 1970 and conducted from 1971 under the chairmanship of Senator Peter Rae (the Rae Committee).

Securities industry regulation 1.41 The minerals markets boom (and subsequent bust) of the late 1960s is well documented; the seven volumes of the Rae Committee’s report set out the events in detail. Legislative responses to events in the market were swift; New South Wales enacted legislation regulating the stock exchanges and the securities industry in 1970, and Victoria, Western Australia and Queensland followed within a few years. This early securities industry legislation was concerned with registration of stock markets and intermediaries and with some aspects of trading in securities; regulation of companies (including offers to the public of their securities, their accounts, takeovers and the regulation of investment companies and debenture trust deeds) continued to be a matter for the Companies Acts.38 The Securities Industry Act 1970 (NSW) provided for the appointment of a Commissioner for Corporate Affairs; the approval of stock exchanges by government; the licensing of securities dealers and investment advisers and their respective representatives; the imposition of accounting and audit requirements for licensed dealers and of restrictions on the use and investment of stockbrokers’ trust funds; and the establishment of stock exchange fidelity funds. It created new market manipulation offences proscribing the creation of false markets through false trading, market rigging, fictitious transactions or the making of false or misleading statements about marketable securities. While covering a similar field, the legislation in the other states was not identical and this lack of consistency was criticised by the Rae Committee. In 1975, in response to the Rae Committee Report, more extensive legislation was enacted in each of the states, which endeavoured to adopt a more uniform approach. For

example, the Securities Industry Act 1975 (NSW) extended the 1970 Act to provide for deposits by members with stock exchanges and to impose requirements relating to the [page 34] conduct of securities businesses by licensees (including a requirement for dealers to give priority to client orders and a restriction on dealings by employees of licensees) and to require the creation of registers of interests in securities for licensees and financial journalists. A prohibition on dealings in securities by insiders in possession of non-public, price-sensitive information was also introduced.

Takeovers regulation 1.42 Drawing on the work of the Eggleston Committee, takeovers regulation was introduced in New South Wales in 1971, with the enactment of the Companies (Amendment) Act 1971 (NSW). The legislation provided for the disclosure of substantial shareholdings in companies and the regulation of takeover offers along the lines of the Eggleston Principles. It also strengthened the requirements for company accounts and audit, and expanded the Commissioner’s powers of investigation into the affairs of companies. Again, the other states followed and their legislation was to some extent harmonised in the mid-1970s in line with the Rae Committee recommendations.

Futures industry regulation 1.43 Regulation of futures markets followed some years later. The Sydney Greasy Wool Futures Exchange Limited had been established in 1960, and in 1972 had changed its name to the Sydney Futures Exchange. In April 1978 its scope and operation expanded greatly with the introduction of a gold futures market, to which markets in United States dollars and two-year and 10-year Treasury bonds were soon added.39 The Futures Market Act 1979 (NSW), which was enacted in 1979 and amended by the Futures Market (Amendment) Act 1982 (NSW), provided

for ministerial approval of futures exchanges and conferred supervisory power on the Corporate Affairs Commission. In 1983, nationwide regulation of futures markets came under consideration, and in 1984 the Commonwealth Government produced an Exposure Draft of a Futures Industry Bill as a template for discussion of consistent national regulation. In 1986 legislation along the lines of the draft Bill was adopted nationally (in accordance with the co-operative scheme discussed in 1.58 below): see Futures Industry Act 1986 (Cth). The legislation regulated the establishment of futures exchanges, clearing houses and futures associations and provided for a fidelity fund, and required futures brokers and advisers and their representatives to be licensed. It also included rules for conduct of futures businesses and for licensees’ accounts and audit, and prohibited insider trading, market manipulation, front-running and trading by licensees with their employees.

Second wave of reform: Wallis Inquiry, CLERP and FSR 1.44 While the constitutional and administrative arrangements for securities and markets regulation underwent significant change from the mid-1970s onwards (see 1.56 below), the substantive form of securities and markets law remained relatively settled (although not unchanged) from about 1976 to the late 1990s. [page 35] The second major wave of substantive reform began in March 1997, with the release of the Wallis Inquiry Final Report, and the instigation of the (new) coalition government’s Corporate Law Economic Reform Program.

Financial System Inquiry 1.45 The main task of the Wallis Inquiry was to consider and report to government on the adequacy of the regulatory framework within which the whole of the Australian financial sector operated. The Wallis Inquiry’s Final Report contains numerous recommendations for reform of that framework that extend beyond the matters covered in this book,

particularly in the areas of financial safety and systemic stability and payments. In the area of securities and markets regulation, the key recommendation of the Wallis Inquiry was for the establishment of a single regulator for conduct and disclosure across the financial system. The Wallis Inquiry proceeded on the basis that specialised regulatory arrangements for the financial sector were justified by the complexity of financial products and the specialised nature of financial markets: see 1.6 above. The Wallis Inquiry found that conduct and disclosure regulation in Australia was being provided through a variety of agencies, with arrangements governed by the institutional form of the service provider. It considered such arrangements to be inconsistent with the emerging structure of markets, and took the view that they had resulted in inefficiencies, inconsistencies and regulatory gaps and were not conducive to effective competition in financial markets. Accordingly, the Wallis Inquiry recommended that: … a single market conduct and disclosure regulator for the financial sector should be established by the Commonwealth. This new body should seek to establish a consistent and comprehensive disclosure regime for the whole financial system, albeit one with flexibility to apply different rules, in response to different situations, beyond a common core. This regulator should also have responsibility for the regulation of advice and sales of retail financial products, including the licensing of financial advisers under a single regime. It should oversee industry based schemes for complaints handling and dispute resolution and establish a common means of access for consumers.40

The Wallis Inquiry took the view that ‘regulation for the integrity of market conduct, consumer protection and the regulation of companies have significant synergies’. Accordingly, it recommended that these functions be combined by establishing a single regulator comprising the (then) ASC and that part of the Insurance and Superannuation Commission (ISC) that dealt with disclosure, sales and advice. It also recommended that the new regulator be given powers, exercisable with respect to the financial sector, which mirrored those provided under the consumer protection provisions of the then TPA, and that administration of these powers should vest in the regulator to the exclusion of the ACCC. The Wallis Inquiry’s recommendation for a single market conduct and disclosure regulator covering the whole of the financial system (excluding credit) was acted

[page 36] upon by government in 1998, with the establishment of ASIC and the enactment of the consumer protection and unconscionable conduct provisions covering the financial sector in what is now Pt 2 Div 2 of the ASIC Act. Its recommendation for a consistent set of conduct and disclosure laws across the sector was taken up as part of the CLERP project, and implemented (in a modified form) in the FSR Act: see 1.48 below.

Corporate Law Economic Reform Program 1.46 Coinciding with the delivery of the Wallis Inquiry’s Final Report was the establishment by the then government of its Corporate Law Economic Reform Program (CLERP) in April 1997. CLERP replaced the earlier Corporate Law Simplification Program which had been pursued by the previous government. Under CLERP, the new government proposed ‘a fundamental review of key areas of regulation which affect business and investment activity’ with the objective of ensuring that ‘business regulation is consistent with promoting a strong and vibrant economy and provides a framework which assists business in adapting to change’. As part of the government’s microeconomic reform agenda, CLERP proposed reforms to companies and securities regulation to ‘promote business and market activity … by enhancing market efficiency and integrity and investor confidence’.41 This was to be achieved by focusing on the economic effect of regulation on business and markets. CLERP identified six key principles underlying its review, which were to be applied to the various areas identified for reform. The principles were: market freedom; investor protection; information transparency; cost effectiveness; regulatory neutrality and flexibility; and business ethics and compliance. On 1 April 1997 five proposal papers were released, dealing with (respectively) accounting standards, fundraising, directors’ duties and corporate governance, takeovers, and electronic commerce. CLERP 6 (financial markets and investment products) followed in December 1997, CLERP 7 (simplified lodgment and compliance) in 1999, and CLERP 8 (cross-border insolvency) and CLERP 9 (corporate disclosure) in 2004.

The proposals directly relevant to securities and markets regulation were CLERP 2 (fundraising), CLERP 4 (takeovers) and CLERP 6 (financial markets and investment products). 1.47 The first tranche of reforms resulting from CLERP were made by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act), which commenced (for the most part) on 13 March 2000. Among other things the CLERP Act substantially amended the existing law covering fundraising by the issue and sale of securities, and takeovers. In the area of fundraising, the CLERP Act introduced the new Ch 6D into the (then) Corporations Law, repealing the predecessor Pt 7.12 (which covered public offers of securities) and the provisions of Pt 7.11 dealing with liability for defective prospectuses. While key elements of the earlier law remained, including the basic prohibition against making offers without a disclosure document [page 37] and reliance on the general ‘reasonable investor’ disclosure standard, all of the statutory provisions were redrafted. The principal policy changes were: … to permit shorter disclosure documents; to liberalise the advertising restrictions for issues of quoted securities; to clarify and simplify the liability provisions, and extend the defences based on due diligence and reliance on others; to facilitate access to capital by small and medium-sized enterprises by removing restrictions on small scale offers and offers to ‘sophisticated investors’; to facilitate fundraising and disclosure in electronic form; and to remove the requirement that a prospectus be not merely lodged but registered.42

In the area of takeovers, the CLERP Act repealed the whole of the extant Ch 6 of the Corporations Law, which regulated the acquisition of shares, takeover procedures, disclosure of substantial shareholdings, tracing beneficial ownership of shares, and ancillary matters such as liability for misstatements and the powers of ASIC, the Corporations and Securities Panel (the Panel) and the courts. In its place, new Chs 6 (acquisition of shares and takeovers), 6A (compulsory acquisitions and buy-outs), 6B (liability) and 6C (substantial shareholdings and beneficial ownership) were inserted. The CLERP Act made three significant policy changes to the

takeovers law, and numerous technical changes. The three policy changes related to the role of the Panel, the procedures for compulsory acquisition, and the extension of the takeovers regime to acquisition of interests in listed managed investment schemes. The CLERP Act strengthened the role of the Panel, which was to ‘take the place of the courts as the principal forum for resolving takeover disputes under the Corporations Law, with the exception of civil claims after a takeover has occurred and criminal prosecutions’: Explanatory Memorandum to the CLERP Bill. It also extended the legislative mechanism for compulsory acquisition to allow better and more efficient management of corporate groups and to reduce the opportunities for ‘greenmailing’ by minority shareholders.

Financial services reform 1.48 The separate proposals for reform of financial services and market regulation, proposed in CLERP 6, were not included in the CLERP Act reforms of 1999. These reforms had a longer gestation, and did not achieve legislative form until the enactment of the FSR Act in 2001. An important precursor to CLERP 6 was the Report of the Companies and Securities Advisory Committee (CASAC) entitled ‘Regulation of Onexchange and OTC Derivatives Markets’, released in July 1997. Innovation in the design of financial instruments during the 1990s, and the development of new trading technologies, had placed pressure on the traditional distinctions between securities and futures, and between onexchange and OTC markets. The decision in Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 56 FCR 236; 16 ACSR 148 (LEPO case) to the effect that deliverable share futures and options over shares fell outside the definition of ‘futures contract’ for the purposes of the (then) Ch 8 of the Corporations Act made these pressures clear. The CASAC [page 38] Report examined these distinctions and recommended that a ‘core regulatory approach’ be adopted for all financial markets and the

instruments traded on those markets, including securities and derivatives. CASAC argued (at [3.9]) that such an approach: … could clarify and simplify the law, thereby reducing uncertainties and compliance costs; avoid regulatory overlaps or gaps; facilitate the development of new products by eliminating unnecessary differences in the way products are regulated; reduce regulatory arbitrage, that is, artificially designing products to take advantage of different regulatory regimes; and increase the compatibility of Australian and overseas financial markets regulatory regimes.

The structure and approach of CLERP 6 was influenced by the work of the economist Robert Merton.43 The formal reform process for financial markets and investment products began in December 1997, with the release of the CLERP 6 Proposal Paper. The Paper put forward nine core proposals for discussion. The first was that there should be uniform regulation of financial instruments (including all securities, futures and other derivatives as well as foreign exchange, superannuation, general and life insurance and deposit accounts), to be achieved by developing ‘an integrated regulatory framework … providing for consistent regulation of functionally similar markets and products’. The second to fifth proposed new licensing arrangements for entities that operate a market facility, operate a CS facility, or provide financial intermediary (that is, dealing and advisory) services. The sixth was for rules covering the conduct of financial intermediaries’ business, including requirements relating to risk disclosure, confirmation documentation and periodic statements, accounts and record keeping, benefits disclosure, pressure sales, the suitability of personal product recommendations, and complaints and dispute resolution. The seventh was for a consistent and comparable disclosure regime for all financial instruments, to assist investors to make comparisons across all financial instruments. The eighth was that the market misconduct provisions of the Corporations Law, which included prohibitions on insider trading and market manipulation, should be harmonised for all markets where financial instruments are regularly traded by multiple buyers and sellers; and that rules relating to misconduct by financial advisers and dealers, including breaches of licence conditions, should be harmonised and enforced by the single regulator. The ninth related to the institutional arrangements for administration of the new regime, including the desirability of adopting the Wallis Inquiry recommendation for a single conduct and disclosure regulator covering the whole financial sector.

1.49 The Proposals Paper was followed in March 1999 by a consultation paper entitled ‘Financial Products, Service Providers and Markets: Implementing CLERP 6’. The Consultation Paper comprised 10 chapters dealing with, respectively: 1.

uniform regulation of financial products;

2.

licensing of financial service providers; [page 39]

3.

financial service provider conduct and disclosure;

4.

financial product disclosure;

5.

codes of conduct in the financial services industry;

6.

licensing of financial product markets;

7.

licensing of CS facilities;

8.

compensation arrangements;

9.

transfer of securities; and

10. misconduct and enforcement. The consultation paper raised two particular significant matters for discussion. First, it proposed a broad, functional definition of ‘financial product’. Second, it extended the reach of the reform proposals specifically into wholesale markets. The Consultation Paper proposed a broad definition of financial product that would include (among others) arrangements for making a financial investment or managing a financial risk. Making a financial investment involved two key elements — an investor giving money to another who uses the money to generate a financial return or other benefit for the investor, and the investor having no day-to-day control over the use of the money to generate the return or benefit. This was intended to encompass purchasing shares in a company, purchasing an interest in a managed investment scheme, opening a deposit or retirement savings account, purchasing a non-risk life insurance product (that is, the investment

component of life insurance products) and contributing to a superannuation fund. Managing a financial risk involved a person managing the financial consequences to them of particular circumstances occurring (whether by insurance, hedging or otherwise) or avoiding or limiting the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates). This would encompass arrangements under which financial risk exposure is transferred, financial risk is hedged or adjusted, or cash flow or price certainty is provided, including risk insurance products (both general insurance and the risk elements of life insurance), currency or interest rate swaps, and other derivatives. In relation to the regulation of wholesale markets, the Consultation Paper proposed that the new regulatory framework should apply to all financial products, whether they are made available to retail clients or not. Products that are only made available to wholesale clients would be brought within the regime so as to limit legislative barriers to retail participation in wholesale markets and foster integrity in wholesale markets. This appears to have reflected a desire on the part of policymakers that there should be no regulatory prohibition on retail consumers accessing wholesale markets, and in particular that prohibitions on retail consumers participating in OTC derivative markets should be discontinued. The proposal was that providers of wholesale products and services should be licensed, but that certain elements of the conduct and disclosure requirements would not apply where there is wholesale-only participation. These were to include requirements for professional indemnity insurance or fidelity fund arrangements and complaints handling mechanisms, and requirements to provide disclosure (in the form of Financial Services Guides or Product Disclosure Statements) and to meet suitability requirements. [page 40] 1.50 A first exposure draft of the CLERP 6 legislation was released in February 2000, and was followed in 2001 by the Financial Services Reform Bill 2001 (FSR Bill). The Explanatory Memorandum to the FSR

Bill began by noting the Wallis Inquiry’s criticism that financial system regulation was piecemeal and varied, and was determined according to the particular industry and the product being provided. This was seen as inefficient, as giving rise to opportunities for regulatory arbitrage, and in some cases leading to regulatory overlap and confusion. The purpose of the FSR Bill was to implement the Wallis Inquiry’s recommendation that there be a single licensing regime for financial sales, advice and dealings in relation to financial products, consistent and comparable financial product disclosure, and a single authorisation procedure for financial exchanges and CS facilities. It noted that the proposed regulatory framework would cover a wide range of financial products including securities, derivatives, general and life insurance, superannuation, deposit accounts and means of payment facilities, and that the requirements would apply to the activities of existing financial intermediaries such as insurance agents and brokers, securities advisers and dealers, and futures brokers, as well as any other person carrying on a financial services business. The FSR Bill was also intended to put in place a simplified authorisation process for market operators and CS facilities. The new regulatory regime was to provide a flexible and adaptable framework that encouraged innovation and competition in markets and CS facilities: Explanatory Memorandum 1.1– 1.7. The FSR Act commenced on 11 March 2002. A two-year transition period for existing financial services firms was allowed. The FSR Act repealed and replaced a range of existing regulatory requirements affecting securities and markets, most notably the then Ch 7 (securities) and Ch 8 (futures) of the Corporations Law. These were replaced by a new Ch 7 entitled ‘Financial Services and Markets’. The main object of the chapter, set out in Corporations Act s 760A, is: … to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

The move to the new regulatory arrangements provided for in the FSR Act, particularly in the areas of financial product disclosure and financial services licensing and disclosure, proved costly and difficult.44 This led

within months of the legislation coming into full effect in March 2004 to a ‘refinements’ project which made certain changes to the coverage and content of the FSR Act, not by legislative amendment, but through subordinate legislation and ASIC policy. Following a report from the Financial Sector Advisory Council on the implementation of the FSR Act and extensive lobbying from industry, a proposals paper was released in May 2005 setting out 25 proposals for refinements to the FSR Act, most of [page 41] which were adopted by December 2005. The majority of the refinements related to the disclosure requirements of the legislation, and were intended to ‘focus on ways to ensure that disclosure (both written and oral) operates effectively as an information tool for consumers, rather than a means for financial service providers to demonstrate compliance with the legislation’.45 The refinements project was followed in April 2006 by another set of reform proposals, made as part of the Corporate and Financial Services Regulation Review. Chapter 1 of the Review’s proposals paper put forward 27 matters for consideration in relation to the FSR Act, again designed to reduce the regulatory burden imposed by it. A number of these proposals resulted in legislative change in the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth).

Third wave of reform: post-GFC 1.51 The resilience of the regulatory arrangements established during the second wave of reforms was severely tested by the events in global financial markets triggered by escalating problems in the United States subprime mortgage market in 2007 and 2008. The causes and features of the widespread disruption to global equity and credit markets, which came to be referred to in Australia as the ‘global financial crisis’ (GFC), have been the subject of extensive research and analysis.46 Causative factors in the United States included high-risk lending, regulatory failure, inflated credit ratings, and investment bank abuses: Lenders introduced new levels of risk into the U.S. financial system by selling and

securitizing complex home loans with high risk features and poor underwriting. The credit rating agencies labeled the resulting securities as safe investments, facilitating their purchase by institutional investors around the world. Federal banking regulators failed to ensure safe and sound lending practices and risk management, and stood on the sidelines as large financial institutions active in U.S. financial markets purchased billions of dollars in mortgage related securities containing high risk, poor quality mortgages. Investment banks magnified the risk to the system by engineering and promoting risky mortgage related structured finance products, and enabling investors to use naked credit default swaps and synthetic instruments to bet on the failure rather than the success of U.S. financial instruments. Some investment banks also ignored the conflicts of interest created by their products, placed their financial interests before those of their clients, and

[page 42] even bet against the very securities they were recommending and marketing to their clients. Together these factors produced a mortgage market saturated with high risk, poor quality mortgages and securities that, when they began incurring losses, caused financial institutions around the world to lose billions of dollars, produced rampant unemployment and foreclosures, and ruptured faith in U.S. capital markets.47

By October 2008 the contagion effect of the deterioration in the balance sheets of global banks following the collapse of investment bank Lehman Brothers reached Australia. In October 2008 the Australian Government extended deposit and wholesale funding guarantees to Australian ADIs to stabilise the system and restore consumer confidence. 1.52 In the areas of securities and financial services law, the GFC led to a range of legislative and regulatory responses at the domestic level. Some were intended to stabilise the operation of financial markets during the crisis, while others were intended to address proximate causes of the crisis. These included changes to the rules relating to short selling of securities (see 16.30–16.31 below) and in the regulation of ratings agencies of derivative transactions and derivative trade repositories. More broadly, the effect of the GFC on asset prices, the availability of credit and the performance of particular investments or investment types resulted in significant investor losses in Australia, including at the level of retail investors and financial consumers. Losses sustained by clients of Storm Financial and Opes Prime, among others, prompted a review in 2009 by the Parliamentary Joint Committee on Corporations and Financial Services of the law regulating financial products and services, with

particular reference to the collapse of those two firms. The resulting report, entitled ‘Financial Products and Services in Australia’, was released in November 2009 (the Ripoll Report). In the Ripoll Report, the Committee reaffirmed the policy approach underlying FSR, and declined to recommend that particular investments or investment strategies should be closed to retail investors. Instead, the Committee made 11 specific recommendations for reform, including that the Corporations Act be amended to explicitly include a fiduciary duty for financial advisers operating under an AFS licence, requiring them to place their clients’ interests ahead of their own; that the government consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers; and that the Corporations Act be amended to provide extended powers for ASIC to ban individuals from the financial services industry and to suspend or cancel an AFS licence. 1.53 A number of the Ripoll Report’s recommendations were adopted by the government, including through reforms to the regulation of margin lending and as part of the FoFA reforms. The FoFA reforms made significant changes to the regulation of financial advice given to retail clients, including banning various forms of commission-based, volumebased and (in respect of geared investments) [page 43] asset-based remuneration arrangements; replacing existing suitability requirements with a statutory duty requiring financial advisers to take reasonable steps to act in their clients’ best interests and place their clients’ interests ahead of their own when providing advice; controlling ongoing advisory fees; and strengthening ASIC’s banning, licence revocation and licence suspension powers. These reforms are considered in 14.53ff. 1.54 Coinciding with the GFC-related reforms, two other significant developments occurred in the regulation of financial services and markets during this period. The first arose out of the move to competition for the provision of market (that is, trading) facilities. These changes included the

reallocation of responsibility for regulating certain aspects of market participants’ conduct from market operators to ASIC; the introduction of ASIC Market Integrity Rules in respect of particular markets and the wider ASIC Market Integrity Rules (Competition in Exchange Markets) (2011); the introduction of new mechanisms to deal with breaches of those rules, including an infringement notice regime and a Markets Disciplinary Panel; and the grant of a market licence to Chi-X Australia which offers a competing market for products traded on the ASX. These developments are considered in Chapters 10 and 11. The second significant development concerned changes to laws relating to unconscionable conduct, consumer protection and unfair contracts in the financial sector, reflecting the economy-wide rationalisation and enhancement of consumer laws through the amendment and renaming (as the CCA) of the TPA and the harmonisation with the Commonwealth law of the various state fair trading laws through adoption of the Australian Consumer Law.

TRANSITION TO A NATIONAL REGULATORY SYSTEM 1.55 Running alongside the developments in the substantive law governing securities and markets discussed above, was the transition from a wholly state-based regulatory framework to a national one. This transition began slowly, with preliminary work to harmonise companies legislation through the Uniform Companies Act (1961–62) and the establishment of the Interstate Corporate Affairs Commission in 1974. The beginning of each subsequent decade brought with it further moves in this direction. A formal co-operative scheme was established between the states in 1981, and a new National Companies and Securities Commission (NCSC) was formed to operate alongside state Corporate Affairs Commissions. In 1991, the co-operative scheme was replaced by the Corporations Law, which although still dependent on the exercise by state parliaments of their legislative powers, involved more sophisticated mechanisms to mesh administration and adjudication across the various jurisdictions. At the same time the NCSC and the state Corporate Affairs Offices were replaced by a single national companies and securities regulator, the ASC.48 In 2001, following the failure of the Corporations

Law scheme and a referral of powers from the states, the Corporations Law was replaced by the Corporations [page 44] Act 2001 (Cth), a Commonwealth law applying of its own force to the whole of Australia.

Position until 1980 1.56 The decision of the High Court in Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330 established early in the life of the Australian Federation that companies and securities laws were a matter for the states, not the Commonwealth. Over the first half of the 20th century, each state developed its own corporations and securities legislation, modelled on the English companies legislation of 1929 but containing significant regional differences.49 Each state had its own registrar of companies; and companies operating in more than one state were required to comply with varying (and sometimes inconsistent) regulatory requirements. The emergence of companies operating across state boundaries, and of national markets for securities, led inevitably to calls to standardise the law across the Australian states and territories and to eliminate (or at least reduce) overlapping or inconsistent regulatory requirements. In 1959, the Commonwealth’s Joint Committee on Constitutional Review recommended that the uniform companies legislation be adopted by the states. Model legislation based largely on the Victorian statute was prepared, and subsequently enacted (with some variations) as the Uniform Companies Act by each of the states and the Australian Capital Territory in 1961–62. Although the Uniform Companies Act achieved some measure of consistency, particularly in the numbering and arrangement of the legislation,50 it remained state legislation under the administration of the State Registrars of companies. The enactment of the securities industry legislation in 1970 did not much alter the regional nature of regulation. As the Rae Committee noted in 1974:

Beginning in 1970, four States have … enacted securities industry legislation. The New South Wales Registrar has also become the Commissioner for Corporate Affairs and the Queensland Registrar has been given the title of Commissioner. The securities industry legislation is concerned with registration of stock markets and intermediaries and with some aspects of trading in securities. The regulation of companies, including offers to the public of their securities, their accounts, takeovers and the regulation of investment companies and debenture trust deeds continues to be principally a matter for the Companies Acts. Both sets of legislation continue to be administered for the most part by the Companies Offices.

In 1970 the Eggleston Committee argued for the formation of a national Companies Commission to deal with (limited) matters related to company accounts and audit, operating alongside local Registrars: The Committee regards it as essential that a single body should be constituted and that it be empowered by each of the Companies Acts and Ordinances to grant relief from and to alter or add to particular legislative requirements … It would be an authority set up cooperatively by the States and Territories to avoid

[page 45] placing unnecessary burdens on companies and to keep the detailed accounts requirements in line with modern practice.51

Within a few years, the Eggleston Committee’s modest recommendation for a national body with responsibility for accounts and audit was overtaken by the Rae Committee’s more sweeping recommendations for a national regulator of securities markets. In its interim report in the wake of the Poseidon boom, delivered in 1971, the Rae Committee had recommended the establishment of a national regulator of securities markets and public companies. In its final report in 1974, the Rae Committee noted that: … in Australia at present there is no body or group of bodies which has, individually or collectively, the responsibility, the jurisdiction, the power and the expertise to ensure the adequacy and effectiveness of regulation of the securities market and related public company activities.

A key theme of the Rae Committee Report was: … that the securities market is largely an interacting national market. Yet not one of the Companies Offices and none of the State and Territorial Acts has a national operation. In several chapters we have described in detail how the proper understanding and detection of manipulatory and improper practices often depends upon an investigator watching

closely and concurrently the activities in several cities and then moving swiftly to collect and examine documents in these cities. An investigator confined to one capital city can frequently see only a limited part of the picture. There is a need for a body which watches closely the entire Australian securities market and which will investigate expeditiously on a national scale.52

In 1974, in accordance with the Interstate Corporate Affairs Agreement of December 1973, the governments of Queensland, New South Wales and Victoria established an Interstate Corporate Affairs Commission (ICAC), headquartered in Sydney. Western Australia joined the arrangement in 1975. The arrangement was intended to achieve: … greater uniformity in the law relating to companies and the regulation of the securities industry; to establish reciprocal arrangements and common standards and procedures; to co-ordinate the administration of the law relating to companies and thus avoid unnecessary duplication and to increase the protection afforded to the investing public.53

This was to be done through uniformity in administration and reciprocal arrangements with respect to: incorporation of companies; the regulation of the securities industry and trading in securities; registration of prospectuses; approval of trust deeds and trustees in relation to interests; requirements relating to accounts and audit; proclamation of companies as investment companies; and class and individual [page 46] exemption powers relating to fundraising and takeovers. However, ICAC was not considered a success, mostly because power remained vested in the various state bodies and co-operation between them was difficult to achieve. The more radical recommendation of Ch 16 of the Rae Committee Report, for a federal regulatory agency with full investigative and regulatory powers of its own, began to achieve more widespread support. 1.57 The ad hoc efforts at inter-state co-operation in the 1970s were replaced in 1981 with a co-operative regime established more formally between the Commonwealth and the states.54 The co-operative scheme provided for identical (or substantially identical) legislation covering companies and securities matters to be enacted in each state and territory,

and for the establishment of a national regulator. As well as the Companies Act 1981 and corresponding state codes, the legislative package included the Securities Industry Act 1981 and Codes, which were based on the 1970 New South Wales legislation, and the Companies (Acquisition of Shares) Act 1981 and Codes, which provided for the regulation of takeovers along the lines of the principles established by the Eggleston Committee and contained in the 1971 takeovers legislation. The co-operative scheme also provided for the establishment of the NCSC, which for the most part acted as a national regulator of takeovers and markets while delegating to the state Corporate Affairs Commissions the registration and regulation of companies and fundraising.

Corporations Law scheme 1991 1.58 The co-operative scheme lasted for 10 years, until 1991. In 1989, believing it had plenary power to pass a comprehensive Act on companies and securities to apply across the nation, the Commonwealth passed the Corporations Act 1989. However, in February 1990 the High Court, in a case brought by New South Wales, South Australia and Western Australia, held that the Commonwealth’s legislative power under the Commonwealth Constitution s 51(xx) to make laws with respect to trading corporations and financial corporations did not authorise those parts of the Commonwealth Corporations Act 1989 providing for incorporation of trading corporations and financial corporations: NSW v Commonwealth (1990) 169 CLR 482. That decision meant that comprehensive nationwide companies and securities legislation was impossible without co-operation between the Commonwealth and the states. Instead of a single national law, a new form of co-operative arrangement was proposed. At a meeting on 29 June 1990 held in Alice Springs between Commonwealth, state and Northern Territory Ministers, a new cooperative arrangement was agreed that gave much more extensive administrative and legislative control to the Commonwealth. The agreement reached was recorded in the Alice Springs Heads of Agreement, tabled in the Commonwealth Senate on 11 December 1990. Under the new arrangements, the Commonwealth amended the Corporations Act 1989

and the Australian Securities Commission Act 1989 so that they would apply in the [page 47] Australian Capital Territory. Each state and the Northern Territory then adopted the operative provisions of that legislation (referred to for this purpose as the ‘‘Corporations Law’) through the enactment of adopting legislation by each of their respective parliaments. Importantly, each state and the Northern Territory agreed to legislate so as to require courts and others to treat the applied law as if it were a law of the Commonwealth. The object was to simulate the effect that would have been produced if the Commonwealth had been able independently to pass one law for the whole of Australia. The Alice Springs Heads of Agreement also provided for the new ASC to be the sole administering authority, to the exclusion of state and territorial corporate affairs authorities. The Ministerial Council, which had been the main co-ordinating mechanism between the states and the Commonwealth under the co-operative scheme, was to continue, but under new arrangements giving the Commonwealth more power, the Commonwealth Attorney-General being permanently in the chair. The Council would have no control over the ASC. The Commonwealth’s power to control the introduction of new or amending legislation was also greatly enhanced. The rise in the Commonwealth’s power can be partly explained by a change in the climate of thought favouring centralised control brought about by some spectacular corporate failures during the 1980s which were thought to have tarnished the national image. The willingness of the Commonwealth to assume a larger part of the financial costs was also instrumental. 1.59 To implement the Alice Springs Heads of Agreement, the Commonwealth in 1990 enacted amendments to the Corporations Act 1989 and the Australian Securities Commission Act 1989. As part of those amendments the Commonwealth created the Corporations Law as part of the Corporations Act 1989 to be the Corporations Law of the Australian

Capital Territory. The Corporations Law was set out in s 82 of the Corporations Act 1989, and in 1990 each state and the Northern Territory passed legislation (styled, in each case, as the Corporations (Name of State) Act 1990) declaring the Corporations Law as set out in s 82 of the Commonwealth Act to be a law in force in its jurisdiction. The major part of that legislation, including that on securities, came into operation on 1 January 1991. Thus, there were really eight Corporations Laws in force in Australia, one for the Australian Capital Territory, one for each of the six states and one for the Northern Territory. The Corporations Law incorporated many of the provisions of the cooperative scheme Codes, including the Companies (Acquisition of Shares) Codes (in Ch 6 of the Corporations Law) and the Securities Industry Codes (in Ch 7 of the Corporations Law). However, the mandatory disclosure requirements in relation to the issue of securities, incorporated in Pts 7.11 and 7.12 of the Corporations Law, differed significantly from the predecessor prospectus requirements contained in the Companies Code. While the Companies Codes had prescribed the disclosure of certain specified information in relation to the offer of securities to the public, the Corporations Law included a general obligation to disclose all material matters in connection with any offer of securities that did not fall within certain prescribed categories of excluded offer. [page 48] In due course the Alice Springs Heads of Agreement were replaced by a further agreement between the various governments (entitled the Corporations Agreement) made on 23 September 1997.

Failure of the Corporations Law scheme 1.60 The efficacy of the Corporations Law as a national regulatory regime was thrown into doubt in the late 1990s by a series of High Court decisions relating to the constitutionality of the arrangements on which administration of the Corporations Law scheme rested.

In Re Wakim (1999) 198 CLR 511; 31 ACSR 99; [1999] HCA 27 the High Court held that the cross-vesting arrangements in the Corporations Law (which allowed the Federal Court and the state Supreme Courts to hear corporations matters) were incapable of conferring jurisdiction on the Federal Court. In R v Hughes (2000) 202 CLR 535; 34 ACSR 92; [2000] HCA 22, a person charged with an offence under the Corporations Law as it applied in Western Australia (that is, under the conferring Corporations (Western Australia) Act 1990 (WA)) argued that the Commonwealth Director of Public Prosecutions did not have the power to prosecute him under what was, essentially, state law.55 The uncertainty over the constitutional validity of the Corporations Law was a matter of significant concern for the Australian business community. After some delay and debate the state Attorneys-General agreed in August 2000 to resolve these concerns by referring to the Commonwealth on an interim basis the power to make laws with respect to the matters contained in the then Corporations Law and FSR Bill.

Corporations Act 2001 (Cth) 1.61 Under the agreement reached between the joint Standing Committee of Attorneys-General and the Ministerial Council for Corporations, the substance of the Corporations Law scheme, and the powers of Commonwealth authorities to carry out the scheme, were referred to the Commonwealth pursuant to s 51(xxxvii) of the Commonwealth Constitution. This provided a constitutional basis for the Commonwealth Parliament to enact the Corporations Act as a Commonwealth law applying of its own force throughout Australia.56 [page 49] The referral made by the states under s 51(xxxvii) is limited both in its scope and its duration. The referral allows the Commonwealth to enact laws in substantially the form of the Corporations Law and the FSR Bill as in force at the date of the referral, and to amend the law in relation to ‘the formation of corporations, corporate regulation and the regulation of

financial products and services’. However, the referral contains provisions that mean that the Commonwealth Parliament cannot use the powers referred to it to make laws with respect to industrial relations. Also, the referral is for a limited period, and expires unless extended periodically.57 The referral was extended in 2016. 1.62 The new Corporations Act 2001 (Cth) came into effect on 15 July 2001, replacing the Corporations Law. As a result, for the first time in its history, Australia now had a single company and securities law of national application. The referral of power that underpins the Corporations Act operates on the framework of a new Corporations Agreement 2002, discussed in 2.5 below. Under the terms of the Corporations Agreement ASIC remained, as it had been under the Corporations Law regime, solely responsible for the general administration of company law. The agreement also provided for the continued involvement of a Ministerial Council, made up of representatives of the state and territory governments and the Commonwealth Government. The Ministerial Council has the right to be consulted on amendments to the Corporations Act. As Commonwealth law, the Corporations Act operates against the background of other Commonwealth legislation on criminal law, administrative law and statutory interpretation which applies to Commonwealth legislation generally. (This is sometimes referred to as adjectival law.) For example, the Corporations Act is interpreted in accordance with the Acts Interpretation Act 1901 (Cth). Similarly, the Crimes Act 1914 (Cth) and the Criminal Code applies in relation to offences against the Corporations Act. The administration of the Corporations Act is subject to Commonwealth administrative laws including the Administrative Decisions (Judicial Review) Act 1977 (Cth), Freedom of Information Act 1982 (Cth) and Privacy Act 1988 (Cth). ___________________________ 1.

Financial markets serve various functions, including mobilising and directing savings to their most productive uses, providing price discovery through the exchange and evaluation of information, facilitating the management and pricing of risk, assisting individuals in assessing and making investment decisions by reflecting risk in the pricing of financial instruments, and facilitating capital raising by a diverse range of firms: Commonwealth of Australia, Financial Markets and Investment

Products, CLERP Proposal Paper 6, 1997, pp 20–1. 2.

A ‘managed investment scheme’ is, broadly speaking, a collective investment arrangement that is structured otherwise than as a body corporate and that is open to passive investors. Examples include listed and unlisted unit trusts, investment syndicates and limited partnerships. Investment arrangements that are prudentially regulated, such as superannuation trusts and life insurance companies’ statutory funds, are not included. The definition of ‘managed investment scheme’ is discussed in detail in 3.17–3.32 below. Managed investment schemes that are listed or are otherwise open to retail investors must be constituted, registered and operated in accordance with Ch 5C of the Corporations Act. As at 30 June 2015 there were 3642 registered managed investments schemes: ASIC Annual Report 2014–15, p 167.

3.

J Lawrence, ‘The Economics of Market Confidence: (Ac)Costing Securities Market Regulations’ (2000) 17 C&SLJ 171–2.

4.

For a detailed treatment of company law and corporate governance in Australia, see instead R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law, 16th ed, LexisNexis Butterworths, Sydney, 2013; J H Farrar and P F Hanrahan, Corporate Governance, LexisNexis Butterworths, Sydney, 2016.

5.

Commonwealth of Australia, Financial System Inquiry Final Report, 1997, p 186.

6.

The Campbell Committee of Inquiry into the Australian Financial System was established in 1979 by John Howard, when he was Commonwealth Treasurer, under the Chairmanship of Sir Keith Campbell. It was the first major governmental review of the Australian financial system since the 1936 Royal Commission into the monetary and banking system. Following the change of government in March 1983, the new Treasurer, Paul Keating, instigated a review of the Campbell Committee’s recommendations known as the Martin Review (after its chairman, V E Martin). The Martin Review reported in February 1984; it substantially accepted and adopted the Campbell Committee’s recommendations. Significant deregulation of financial institutions and capital markets followed. This included removing official controls on all bank interest rates; removing restrictions on bank borrowing and lending products; and floating the exchange rate and removing exchange controls. New approval arrangements allowed for the entry into the Australian market of new foreign banks and merchant banks. A new system of regulation for banking, based on prudential guidelines and monitoring rather than direct controls, emerged. For a more detailed description of regulatory change in the financial sector in the period between the Campbell Committee Report and the Wallis Inquiry, see A Tyree and P Weaver, Weerasooria’s Banking Law and the Financial System in Australia, 6th ed, LexisNexis Butterworths, Sydney, 2006, Ch 2.

7.

Commonwealth of Australia, Financial System Inquiry Final Report, 1997, p vii.

8.

Above, p 187.

9.

Above.

10.

Commonwealth of Australia, Financial System Inquiry Final Report, 2014, Ch 5.

11.

Above, p 8.

12.

Above, p 10.

13.

Above, p 3. See also P Hanrahan ‘Should the FSI Revisit the Philosophy of Financial Regulation?’ (2014) 8 Law and Financial Markets Review 199.

14.

Commonwealth of Australia, Financial System Inquiry Final Report, 2014, pp 4–6.

15.

Above, p 12.

16.

The ‘Poseidon boom’ refers to the rapid rise and subsequent collapse of the share price in certain Australian mining stocks from 1969–70. See, for example, T Sykes, The Money Miners: Australia’s Mining Boom 1969–1970, Wildcat Press, Sydney, 1978.

17.

Rae Committee Report, vol 1, 1974, [15.2].

18.

A Georgosouli, ‘Investor Protection Regulation: Economically Rational?’, March 2006, available at SSRN: .

19.

Commonwealth of Australia, Financial System Inquiry Final Report, 1997, p 235.

20.

Commonwealth of Australia, Best Practice Regulation Handbook, 2007, p 60.

21.

See, for example, L P Schwartz, ‘Cost-Benefit Analysis in Canadian Securities Regulation: Research Study Commissioned by the Task Force to Modernize Securities Legislation in Canada’, 31 August 2006. For a contrary view, see, for example, S M Bainbridge, ‘Mandatory Disclosure: A Behavioral Analysis’, (2000) 68 U Cin L Rev 1023, which usefully summarises the debate in the United States about the ‘market failure’ case for mandatory disclosure in securities markets.

22.

Commonwealth of Australia, Financial Markets and Investment Products — Corporate Law Economic Reform Program Proposals for Reform: Paper No 6, 1997, p 47.

23.

For a detailed discussion of the distinction between retail and wholesale investors (which varies depending on the context), see 6.17–6.25 below.

24.

As at 30 June 2015 there were 43 authorised financial markets: ASIC Annual Report 2014–15, p 167.

25.

Prior to 1 August 2010, market supervision was the responsibility of the market operator.

26.

As at 30 June 2015 there were seven licensed clearing and settlement facilities: ASIC Annual Report 2014–15, p 167.

27.

ASIC Annual Report 2014–15, p 167.

28.

See Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963; Wingecarribee Shire Council v Lehman Bros Australia Ltd (in liq) (2012) 301 ALR 1; [2012] FCA 1028; ABN AMRO Bank NV v Bathurst Regional Council (2014) 99 ACSR 336; [2014] FCAFC 65. For a discussion of the circumstances in which a financial intermediary is a fiduciary, see P F Hanrahan, ‘The Relationship between Equitable and Statutory “Best Interests” Obligations in Financial Services Law’ (2013) 7 Journal of Equity 46.

29.

The operating rules also include the ASX Listing Rules that apply to issuers.

30.

Australian Securities and Investments Commission v National Exchange Ltd (2005) 148 FCR 132; 56 ACSR 131; [2005] FCAFC 266 at [33].

31.

L Loss, Fundamentals of Securities Regulation, Little, Brown, Boston, 1983, p 1.

32.

6 Geo 1, C18, s 18.

33.

In many jurisdictions, including in a number of states of the United States, promoters are permitted to raise capital through the issue of securities of a corporation only if the corporation and the use to which the capital will be put has satisfied a minimum standard for approval by the regulator. For example, under Californian law, an offer cannot proceed unless the regulator forms the view that ‘the proposed plan of business of the applicant and the proposed issuance of securities are fair, just and equitable [and] that the applicant intends to transact its business fairly and honestly’: Cal Corp Code §24150. This kind of merit-based regulation is sometimes referred to as ‘blue sky’ regulation.

34.

25 & 26 Vict, c 89. The legislation of 1862 consolidated various company law statutes passed in England during the 1840s and 1850s, to provide for incorporation by lodgment of constituent

documents, to require associations of more than 20 members to incorporate by prohibiting them from operating as partnerships or joint stock companies, and to introduce limited liability for members: see P Lipton, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 MULR 805 at 814. 35.

P Lipton, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 MULR 805 at 820.

36.

Companies Act 1896 (Vic) s 47. For a detailed discussion of the 1896 legislation, see P Lipton, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 MULR 805 at 826–8.

37.

The Victorian Statute Law Revision Committee, in a report made in 1954, said that it had ‘heard considerable evidence, with regard to unit and option certificates, lots, concessions, and other forms of interests in or in the undertaking of business’. Noting that such forms of interest were issued outside the legislation controlling the issue of shares to the public, the Committee concluded that ‘this field provides opportunity for fraudulent practice’: Parliament of Victoria, Report from the Statute Law Revision Committee on Amendments of the Statute Law to Deal with Fraudulent Practices by Persons Interested in the Promotion and/or Direction of Companies and by Firms, 26 October 1954. In response, the Victorian Parliament introduced measures to regulate the promotion of these alternative investment arrangements. These measures prohibited the offer of interests in such schemes by anyone other than a public company, and required the issue of a prospectus in relation to the offer, the appointment of an approved trustee, and the adoption of an approved deed. For a detailed discussion of the history of collective investment regulation, see B Mees, M Wehner and P Hanrahan, Fifty Years of Managed Funds in Australia, CCLSR Preliminary Research Report, 2005.

38.

Rae Committee Report, 1974, vol 1, [15.20].

39.

For a discussion of the Australian futures market in the early 1980s, see E F Frochlich, ‘Some Features and Legal Aspects of the Futures Industry’ (1986) 60 ALJ 224.

40.

Wallis Inquiry Final Report, p 17.

41.

Treasury, ‘CLERP — Policy Framework’, 1 May 1998, available at .

42.

H Ford, R Austin and I Ramsay, An Introduction to the CLERP Act 1999: Australia’s New Company Law, Butterworths, Sydney, 2000, p 41.

43.

See, in particular, R Merton and Z Bodie, ‘A Conceptual Framework for Analysing the Financial Environment’ in D B Crane et al (eds), The Global Financial System: A Functional Perspective, Harvard Business School Press, Cambridge MA, 1995, pp 3–31.

44.

See, for example, M Adams, A Young and M Nehme, ‘Preliminary Review of Over-Regulation in Australian Financial Services’ (2006) 20 AJCL 1.

45.

Commonwealth of Australia, ‘Information Package: Refinements to Financial Services Regulation’ 19 December 2005, available at .

46.

For contemporaneous Australian perspectives on the crisis and its implication for securities and financial services regulation, see, for example, D Gruen, ‘Reflections on the Global Financial Crisis’, Address to the Sydney Institute, Economic Roundup, Issue 2, 2009, pp 51–65; J Laker, ‘The Global Financial Crisis — Lessons for the Australian Financial System’, Address to the Australian Economic Forum, 19 August 2009; and A D’Aloisio, ‘Responding to the Global Financial Crisis: The ASIC Story’, Address to the Trans-Tasman Business Circle, 30 November 2010. For key official international analyses, see United States Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report, 2011; United Kingdom Financial Services Authority, The Turner Review: A Regulatory Response

to the Global Banking Crisis, 2009; The High-Level Group on Financial Supervision in the European Union, Report, 2009. More generally, see R P Buckley and D W Arner, From Crisis to Crisis: The Global Financial System and Regulatory Failure, Kluwer Law International, 2011. 47.

United States Senate, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse — Report of the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs of the United States Senate, 13 April 2011, p 12.

48.

For a detailed discussion of the emergence of federal regulation between 1961 and 2000, see B Mees and I Ramsay, ‘Corporate Regulators in Australia (1961–2000): From Companies’ Registrars to the Australian Securities and Investments Commission’, CCLSR, 2008.

49.

See R McQueen, ‘An Examination of Company Law and Regulation 1901–1961’ (1992) UNSWLJ 1.

50.

G Sawer, ‘Federal–State Cooperation in Law Reform: Lessons of the Australian Uniform Companies Act’ (1963) 4 MULR 238.

51.

Company Law Advisory Committee (Eggleston Committee), Report to the Standing Committee of Attorneys-General on Accounts and Audit, 24 March 1970, [51].

52.

Rae Committee Report, vol 1, 1974, [15.20]–[15.21].

53.

Public Record Office of Victoria VA 679 Corporate Affairs Office, available at .

54.

The Northern Territory did not join the co-operative scheme until 1986.

55.

In Hughes the High Court held that the Commonwealth DPP was competent to prosecute Hughes under the Corporations Law because of specific Commonwealth heads of power in the Australian Constitution. Significantly, Hughes’ charges (which related to an investment scheme involving the United States) were supported by the Commonwealth’s power to regulate trade and commerce with other countries and extra-territorial matters. The decision left open the possibility that, without the link to a direct Commonwealth head of power, a conferral of authority to the Commonwealth DPP (or other authority such as ASIC) may prove to be invalid. It may not be possible to establish such a link in the absence of special facts (such as the overseas transactions present in the Hughes case).

56.

The Commonwealth Parliament has power under s 51(xxxvii) of the Constitution to make laws with respect to ‘matters referred to the Parliament of the Commonwealth by the Parliament or Parliaments of any State or States, but so that the law shall extend only to States by whose Parliament the matter is referred, or which afterwards adopt the law’.

57.

See G Williams, ‘Cooperative Federalism and the Revival of the Corporations Law: Wakim and Beyond’ (2002) 20 C&SLJ 160.

[page 51]

Chapter 2 ADMINISTRATION of the SECURITIES and FINANCIAL SERVICES LAWS Introduction Constitutional arrangements for regulation Role of the Commonwealth Treasurer Appointments Market infrastructure licensing Oversight of ASIC rule-making Directions to ASIC Statements of expectations and intent Australian Securities and Investments Commission Structure and operation of ASIC Regulatory documents issued by ASIC Administrative law controls on ASIC ASIC’s Modification and Exemption Powers Rationale for giving ASIC power to relieve Breadth of the power Exercise of the power ASIC’s Information-Gathering Powers Mandatory reporting General information-gathering powers ASIC Hearings ASIC Investigations Conducting an investigation ASIC’s power to conduct oral examinations ASIC’s power to require reasonable assistance

2.1 2.2 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.17 2.21 2.31 2.34 2.35 2.37 2.38 2.41 2.48 2.62 2.67 2.68 2.70 2.76

[page 52] ASIC’s Enforcement Role Criminal prosecutions Civil penalty proceedings Civil proceedings Administrative actions Other ASIC Act Bodies Corporations and Markets Advisory Committee Parliamentary Joint Committee

2.79 2.81 2.85 2.92 2.97 2.103 2.104 2.105

INTRODUCTION 2.1 Chapter 1 provided a broad overview of Australia’s securities and financial services laws as they apply to primary and secondary markets for securities and other financial products. This chapter explains in greater detail the current administrative arrangements under which the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) operate. In particular, it explains the role of the Commonwealth Treasurer and the role and powers of the Australian Securities and Investments Commission (ASIC) in connection with the regulation of securities and financial services. It also makes brief mention of the organisation and functions of other key bodies established under the ASIC Act, including the (now defunded) Corporations and Markets Advisory Committee (CAMAC) and the Parliamentary Joint Committee on Corporations and Financial Services (PJC).

Constitutional arrangements for regulation 2.2 As Chapter 1 explained, exclusive legislative and administrative responsibility for securities and financial services law in Australia now resides in the Commonwealth. The Commonwealth’s power to make laws with respect to securities and financial services arises in part from the referral of powers made by each of the states to the Commonwealth in

2001. Under the referral (which was renewed in 2016), each state handed over its legislative powers covering the formation of corporations, corporate regulation and the regulation of financial products and services in accordance with s 51(xxxvii) of the Commonwealth Constitution. However, the referral is not the sole source of the Commonwealth’s power in this area; for example, ASIC Act Pt 2 Div 2 (unconscionable conduct and consumer protection) is made pursuant to the Commonwealth’s power under s 51(xx) of the Constitution, to make laws with respect to ‘foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth’.1 [page 53] 2.3 The present constitutional arrangements comprise three main elements. The first is the legislation of each of the state parliaments referring certain matters to the Commonwealth Parliament in accordance with s 51(xxxvii) of the Constitution. The second is the legislation of national application, enacted by the Commonwealth Parliament in (partial) reliance on the referral, for the formation of corporations, corporate regulation and the regulation of financial products and services (including the establishment of ASIC). The third is the Corporations Agreement 2002, which sets out the political agreement reached by each of the participating governments as to how the national legislation is to work.

State referral legislation 2.4 The referring legislation (called, in each state, the Corporations (Commonwealth Powers) Act 2001) makes two separate referrals. The first confers power on the Commonwealth to enact the Corporations Bill 2001 and the Australian Securities and Investments Commission Bill 2001 in the form tabled at the time. The second confers power on the Commonwealth to amend the Corporations Act or the ASIC Act in relation to the formation of corporations, corporate regulation and the regulation of financial products and services. Each referring Act expressly provides that ‘nothing in this Act is intended to enable the making of a law pursuant to the amendment reference with the sole or main underlying purpose or

object of regulating industrial relations matters even if, but for this subsection, the law would be a law with respect to a matter referred to the Parliament of the Commonwealth by the amendment reference’: see, for example, s 1(2) of the Corporations (Commonwealth Powers) Act 2001 (Vic).

Corporations Agreement 2002 2.5 The political arrangements underpinning the referral are recorded in the Corporations Agreement 2002 (as amended in 2006). The Corporations Agreement deals with a number of matters related to the national law, including the ongoing role of the Ministerial Council for Corporations (which comprises the relevant Commonwealth, state and territory ministers), the responsibilities and functions of ASIC, the procedures for (and restrictions on) amending the national law and the referral legislation, and the funding arrangements.

ROLE OF THE COMMONWEALTH TREASURER 2.6 Ministerial responsibility for corporations and financial services law lies with the Commonwealth Treasurer. The Treasurer has certain express powers as ‘Minister’ under the Corporations Act and the ASIC Act, discussed below. The Treasurer also oversees the operation of ASIC and the other portfolio agencies regulating the financial sector.

Appointments 2.7 The Minister is responsible for making nominations or appointments to the various bodies and committees involved in the formation or administration [page 54] of corporations law, including ASIC (ASIC Act s 9), CAMAC (ASIC Act s

147),2 the Takeovers Panel (ASIC Act s 172), the Companies Auditors and Liquidators Disciplinary Board (ASIC Act s 203), and the Financial Reporting Council (ASIC Act s 235A). The Minister also appoints the chair of the Australian Accounting Standards Board (ASIC Act s 236B) and the Auditing and Assurance Standards Board (ASIC Act s 236F). The Minister is required to consult with the Ministerial Council on some of these appointments, under the terms of the Corporations Agreement. The role of these bodies is discussed in 2.103 below.

Market infrastructure licensing 2.8 Given their significance for the systemic stability of the financial system, the Minister also has a role to play in approving and regulating certain entities that provide the systems and infrastructure of financial markets, including clearing and settlement (CS) facilities. The Minister’s role and powers in relation to licensing are discussed more fully in Chapter 10 below. The power to grant a licence to operate a financial market is in the hands of the Minister under Corporations Act s 795B. The Minister also has power to grant exemptions from the licensing requirement under Corporations Act s 791C; to impose, vary or revoke conditions on an Australian market licence under Corporations Act s 796A; to suspend or cancel an Australian market licence under Corporations Act s 797C; and to disallow a change to the operating rules of a licensed market under Corporations Act s 793E. The Minister may give written directions to a licensee under Corporations Act s 794A requiring it to comply with its obligations as a licensee, and may require a special report from a licensee under Corporations Act s 794B. In relation to CS facilities, the Minister has power to grant an Australian CS facility licence under Corporations Act s 824B; to impose, vary or revoke conditions on an Australian CS facility licence under Corporations Act s 825A; to suspend or cancel a licence under Corporations Act s 826C; and to disallow a change to the operating rules of a licensed CS facility under Corporations Act s 822E. While derivative trade repository licences are granted by ASIC (rather

than the Minister) under Corporations Act s 905C, the Minister has power to give written directions to a derivative trade repository licensee under Corporations Act s 904F requiring it to comply with its obligations as a licensee.

Oversight of ASIC rule-making 2.9 ASIC’s power to make rules under Corporations Act s 798G relating to the activities or conduct of licensed markets, of persons in relation to licensed markets and in relation to financial products traded on licensed markets (the market integrity rules) is subject to Ministerial oversight. Under s 798G(3), ASIC must not make a market integrity rule (other than an emergency rule provided for in s 798G(4)) unless the Minister has consented in writing. The Minister can also [page 55] review a direction given by ASIC under s 798J at the request of an affected entity, under s 798J(5). The Minister is also involved in rule-making by ASIC under Corporations Act Pt 7.5A, which deals with derivative transaction rules and derivative trade repository rules. It is the role of the Minister to determine, by legislative instrument, the class or classes of transactions in relation to which execution requirements, reporting requirement or clearing requirements may be imposed by the derivative transaction rules, under Corporations Act s 901B. Also, ASIC must not make a derivative transaction rule or derivative trade repository rule (other than an emergency rule provided for under s 901L or s 903J) unless the Minster has consented, in writing, to the making of the rule: Corporations Act ss 901K and 903H.

Directions to ASIC 2.10 ASIC is expected to act independently of government; it has been

formally recognised by government that ‘it is imperative that ASIC continue to act independently and objectively in the exercise of its powers’: Statement of Expectations, April 2014.3 However, the Minister is able under ASIC Act ss 12 and 14 to provide limited written directions to ASIC. Section 12 of the ASIC Act allows the Minister to give ASIC a written direction as to its general policies and priorities, but not as to the conduct of a ‘particular case’: ASIC Act s 12. The Minister’s direction must be published in the Gazette and laid before each House of Parliament. The only example to date of such a direction being given was in 1992, dealing with relations between the (then) Australian Securities Commission and the Commonwealth Director of Public Prosecutions (CDPP). Cooperation between ASIC and the CDPP is now covered by a Memorandum of Understanding signed between them in 2006. The Minister may direct ASIC to carry out an investigation of certain matters where in the Minister’s opinion it is in the public interest, under ASIC Act s 14. The matters that may be investigated include those relating to alleged or suspected contravention of the Corporations Act and the ASIC Act (other than the excluded provisions),4 or a contravention of any other law concerning specified matters (including matters involving fraud or dishonesty in relation to a body corporate or financial products, or dealing in financial products).

Statements of expectations and intent 2.11 In practice, the Minister communicates his or her expectations of Treasury portfolio bodies (including ASIC) through the issue to them of a document called a ‘Statement of Expectations’. In 2003, a Review of the Corporate Governance of Statutory Authorities and Office Holders (Uhrig Review) considered various matters concerned with the corporate governance of Commonwealth statutory [page 56] authorities and office holders. Its report, released in July 2003,

recommended that Ministers should issue Statements of Expectations to their portfolio bodies to ‘clearly articulate the Government’s expectations of each body, whilst respecting areas of independence of the body in accordance with the legislation establishing it’. A Statement of Expectations was issued by (then Treasurer) Peter Costello to (then ASIC Chairman) Jeffrey Lucy on 20 February 2007. This was replaced by a new Statement of Expectations issued in April 2014. The Uhrig Review recommended that the body should respond to the Minister in a Statement of Intent outlining how it proposed to meet the Minister’s expectations. ASIC responded to the 2014 Statement of Expectations with a Statement of Intent, July 2014. Both the statements are publicly available on the ASIC website.5

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION 2.12 As cl 301 of the Corporations Agreement makes clear, ASIC has sole responsibility for the general administration of the Corporations Act and the ASIC Act. ASIC has been in existence since 1990; it was first established under its former name, the Australian Securities Commission, as a statutory corporation by s 8 of the Australian Securities Commission Act 1989 (Cth). Initially its functions were limited to acting as registrar of companies (a role previously performed by the state Corporate Affairs Commissioners) and as regulator in the areas of company law, securities and futures, and takeovers. On 1 July 1998 ASIC’s functions were expanded to include acting as consumer protection regulator in relation to the financial sector as a whole, taking over in part from the Australian Competition and Consumer Commission (ACCC) in this area. To reflect its extended role and responsibilities, its name was changed on 1 July 1998 from the Australian Securities Commission to the Australian Securities and Investments Commission. ASIC’s responsibilities were further expanded in 2009–10, to include real-time supervision of securities markets (taken over from the Australian Securities Exchange (ASX)), regulation of consumer credit and of trustee companies (taken over from the states and territories) and expanded responsibilities under the new consumer laws.6 Its mandate

was further extended in 2011 to cover the national business names register, and in 2012 new responsibilities under margin lending reforms, Stronger Super and Future of Financial Advice were added. In 2013, ASIC was given rule-making power in relation to over-the-counter derivative products. The breadth of ASIC’s mandate (as at September 2016) is illustrated in the following figure: [page 57] Figure 2.1: Breadth of ASIC mandate7

[page 58] ASIC is a body corporate with perpetual succession, which has a common seal and may acquire, hold and dispose of real and personal property (other than on trust), may enter into contracts and may sue and be sued in its own name: ASIC Act s 8. Its functions and powers are set out in ASIC Act ss 11, 12A and 13: see below. ASIC is subject to the Public Governance, Performance and Accountability Act 2013 (Cth). For the purpose of the finance law (as defined in that Act) ASIC is taken to be a non-corporate rather than corporate Commonwealth entity; to be part of the Commonwealth, and not to be a body corporate: ASIC Act s 8(1A). ASIC operates within an accountability framework that includes appearances before parliamentary committees on a regular and an ad-hoc basis to explain its actions and decisions. These include the Senate Economics Legislation Committee (which examines all Treasury portfolio agencies and reviews the annual reports of these agencies) and the PJC (which enquires into the activities of ASIC and the operation of the corporations legislation, and reviews the annual reports of bodies established under the ASIC Act).8

Structure and operation of ASIC Key functions and powers 2.13 Reflecting the constitutional underpinnings of its regulatory responsibilities, the ASIC Act contains separate provisions setting out the functions and powers of ASIC. Section 11 of the ASIC Act, which is based on the referral of powers described in 2.4 above, sets out ASIC’s functions and powers related to the administration of the Corporations Act and the ASIC Act, except the ‘excluded provisions’ (that is, ASIC Act s 12A and the consumer protection and unconscionable conduct provisions in ASIC Act Pt 2 Div 2). ASIC’s functions and powers are limited to those matters provided for in the legislation, by the doctrine of ultra vires.

Section 12A of the ASIC Act sets out ASIC’s functions and powers with respect to ASIC Act Pt 2 Div 2 and its functions as a financial sector regulator under the financial sector legislation, including the Insurance Contracts Act 1984 (Cth), Superannuation Industry (Supervision) Act 1993 (Cth), Superannuation (Resolution of Complaints) Act 1993 (Cth), Life Insurance Act 1995 (Cth), Retirement Savings Accounts Act 1997 (Cth), National Consumer Credit Protection Act 2009 (Cth), National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (Cth), Business Names Registration Act 2011 (Cth) and Business Names Registration (Transitional and Consequential Provisions) Act 2011 (Cth). By its legislation ASIC is given ‘power to do whatever is necessary for or in connection with, or reasonably incidental to, the performance of its functions’.9 Section 13 of the ASIC Act contains ASIC’s general powers of investigation. [page 59] In relation to the matters the subject of this book, ASIC’s regulatory responsibilities and functions are extensive. In addition to monitoring and enforcing compliance with Ch 6CA (continuous disclosure) Ch 6D (fundraising) and Pt 7.9 (financial product disclosure) of the Corporations Act, ASIC’s functions include supervising financial market licensees (Corporations Act Pt 7.2 Div 3 Subdiv C) and licensed CS facilities (Corporations Act Pt 7.3 Div 2 Subdiv C); regulating derivatives trading (Corporations Act Pt 7.5A); and licensing and supervising financial services providers (Corporations Act Pt 7.6). It is also responsible for consumer protection and market integrity regulation for the financial sector, including under ASIC Act Pt 2 Div 2 and Corporations Act Pt 7.10. In exercising its regulatory functions, ASIC has numerous powers and discretions conferred upon it by legislation.10 These powers are described, in broad terms, in this chapter. They include: powers to modify or exclude parts of the law as it applies generally or in a specific case; general information-gathering powers, including powers to require the production of information or books under notice;

power to conduct investigations and to require persons to give assistance in connection with an investigation, including answering questions on oath; power to require persons to provide reasonable assistance in connection with certain enforcement actions; power to conduct hearings; and power to take certain enforcement actions, including referring matters to the CDPP for prosecution, bringing civil penalty proceedings, bringing civil actions, accepting enforceable undertakings, issuing infringement notices, and taking a variety of administrative actions (such as issuing stop orders or suspending or cancelling licences). 2.14 In performing its functions and exercising its powers, ASIC must have regard to the broad principles for its operation set out in ASIC Act s 1(2). The ASIC Act has effect, and is to be interpreted, in accordance with these principles. They include that ASIC must ‘strive to maintain, facilitate, and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy’ and ‘promote the confident and informed participation of investors and consumers in the financial system’.

Organisation 2.15 Section 9 of the ASIC Act provides that ASIC is to consist of not fewer than three or more than eight members, at least three of whom must be full-time members. From its establishment in 1990 until 2008, the membership of ASIC was maintained by three full-time members: the Chairman, the Deputy Chairman and [page 60] a Commissioner. In August 2008, ASIC’s membership was increased to five; it later rose to six. The members are appointed by the GovernorGeneral on the nomination of the Minister.11

Under the terms of the Corporations Agreement, the Commonwealth agreed with the states to maintain certain regional services and offices. ASIC is required to establish a regional office in each state and territory and may establish such other offices as it thinks fit. In deciding the number and location of its offices ASIC is directed by the legislation to ensure that it serves adequately the needs of business communities throughout Australia: ASIC Act s 95. ASIC has a regional office for each state and territory under the charge of a Regional Commissioner. There is a central information processing centre in the La Trobe Valley, Victoria.

Delegation by ASIC 2.16 ASIC may delegate any of its functions and powers to a person (including a body corporate) by writing under its common seal: ASIC Act s 102(1). Generally, such delegations are made to the individual members of ASIC (that is, the Chair, Deputy Chair or a Commissioner) or to ASIC staff. However, the legislation does contemplate delegation of ASIC’s powers in certain circumstances to staff of the Australian Prudential Regulation Authority (APRA) or the ACCC, with the written consent of the relevant agency head. A delegate remains subject to ASIC’s directions and their acts as such are treated as acts of ASIC: ASIC Act s 102. The delegation may be to the holder of a specified office rather than to a designated person.12 In deciding whether to delegate its powers to a particular person or in a particular case, ASIC must seek to ensure that persons who make decisions affecting a particular business community are located as close to that community as practicable; and that members of business communities throughout Australia have prompt and convenient access to decisionmaking and to ASIC’s facilities: ASIC Act s 102(4).

Regulatory documents issued by ASIC Regulatory Guides 2.17 Unlike regulatory agencies in some other jurisdictions (for example, the Securities and Exchange Commission in the United States), ASIC does

not have wide-ranging formal rule-making powers under the Corporations Act or the ASIC Act. The exceptions are ASIC’s rule-making powers under s 798G (market integrity rules) and s 901A (derivative transactions rules). However, it does have the power to grant relief from the law in certain circumstances: see 2.31 below. Notwithstanding its lack of formal rule-making power in many areas, ASIC routinely develops and publishes statements of policy with which regulated [page 61] persons are accustomed to comply. This is possible because the discharge by ASIC of its various functions and powers often involves the exercise of a discretion, for example, as to whether to approve an application, grant a request for relief or take enforcement action. ASIC’s policies and procedures set out how those discretions are or will be exercised. From July 2007, the policies and procedures are set out in formal, numbered documents called ASIC Regulatory Guides. The Regulatory Guides (RG) reissued or replaced a range of regulatory documents previously issued by ASIC, including policy statements, practice notes, guides or guidelines, and answers to frequently asked questions. ASIC’s stated intention for the Regulatory Guides is to provide ‘guidance to regulated entities by: explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act), explaining how ASIC interprets the law, describing the principles underlying ASIC’s approach, and giving practical guidance (for example, describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations)’: see ASIC: A Guide to Our Regulatory Documents, June 2007. There are more than 250 Regulatory Guides on issue, dealing with a wide variety of subject matter. 2.18 While the formulation of guidelines and policies by an administrative agency such as ASIC is both appropriate and useful, it is important to remember that (unless the legislation provides otherwise) the

policy does not create a binding rule.13 Regulatory Guides are policy documents to which a court may have regard if relevant but they are not binding.14 ASIC may be permitted or required to depart from the stated policy if the circumstances demand it. In Skoljarev v Australian Fisheries Management Authority (1995) 133 ALR 690, 696 (FCA); aff’d (1996) 41 ALD 481, Davies J observed that ‘rules and standards are important, both as a means of giving effect to lawful policy which a government or an authority has determined and wishes to be implemented and as a means of ensuring that decisions, because they have been taken by reference to rules or settled standards, are fair, consistent and not arbitrary’. However, ‘absent a statutory provision requiring compliance with policy, a decisionmaker may depart from policy and, in an appropriate case, should do so’. As to the circumstances in which departure from policy is justified, his Honour concluded that they are impossible to define or delineate, beyond saying that ‘the decision [to depart] must be made having regard to the decision and its context, the nature and ramifications of the policy and the nature and consequences of the individual circumstances which are relied upon’. In review of ASIC decisions by the Administrative Appeals Tribunal (AAT) (see 2.22 below), the existence and content of ASIC policy may be a relevant fact which the AAT is bound to consider. Where it is, ‘a serious misconstruction of [the policy’s] [page 62] terms or misunderstanding of its purposes in the course of decision-making may constitute a failure to take into account a relevant factor and for that reason may result in an improper exercise of the statutory power’.15 Applicable Regulatory Guides have been held to be relevant in interpreting the conditions imposed by ASIC on an Australian financial services (AFS) licence.16

Legislative instruments (formerly, Class Orders) 2.19 ASIC has power under the Corporations Act to grant relief from the

operation of particular provisions of the Act, including the fundraising provisions (Corporations Act Pt 6D.4); the financial services licensing requirement (Corporations Act s 911A(2)(l)); the financial services disclosure requirements (Corporations Act s 951B); the financial product hawking restrictions (Corporations Act s 992B); the financial product disclosure requirements (Corporations Act s 1020F); and the title and transfer provisions (Corporations Act s 1075A). ASIC’s modification and exemption powers are discussed in 2.31ff below. Where ASIC exercises its power to grant relief in relation to a class of persons (rather than an individual), it will do so by way of legislative instrument. Until 2015, these legislative instruments were known as ‘class orders’.17 These legislative instruments are enduring documents which have the effect of modifying the law as it applies to the specified class of persons in the specified circumstances. In some cases, an affected person is required to take certain active steps to avail themself of the relief provided, while in others the application of the relief is automatic. A number of important class orders and legislative instruments have been made by ASIC that modify or exclude the securities and financial services laws; they are discussed throughout the book.

No-action letters 2.20 Even where ASIC has no specific power to modify or grant exemptions from the Act, it has some discretion as to how it exercises its enforcement powers. To provide guidance on the way it intends to exercise its discretions in relation to enforcement, ASIC may release a Regulatory Guide indicating what it will accept as sufficient compliance with the Act in a particular class of cases — this is referred to as a ‘class no-action position’ under Pt D of ASIC Regulatory Guide 108 — No-action Letters, December 2009 (RG 108).18 Alternatively, it may issue a ‘no-action letter’ to [page 63] an individual applicant, stating that it does not intend to take regulatory

action over a particular state of affairs or particular conduct: see ASIC RG 108.1. ASIC’s policy is to issue a no-action letter only where, in its view, it would serve a clear regulatory purpose (such as business facilitation) to provide such a letter, and it would not advance the policy of the legislation to take enforcement action in relation to the relevant conduct. ASIC will generally issue no-action letters only where it has not yet settled its views on a subject, or for circumstances that arise infrequently. Where its position is settled and can be generalised, ASIC will instead publish that position as a Regulatory Guide. ASIC RG 108 makes clear that a no-action letter conveys a policy decision, not a legal opinion. Importantly, it does not preclude third parties (including the CDPP) from taking legal action in relation to the conduct, or conduct of the kind, covered by the no-action position; nor will it necessarily impede a court from holding that such conduct infringes the legislation. If events or circumstances change, ASIC may review or withdraw a no-action letter.

Administrative law controls on ASIC 2.21 The exercise by ASIC of its various regulatory functions and powers is subject to a variety of administrative law controls. These include merits review of ASIC’s decisions by the AAT; judicial review of decisions by the Federal Court; and control of the members of ASIC by the High Court.

Review by the AAT 2.22 Under the Corporations Act and the ASIC Act, ASIC is given power to make decisions on a wide range of matters. They include decisions related to licensing, granting relief from or modifying the law, intervening in takeovers, investigating, providing information to other agencies and authorities, and litigating. Both the Corporations Act and the ASIC Act provide for a merits review of ASIC’s decision-making in certain of these areas to be carried out by the AAT.19 The review is conducted in accordance with the Administrative Appeals Tribunal Act (1975) (Cth) (AAT Act). Section 25 of the AAT Act relevantly provides that a Commonwealth

statute (such as the ASIC Act or the Corporations Act) ‘may provide that applications may be made to the Tribunal … for review of decisions made in the exercise of powers conferred by that enactment’. The AAT Act defines ‘decision’ widely as including doing or refusing to do any act or thing; however, it is clear that not all actions taken by ASIC are ‘decisions’ for this purpose. Application for review can be made by any person whose interests are affected by the decision, under s 27 of the AAT Act. Review of ASIC decision-making by the AAT is possible in the circumstances set out in Corporations Act Pt 9.4A and ASIC Act s 244. Part 9.4A of the Corporations Act provides for a review by the AAT of a decision made under the Corporations Act [page 64] (subject to some exceptions) by the Minister, ASIC or the Companies Auditors and Liquidators Disciplinary Board: Corporations Act s 1317B. Decisions that cannot be reviewed by the AAT are set out in Corporations Act s 1317C — they include decisions in respect of which a provision in the nature of an appeal or review is expressly provided by the Corporations Act and a decision that is declared to be final or conclusive evidence of some matter. Nor is a decision by ASIC to deregister a company or a decision to seek an order for examination of persons by a court reviewable by the AAT. Specific decisions made by ASIC in connection with securities and financial services regulation excluded from review by the AAT include: a decision to make an application to a court under s 1325A, s 1325B or s 1325C; a decision to make market integrity rules under s 798G; a decision to take action under s 798K; decisions relating to derivative transaction rules under ss 901A and 903A; a decision to take action under s 901F or s 903E; a decision to approve a code of conduct under s 1101A; a decision to make a determination under s 1317D(3); and a decision to issue or withdraw an infringement notice under s 1317DAC or s 1317DAI. Certain relevant decisions by the Minister are also excluded from review by the AAT, under s 1317C(gcb), (gd) and (gda).

Section 244 of the ASIC Act allows for application to be made to the AAT for a review of a decision by ASIC to make an order under ASIC Act Pt 3 Div 8. Division 8 is discussed below; it allows for ASIC to make certain orders where, in its opinion, information about affairs of a body corporate or financial products needs to be found out for the purposes of the exercise of any of ASIC’s powers under ASIC Act Pt 3 (dealing with investigations and information-gathering) and that information cannot be found out because a person has failed to comply with a requirement made under Pt 3. 2.23 Reviewable decisions include certain key ASIC decisions that affect a person’s capacity to conduct regulated activities (including decisions suspending or cancelling AFS licences under Corporations Act s 915C or banning individuals from providing financial services under Corporations Act s 920A). In these cases, applicants for review are generally concerned to ensure that there is no disruption to their business pending the AAT’s decision. Frequently, applicants will apply for stay and confidentiality orders in these circumstances, under ss 41 and 35 of the AAT Act respectively.20 The basis on which such orders should be granted is considered in Australian Securities and Investments Commission v Administrative Appeals Tribunal (2009) 181 FCR 130; [2009] FCAFC 185 Downes and Jagot JJ emphasised that the decision to grant such an order involved the balancing of competing interests — those of the person the subject of the order to preserve their business and reputation, of clients to be protected and of the market to be informed. The majority noted (at [53]–[54]) that a banning order is made following the holding of a confidential hearing and on the basis [page 65] of a published statement of reason; and that the order must be publicised by ASIC in accordance with the Act. Downes and Jagot JJ considered that, for the AAT to: … form an opinion under s 41(2) of the AAT Act (that it would be desirable and in the

‘interests of any persons who may be affected by the review’ to make an order staying or otherwise affecting the operation or implementation of ASIC’s decision) these elements of the statutory regime, and the balance between the competing interests that they represent, must be treated as a fundamental element in the weighing of the competing considerations.

In relation to AAT Act s 35, and noting that suppression orders are rarely made in courts even though publicity undoubtedly disadvantages the parties, their Honours said (at [76]): When measured against the existence of the norm of a public hearing and the scheme established by the Corporations Act with respect to banning orders, it is apparent that the AAT would need some cogent reason by reference to the particular case to depart from the ordinary requirement of a public hearing. It is difficult to accept that harm (even serious harm) to the recipient’s reputation resulting from public awareness of the banning order will be a sufficiently cogent reason to justify the grant of a stay in most cases. This is because the risk of harm of this type is inherent in the nature of a banning order.

2.24 Under s 43 of the AAT Act, the AAT may affirm, vary or set aside the decision under review. The process undertaken by the AAT is sometimes referred to as a ‘merits’ review, because the role of the AAT is to satisfy itself that the decision under review was the correct or preferable one on the material before it.21 This contrasts with judicial review, which is directed at whether the reasons given by the decision-maker were adequate or defective. The AAT ‘does not simply review the adequacy of the primary decision-maker’s reasons’. It must ‘make its decision de novo’.22 In carrying out its review, the AAT stands in the shoes of ASIC. For the purpose of determining whether the decision under review was the correct or preferable decision on the material before it, the AAT ‘may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision’: AAT Act s 43(1). Accordingly, the AAT ‘is not confined to the decision-making power upon which the previous decision-maker actually relied in making the decision under review, but is armed with all the powers and discretions of the original decision-maker that are relevant to the review’.23 It is all the ‘powers and discretions’ which ASIC had when making the disqualification order, not the procedures which bind ASIC, to which the AAT accedes.24 [page 66]

2.25 Appeal from a decision of the AAT on a question of law is permitted under s 44 of the AAT Act.25 Whether in a particular case the facts as found answer a statutory description or satisfy statutory criteria will very frequently be exclusively a question of law.26 The process of construction may, in some cases, involve a question of mixed fact and law, but where on the facts as found, only one conclusion is open, the question is exclusively one of law.27 The Full Federal Court has characterised the distinction to be drawn as being: … between the factum probandum (that is, the ultimate fact in issue) and the facta probantia (the facts adduced to prove the ultimate fact). Where the factum probandum involves a term used in a statute (or a quasi-statutory instrument) the question whether the accepted facta probantia establish the factum probandum will generally be one of law.28

Review by the Federal Court 2.26 Where the complaint about a decision of ASIC is as to the process used by ASIC rather than the merits of the decision, an application may be made for judicial review by the Federal Court of Australia or the Federal Circuit Court under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act). Broadly speaking, review under the ADJR Act goes to whether a decision-maker has acted fairly and within his or her powers in coming to a decision. The ADJR Act applies to ‘a decision of an administrative character made under an enactment’.29. A person aggrieved can ask the court for an order of review in relation to a decision to which the Act applies (ADJR Act s 5), conduct engaged in for the purpose of making a decision to which the Act applies (ADJR Act s 6), or failure to make a decision to which the Act applies (ADJR Act s 7). 2.27 In examining the decision or conduct, the court is concerned with its legality, rather than its merits. Grounds for review include absence of natural justice or procedural fairness, ultra vires, jurisdictional error, error of law or fraud. This reflects the ‘limited confines of judicial review … in which fairness of the process rather than fairness of the outcome is the main concern’.30 A court conducting judicial review [page 67]

has no jurisdiction simply to correct administrative error or injustice.31 Section 39B of the Judiciary Act 1903 (Cth) gives the Federal Court jurisdiction ‘with respect to any matter in which a writ of mandamus or prohibition or an injunction is sought against an officer or officers of the Commonwealth’. This includes officers of ASIC.32 Section 39A enables proceedings to be commenced in the Federal Court by use of the old administrative law procedures available under the writs of mandamus and prohibition and the remedy of injunction, and allows the High Court to remit to the Federal Court, in accordance with s 44 of the Judiciary Act, actions commenced in the High Court under s 75(iii) or (v) of the Constitution: see 2.28 below.

Control by the High Court 2.28 Because the members of ASIC are appointed by the GovernorGeneral on the nomination of the Minister they are officers of the Commonwealth for the purposes of s 75(v) of the Commonwealth Constitution.33. As officers of the Commonwealth they are amenable to a writ of mandamus or prohibition or an injunction issued by the High Court in its original jurisdiction. The constitutional writs are directed at jurisdictional error, as distinct from other types of error of law.34

Oversight by the Commonwealth Ombudsman 2.29 Defective administration by ASIC can be the subject of a complaint to the Commonwealth Ombudsman, under the Ombudsman Act 1976 (Cth). The Ombudsman is an independent person appointed to investigate complaints about action that relates to matters of administration taken by Commonwealth Government officials or Commonwealth agencies. The Ombudsman is given wide powers to question officials and other persons and to inspect documents and premises. If the Ombudsman finds evidence of defective administration, this fact is reported to the agency and the responsible Minister. The Ombudsman will usually make recommendations that certain action be taken to remedy the conduct complained about. If the recommendations are not acted upon, the Ombudsman can inform the Prime Minister and make a report on the matter to the Parliament.

Oversight by the Office of the Information Commissioner 2.30 Following reforms to the freedom of information and privacy regimes in 2010, ASIC is also subject to oversight by the Office of the Information Commissioner. ASIC is subject to the Freedom of Information Act 1982 (Cth) (FOI Act). Importantly, FOI Act s 11 provides that every person has a legally enforceable right of access [page 68] to documents of agencies and official ministerial documents, subject to certain exceptions and exemptions. Section 14 of the Privacy Act 1988 (Cth) restricts the collection by ASIC of personal information to collection for a lawful purpose directly related to a function or activity of ASIC. The Information Commissioner is empowered to investigate alleged breaches of the principles as to privacy of information set out in the legislation.

ASIC’S MODIFICATION AND EXEMPTION POWERS 2.31 One of the most significant functions that ASIC performs in the area of securities and financial services regulation is the exercise of its statutory powers to modify the application of, or grant exemptions from, provisions of the Corporations Act. Its general exemption and modification powers extend to (among others) the fundraising provisions (Corporations Act s 741); the provisions regulating derivative transactions and derivative trade repositories (Corporations Act s 907D); the financial services licensing requirements (Corporations Act s 926A); the financial services disclosure requirements (Corporations Act s 951B); certain conduct requirements relating to financial products and financial services (Corporations Act s 992B); the financial product disclosure requirements (Corporations Act s 1020F); and the securities title and transfer provisions (Corporations Act s 1075A).35

2.32 While the language is not identical in all the provisions, the exemption and modification powers generally give ASIC power to exempt a person from the relevant law, or to declare that the law applies to a person as if specified provisions were omitted, modified or varied as specified in the declaration. The exemption or declaration may apply to all or specified provisions of the relevant law; apply to all persons, specified persons, or a specified class of persons; relate to all financial products, specified financial products or a specified class of financial products; and relate to any other matter generally or as specified. An exemption may apply unconditionally or subject to specified conditions. If it is subject to conditions, the person to whom it applies must comply with the conditions, and ASIC has standing to seek orders from the court that the person complies. Usually, an exemption or declaration must be in writing, and ASIC must publish notice of it in the Gazette. The exception is for some exemptions granted under Corporations Act s 907D (derivative transactions and derivative trade repositories) and for certain exemptions and declarations made under Corporations Act s 926A (financial services licensing), which are legislative instruments for the purposes of [page 69] the Legislative Instruments Act 2003 (Cth) and, accordingly, must be publicised in accordance with the requirements of that Act. 2.33 ASIC publishes a quarterly report providing an overview of situations where ASIC has exercised, or refused to exercise, its exemption and modification powers from the financial reporting, managed investment, takeovers, fundraising or financial services provisions.36

Rationale for giving ASIC power to relieve 2.34 ASIC’s power to grant exemptions and modifications is conferred by the Commonwealth Parliament to resolve an inherent tension between the need for comprehensive and detailed regulation in the area of securities

and financial services on the one hand, and for commercial flexibility on the other. As the Eggleston Committee recognised as early as 1970, there are ‘inherent difficulties in formulating statutory requirements which will at all times and in all circumstances be properly and fairly applicable to all companies and groups of companies regardless of their size, the nature of their operations or the number and character of their shareholders’: Eggleston Committee Report, vol 1, [42]. For that reason the Eggleston Committee recommended the establishment of a companies commission with the power to grant relief from legislative requirements in the areas of company accounts and prospectus disclosure in particular: see 1.56 above. Conferring the power to grant relief on ASIC allows for an independent and competent authority to modify or grant exemptions from the strict requirements of the law in appropriate circumstances. As the High Court noted in Australian Securities and Investments Commission v DB Management Pty Ltd (2000) 199 CLR 321; 33 ACSR 447; [2000] HCA 7 at ACSR 454 (in relation to ASIC’s exemption and modification power for takeovers) these powers are ‘a legislative response to a problem of policy concerning regulation of takeovers’ which ‘involved a compromise between the technique of general legislative prescription applying inflexibly to all cases, and that of administrative discretion addressing issues on a case by case basis’. In the case of Ch 7 of the Corporations Act, ASIC’s power to grant exemptions and modifications enables the legislature to adopt a broad, functional approach to regulation while dealing with the possibility that some things, while technically caught by the legislation, should be excluded from it: see, for example, the Explanatory Memorandum to the Financial Services Reform Bill, [6.32].

Breadth of the power 2.35 There are no statutory limitations on ASIC’s power to relieve, beyond the inherent limitation that the power must be exercised for the purpose for which it was conferred. This has been broadly interpreted. The breadth of ASIC’s modification power in connection with takeovers

was confirmed by the High Court in Australian Securities and Investments Commission [page 70] v DB Management Pty Ltd (2000) 199 CLR 321; 33 ACSR 447; [2000] HCA 7 at ACSR 458, with the effect that, in the words of the Takeovers Panel, it ‘permeates every aspect of every takeover’.37 The effect of the decision in DB Management was to allow ASIC to vary provisions of the (then) Corporations Law, even to the extent of abrogating individual property rights.38 2.36 When they were first enacted, the exemption and modification powers provided to ASIC in respect of Ch 7 of the Corporations Act generally contained a limitation that they could not be exercised by ASIC to modify provisions such that they applied in relation to persons or financial products to which they would not otherwise have applied: former Corporations Act ss 951B(2), 992B(2) and 1020F(3). However, those restrictions were removed by the Financial Services Reform Amendment Act 2003 (Cth) (which Act also introduced Corporations Act s 926A). The Explanatory Memorandum to the Financial Services Reform Amendment Bill stated (at [3.79]) that: The exemption and modification powers given to ASIC in parts of the Act outside of Chapter 7 … which do not contain the limitation have been in place for some time, and there is no evidence that ASIC has ever used those powers inappropriately. The powers are invariably used in order to provide some form of concessional treatment, rather than to impose additional obligations. In addition, ASIC’s use of its exemption and modification powers is subject to a number of safeguards to ensure that the powers are not abused, including administrative review by the Administrative Appeals Tribunal, judicial review and consideration in appropriate circumstances by the Commonwealth Ombudsman.

It appears that the exemption and modification powers in Ch 7 of the Corporations Act (that is, Corporations Act ss 926A, 951B, 992B, 1020F or 1075A) are intended to be sufficiently broad to allow the creation, by ASIC, of criminal offences.39 This is contemplated by the sections themselves, which each provide that: … if conduct (including an omission) of a person would not have constituted an offence if

a particular [modification] had not been made, that conduct does not constitute an offence unless, before the conduct occurred … the text of the declaration was made available by ASIC on the Internet, or ASIC gave written notice setting out the text of the declaration to the person.

In a prosecution based on a provision as modified, the burden of proof is on ASIC to show that the notice requirement was met. The Explanatory Memorandum to the Financial Services Reform Bill states (at [6.129]– [6.131]) that: In the Bill there are a number of proposed provisions that give ASIC the power to make exemptions or modifications to proposed Chapter 7 (for example, proposed sections 951B and 1020F). These provisions contain a requirement that ASIC must notify a person in writing about a modification or make it available on the Internet before such a modification can result in the person having any additional

[page 71] criminal liability. Generally, exemptions are not subject to the same notice requirements, as contraventions of exemptions do not give rise to any additional criminal liability … These proposed provisions will ensure that people cannot potentially be subject to criminal liability for failing to comply with requirements about which they could not have been aware.

Exercise of the power 2.37 In each relevant case the Corporations Act does not set out criteria governing the granting of exemptions or modifications. (In contrast, ss 655A and 673 which concern exemptions from or modifications of the takeover laws, require ASIC to consider the purposes of Ch 6 set out in s 602 in exercising its powers). However, this does not mean the power can be exercised ‘for any reason whatever or for no reason at all’.40 The decision-maker may only exercise a power or discretion under the Act for the purpose for which it was given.41 In the exercise of its discretions under the Ch 7 exemption and modification powers, ASIC should have regard to the objectives set out in s 760A. In Re Queensland Power Trading Corporation and Australian Securities and Investments Commission, (2005) 89 ALD 346; [2005] AATA 945 which concerned ASIC’s decision to refuse to grant an

exemption from the Australian financial services licensing requirement in s 911A(1), the tribunal set out the principles guiding its (de novo) exercise of the power (at [87]), saying that: A decision-maker contemplating the exercise of the discretion to exempt someone from the obligation to hold an AFSL must not lose sight of the fact the power is given in order to provide relief from the strict operation of the rules. It is therefore appropriate to have regard to the individual circumstances of the person seeking the exemption. If the operation of the rules would lead to unusually burdensome results for the applicant, a decision-maker should consider granting relief provided the objectives of the regulation are not compromised … While the decision-maker would be sympathetic to requests for relief in cases where an exemption would clearly advance the objectives of the Act, it should be circumspect in other cases. Parliament has created a regulatory regime that was intended to apply to all but exceptional cases. The regime would be undermined if exemptions were given without good reason.

The manner in which ASIC exercises its exemption and modification powers is set out in various ASIC Regulatory Guides (see 2.17 above) dealing with specific circumstances and applications of the power. These include ASIC Regulatory Guide 21 — How ASIC Charges Fees for Relief Applications, January 2006; ASIC Regulatory Guide 51 — Applications for Relief, December 2009; ASIC Regulatory Guide 167: Licensing: Discretionary Powers, April 2016; and ASIC Regulatory Guide 254 — Offering Securities under a Disclosure Document, March 2016 and the numerous regulatory guides listed in Appendix 2 to RG 254. [page 72]

ASIC’S INFORMATION-GATHERING POWERS 2.38 ASIC collects information relevant to the exercise of its regulatory functions in a number of ways. These include through general intelligence, such as complaints made by the public, and through its own economic research and analysis of publicly available information. Beyond this, ASIC is entitled to require the provision to it of information in certain circumstances. This occurs in one of four main ways. The first is through the lodgment by regulated entities and others of reports, documents and

other information as required by law, either periodically or on the happening of a particular event, including reportable breaches of the law. This is discussed briefly in 2.41–2.47 below. The second is through the exercise by ASIC of statutory powers to require the provision of information or books in connection with what it describes as ‘surveillance’: that is, otherwise than in connection with a formal investigation into suspected misconduct. This includes ASIC’s power to require the production of documents, its power to inspect documents, its power to require the disclosure of certain information under notice, and its power to require the assistance of certain licensees: see 2.48–2.61 below. The third is its hearings power, which is discussed in 2.62–2.66 below. The fourth is through the exercise of its powers in connection with investigations and following the commencement of proceedings, including its power to require a person to attend an examination and answer questions under oath, its power to compel assistance with an investigation or proceedings, and its search warrant powers: see 2.67–2.78 below. 2.39 ASIC’s extensive information gathering powers, and its approach to exercising them, are explained in ASIC Information Sheet 145 — ASIC’s Compulsory Information Gathering Powers, September 2015. The powers are used in connection with both surveillances and investigations. As the document explains, ‘the difference between the two types of inquiries lies in the range of information-gathering powers we are able to use, and the purpose for which the information is gathered’. The Information Sheet provides that: Formal investigations occur when we suspect there has been a contravention of a law relating to our regulatory responsibilities, which include regulation of corporations, financial services and consumer credit. Only formal investigations can invoke the use of all our powers to conduct an examination and to request reasonable assistance. After a formal investigation begins, we can also apply for and obtain search warrants when the circumstances call for it. We seek to find out whether there is evidence that a suspected contravention has occurred. If that evidence exists, we consider what action should be taken. A surveillance inquiry can utilise only our powers to inspect documents and compel the production of documents or the disclosure of information. Its purpose is to test and ensure compliance with the law.

2.40 ASIC is required to take all reasonable measures to protect

information that is given to it in confidence or in connection with the performance of its functions under the corporations legislation from unauthorised use: ASIC Act s 127(1). ASIC has described its practice in the disclosure of information obtained under its [page 73] compulsory powers in ASIC Regulatory Guide 103 — Confidentiality and Release of Information, February 1996. Disclosure that is required or permitted under certain laws is authorised: ASIC Act s 127(2). ASIC may provide information to other government agencies whether Commonwealth, state, territorial or foreign: ASIC Act s 127(4). Thus, for example, it can supply information it has obtained to a Royal Commission.42 Where ASIC has obtained information under compulsion, the exercise by ASIC of its power to give information is subject to the interest of the person providing it in its confidentiality. ASIC should, consistently with the principles of natural justice, give an examinee an opportunity to be heard before making the confidential record available for public hearings. There may be exceptional situations where the principle does not require that, as where to do so would frustrate an investigation by the recipient authority. ASIC may disclose the information subject to a condition that it is not published without ASIC’s consent.43

Mandatory reporting 2.41 ASIC’s first source of information about regulated entities and markets comes from the documents and reports that various persons are required to lodge with it under the Corporations Act, either periodically or on the happening of a particular event. Particular reporting obligations are imposed by legislation on securities issuers (which must be public companies), Australian financial services licensees, market licensees, CS facilities, and various gatekeepers involved in the operation of primary and secondary markets.

Misconduct and breach reporting

2.42 The Corporations Act imposes obligations on a number of entities connected with the operation of primary and secondary markets, to report breaches and instances of misconduct when they arise. These include obligations imposed on market operators, CS facilities, derivative trade repositories, financial services licensees, and certain ‘gatekeepers’ such as auditors and trustees. 2.43 The holder of an Australian market licence is required to provide written notice or to report to ASIC in a number of circumstances, involving either breach by the licensee of its own statutory obligations, or certain matters affecting participants. This includes where the market operator takes disciplinary action against a participant, or has reason to suspect that a person has or will contravene the operating rules or the Act: Corporations Act s 792B. The actions of the licensees are protected by qualified privilege under the Corporations Act Pt 7.12 Div 1. These obligations are discussed in 10.17 below. [page 74] 2.44 The holder of an Australian CS facility licence is under a similar obligation to notify ASIC of, or to report to ASIC on, certain matters, including where it takes disciplinary action against a participant in the facility or has reason to suspect a contravention of its operating rules or the Act: Corporations Act s 821B. The actions of an Australian CS facility licensee are also protected by qualified privilege under Corporations Act Pt 7.12 Div 1. These obligations are discussed in 10.30 below. 2.45 The holder of a derivative trade repository licence must notify ASIC of certain information uneder Subdiv A, Div 5 of Pt 7.5A of the Corporations Act. 2.46 The holder of an AFS licence is required to notify ASIC of certain matters under Corporations Act s 912D, and to provide information to ASIC about its authorised representatives under Corporations Act s 916F. AFS licensees are also subject to special financial reporting requirements in Corporations Act Pt 7.8 Div 6, and are required by the conditions placed

on its AFS licence to notify ASIC of matters such as a material adverse change in financial position: Corporations Regulations 2001 (Cth) (Corporations Regulations) reg 7.6.04. These obligations are discussed in 13.36 below. 2.47 The Corporations Act imposes duties on certain people, sometimes described as ‘gatekeepers’, to notify ASIC of breaches of the law or other irregularities that they may discover in the course of performing their statutory functions. This includes trustees for debenture holders, auditors, compliance committee members, receivers, administrators and liquidators: Corporations Act ss 283DA, 311, 601HG, 990K, 601JC, 422, 438D and 533. Those reporting to ASIC are afforded qualified privilege in most cases, which protects them from defamation proceedings when acting honestly: Corporations Act ss 442E, 426, 535, 601JE, 601HG, 990L and 1289.

General information-gathering powers 2.48 The second group of information-gathering powers granted to ASIC are those allowing it to require the provision to it of specific information related to the offer of securities and other financial products, the operation of financial markets and the provision of financial services. The exercise of these powers does not depend upon ASIC having commenced a formal investigation in accordance with ASIC Act s 13: see 2.67 below. These include: its general power to inspect books kept in accordance with the corporations legislation, under ASIC Act s 29; its powers to require the production of books and audit information under notice, pursuant to ASIC Act Div 3 Pt 3; its powers to require the disclosure of certain information, including under ASIC Act Pt 3 Div 4, Corporations Act s 912C and the consumer laws in ASIC Act Pt 2 Div 2; and its power to compel certain licensees to assist it, including under Corporations Act ss 792C, 821C, 904D and 912E. Generally speaking, a person is required to produce a relevant document

even if it might incriminate them or make them liable to a penalty. However, a person is not [page 75] required to hand over a document to which legal professional privilege applies: see 2.54 below.

Inspection of books 2.49 ASIC has a general power under ASIC Act s 29 to inspect any book that the Corporations Act and the ASIC Act (other than the excluded provisions)44 requires a person to keep. This includes, for example, a company’s financial records that must be kept in accordance with Corporations Act s 286. The person conducting the inspection must be authorised in writing by ASIC to do so; the authorised person can require a person who has possession of the book to make it available for inspection, and failure to do so is a strict liability offence by virtue of ASIC Act ss 29(2A) and 63(3). ASIC’s powers of inspection are not limited by the purpose requirement in ASIC Act s 28 (see 2.52 below) and do not required the issue of a formal notice. The power of inspection does not entitle ASIC to take possession of the books or to make copies of them.

Production of books 2.50 Sections 30, 30A,45 31, 32A and 33 of the ASIC Act confer upon ASIC power to issue written notices requiring the production of books.46 The powers conferred by ss 30, 31, 32A and 33 may only be exercised for the purposes specified in ASIC Act s 28, including for the performance or exercise of any of ASIC’s functions or powers, for the purpose of ensuring compliance with the corporations legislation, in relation to a suspected contravention of relevant law,47 or for the purposes of an investigation under ASIC Act Pt 3 Div 1. This includes obtaining books and information for possible contempt proceedings against a person whom ASIC suspects of having contravened orders made under Corporations Act s 1323.48 ASIC’s power to require the production of books is reinforced by its

power, under ss 35, 36 and 36A, to apply for and execute a warrant to search for and take possession of relevant books. Warrants are discussed at 2.55 below. [page 76] Notices under ss 30, 31 and 32A may be given only to the particular persons49 specified in the relevant section, while a notice under s 33 may be given to any person. In each case the notice will require the production of ‘specified books’ to a ‘specified member or staff member [of ASIC]’ at a ‘specified place and time’. The time and place must be reasonable in all the circumstances: ASIC Act s 87. A notice to produce documents under ASIC Act Pt 3 Div 3 may require a company to undertake a degree of investigation, including making enquiries of responsible officers, employees and agents as to the existence of relevant information.50 In Riley McKay Pty Ltd v Bannerman (1977) 15 ALR 561 at 567,51 the High Court held that a notice to produce books is not liable to be set aside because it will be inconvenient for the recipient to answer the notice or because the recipient will need to devote considerable time and resources to producing the books which fall within the scope of that notice.52 Where documents falling within the scope of a notice issued under ASIC Act Pt 3 Div 3 contain information relating to matters which are outside the scope of the notice, it may be possible to mask that information.53 It has been held that the s 30 power is not unlimited and that the manner of its exercise should not be excessive.54 In Riley McKay Pty Ltd v Bannerman Brennan J warned that the commission should ‘administer the Act in such a way as not to impose upon a person or company a burden completely disproportionate to the value to the commission of the information sought’. Power to give notices 2.51 ASIC’s powers to require the production of books under notice to specified persons are as follows:

Section 30(1) covers books relating to the affairs55 of a body corporate (other than an exempt public authority). The notice can be given to the body corporate or an ‘eligible person’ in relation to the body corporate — this includes a person who is or has been a officer, employee, agent, banker, [page 77] solicitor or auditor of the body or is acting or has acted in any other capacity on behalf of the body: ASIC Act s 5(1). Section 30(2) covers books relating to the operation of a registered managed investment scheme. The notice can be given to the responsible entity of the scheme or an ‘eligible person’ in relation to the responsible entity. Section 31 covers books relating to a range of specified matters to do with financial products. These include the business or affairs of a financial market or CS facility; a dealing in financial products; advice given, or an analysis or report issued or published, about financial products; the character or financial position of a financial services business; and certain audits and audit reports relating to dealings or to financial services businesses: see ASIC Act s 31(g)–(m). The range of persons to whom the notice can be given include financial market and CS facility operators and their board members; persons who carry on or who have carried on a financial services business, their representatives and nominees; ‘eligible persons’ in relation to any of them; and ‘any other person’ who, in ASIC’s opinion, has been a party to a dealing in financial products. Section 32A applies for the purposes of the consumer protection provisions in Pt 2 Div 2 of the ASIC Act; it covers books relating to financial services and their supply: see ASIC Act s 32A(c)–(d). The notice may be given to a person who supplies, or has supplied, a financial service or an eligible person in relation to that person. ASIC’s general power to require the production of books relating to these matters from anyone in possession of them is contained in ASIC Act s 33. It provides for ASIC to give a written notice to any person requiring

the production of specified books which are in that person’s possession and which relate to the affairs of a body corporate or registered scheme or to the matters specified in ASIC Act s 31(g)–(m) or s 32A(c)–(d). A notice to produce books under this section may be issued not only to a person who is the target of an investigation, but also to persons ‘with no other involvement in an investigation than that they happen to possess documents or information relevant to an investigation involving the conduct of other persons’.56 A notice to produce books under ASIC Act s 33 need not specify any connection between the documents which are sought and the body corporate in question, and that notice will be valid if the relevant books in fact have the necessary characteristic (for example, that they relate to the affairs of a particular corporation) such that the notice falls within the statutory power.57 The notice relates to books in a person’s possession. The term ‘possession’ is defined in Corporations Act s 86 to include custody and control. A person has custody or control of books if he or she has those books in his or her physical [page 78] possession or has a legal entitlement to require them to be produced.58 Documents held by a person’s solicitor are within that person’s control.59 Thus, a notice issued to a person under ASIC Act s 33 could require production of documents held by a banker, accountant or solicitor on behalf of that person. A person who has physical possession of documents may be required to produce them under this section, whether or not he or she has a legal right to possession of them.60 Form and purpose of the notice 2.52 A notice given under ss 30, 31(1), 32A or 33 may be given by ASIC or a member or staff member of ASIC authorised under ASIC Act s 34, and must be in the form prescribed by reg 5 of the Australian Securities and Investments Commission Regulations 2001 (Cth) (ASIC Regulations). Regulation 5 includes a requirement that the notice specify ‘the nature of the matter to which the request for production of books relates’. By virtue

of s 25C of the Acts Interpretation Act 1901 (Cth) as applied to the ASIC Regulations by s 13(1)(a) of the Legislative Instruments Act 2003 (Cth) the regulation is complied with if ‘there is substantial compliance with the form’.61 If only one or some of a number of matters are stated in the notice, the omission of other relevant matters will not invalidate that notice.62 However, a notice that does not correctly state the matter to which the request relates will be invalid, because the non-compliance prevents the recipient being in a position to assess whether the notice is within power.63 If a person to whom a notice under ASIC Act Pt 3 Div 3 is directed can demonstrate that it was issued for an ulterior purpose, such as to coerce or intimidate the recipient or others, it may be set aside by the court.64 However, the onus of establishing that a notice has been issued for an improper purpose rests upon the recipient that seeks to challenge the notice, and the making of such a challenge does not in itself require ASIC to lead evidence in support of the notice.65 [page 79] It is not improper for ASIC to use its notice powers to obtain information following the commencement of civil penalty proceedings even where the use of those powers might put it in a different position from other litigants. The use by ASIC of its notice power under s 32A after the commencement of civil penalty proceedings has been held not to be improper.66 Reasonable excuse for non-compliance 2.53 The recipient of a notice issued under ASIC Act Pt 3 Div 3 may not refuse or fail to comply with that notice unless he or she has a ‘reasonable excuse’ for not doing so, and a failure to comply with such a notice is an offence: ASIC Act s 63(1). A reasonable excuse for non-compliance could be established if the recipient of the notice could establish sufficient practical difficulty in complying with the notice within the time permitted.67 A contractual duty of confidentiality does not provide a reasonable excuse for non-production of documents in response to a notice

issued under ASIC Act Pt 3 Div 3.68 A person who produces such documents is protected against liability for breach of that duty of confidentiality under ASIC Act s 92.69 It is not a reasonable excuse for a person to refuse or fail to give information, to sign a record or to produce a book in accordance with a requirement made of that person, that the information, signing of the record or production of the book might tend to incriminate that person or make that person liable to a penalty: ASIC Act s 68(1). This provision excludes the common law privilege against self-incrimination.70 The interaction of the statutory regime with the protections against selfincrimination is explained by Foster J in Watson v AWB Ltd (No 3) (2009) 181 FCR 96; [2009] FCA 1174.71 Examinations are undertaken by ASIC under ss 13 and 19–27. The ASIC inspector may require the examinee to answer a question that is put to the examinee at the examination which is relevant to a matter that ASIC is investigating: s 21(3). Under s 22, the examination is to take place in private and a written record of the examination is to be created and kept under s 24. Under s 63(1) [page 80] a person must not intentionally or recklessly fail to comply with a requirement under ss 19 and 21(3) and non-compliance with such a requirement is an offence. Section 65(3) relieves a person from liability for that offence if the person has a reasonable excuse for not so complying. Pursuant to s 68(1) of the ASIC Act, it is not a reasonable excuse for failing to give information that the person may tend to incriminate the person or make the person liable to a penalty, however s 68(3) provides that the statement is not admissible in evidence against the person in criminal or civil penalty proceedings other than one involving making false statements; and that legal professional privilege is preserved by s 69. Foster J held that s 68(3) preserved the essence of the privilege against self-incrimination because it denies to the relevant prosecuting authorities the capacity to use the transcripts in a criminal or civil penalty proceeding

other than in the limited exception. His Honour noted that an examinee must comply with s 68(2) by claiming privilege before answering questions or signing the record to attract the benefit of s 68(3). His Honour held that the ASIC Act had modified the privilege against self-incrimination to some extent but the answers to questions asked during the examinations which are recorded on the transcripts could not be used in criminal or civil penalty proceedings other than in the limited circumstances permitted by s 68(3). Legal professional privilege 2.54 At general law, a client may assert legal professional privilege to resist disclosure of a communication between a legal practitioner and his or her client which is confidential in character and which was created for the dominant purpose of the lawyer giving, or the client obtaining, legal advice, or for use in existing litigation or litigation which was within the reasonable contemplation or apprehension of the client.72 The dominant purpose test also applies in pre-trial proceedings such as discovery.73 Legal practitioners are entitled to refuse to give information or produce a book in response to a notice under ASIC Act Div 3 Pt 3 if compliance with the requirement to do so would involve a breach of legal professional privilege, subject to providing the client’s name and address to ASIC: ASIC Act s 69. For some time it was an open question whether a legal practitioner’s client is entitled to decline to produce books within the scope of a notice under ASIC Act Pt 3 Div 3 on the basis that those documents were subject to legal professional privilege. On the one hand, in Corporate Affairs Commission v Yuill (1991) 172 CLR 319; 4 ACSR 624, the majority in the High Court (Brennan, Dawson and Toohey JJ) held that Pt VII of the Companies (New South Wales) Code (NSW) evidenced a legislative intention to abrogate a client’s entitlement to assert legal professional privilege to resist the production of documents or to answer questions in the course of a special [page 81] investigation under the co-operative scheme legislation. The decision of the

High Court in Yuill’s case was applied to investigations by ASIC under ASIC Act Pt 3 in Australian Securities Commission v Dalleagles Pty Ltd (1992) 8 ACSR 109. On the other hand, in Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543; [2002] HCA 543, the High Court held that legal professional privilege was a fundamental common law immunity from production which could only be overridden by statute expressly or by necessary intendment, and that documents sought by the ACCC under s 155 of the former Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) were protected from production because the statute did not abrogate privilege. The High Court in Daniels did not, in terms, overrule Yuill’s case. All members of the court distinguished it on the basis that it was concerned with different legislation to that under consideration in Daniels. The majority went further to observe that ‘it may be that Yuill would now be decided differently’ (Gleeson CJ, Gaudron, Gummow and Hayne JJ at [35]), and Kirby J observed that ‘there are weaknesses and difficulties in the majority opinions’ in Yuill’s case (at [89]). In practice, ASIC acknowledges the right to claim legal professional privilege in respect of the production of books under ASIC Act Pt 3 Div 3. In particular, ASIC typically does not seek to exercise its powers under ASIC Act Pt 3 Div 3 to obtain access to documents relating to the representation of a client in an investigation or at an examination. An exercise of ASIC’s powers in that manner would involve a fundamental threat to an examinee’s right to legal representation in connection with such an investigation. ASIC’s approach to claims of legal professional privilege is explained in ASIC Information Sheet 165 — Claims of Legal Professional Privilege (INFO 165), issued in December 2012. In responding to a compulsory notice issued by ASIC, a person must provide all responsive information (that is, the information requested in the notice) to ASIC except for information that attracts a valid claim of legal professional privilege. In respect of privileged information, ASIC’s policy allows for the privilege holder to: waive privilege and provide the information to ASIC in response to the compulsory notice; seek to provide the privileged information to

ASIC on a limited and confidential basis intended to preserve privilege; or withhold the information from ASIC. Warrant to seize books 2.55 Section 35 of the ASIC Act authorises ASIC to obtain a search warrant, by application to a magistrate under s 36, if a member or staff member has reasonable grounds to suspect that books whose production could be required under Div 3 are, or may be within three days, on particular premises in Australia. Such a warrant may be issued by a magistrate under s 36, if he or she is satisfied that there are reasonable grounds to suspect that particular books whose production could be required under Div 3 are, or may be within the next three days, on particular premises. Section 36A (introduced by the Corporations Amendment (No 1) Act 2010 (Cth), which commenced on 13 December 2010) in turn provides for execution of the warrant. By contrast with a warrant issued under the Crimes Act 1914 (Cth) Pt 1AA, it is not [page 82] necessary that a warrant issued under the ASIC Act specify an offence. Prior to the amendments made by the Corporations Amendment (No 1) Act 2010 (Cth), these sections only permitted the issue of a warrant where books were not produced in response to an earlier notice to produce books, and ASIC rarely used its powers under the former sections: Replacement Explanatory Memorandum to the Corporations Amendment (No 1) Bill 2010, [3.6], [3.17]–[3.24]. Use to which books may be put 2.56 Section 37 sets out ASIC’s powers where books are produced under notice or seized under warrant: the authorised person may take possession, inspect, make copies and take extracts from any of the books. The person may use, or permit the use of, any of the books for the purposes of a proceeding; this includes a proceeding under a law of the Commonwealth or of a state or territory (s 37(10)) and has been held to extend to

contempt proceedings for contravention of orders made under Corporations Act s 1323.74 Requirement to provide explanation of books 2.57 A person who has produced books in response to a notice under ASIC Act Div 3 Pt 3 and any person who was party to compiling those books, may be required to provide an explanation of any matter about the compilation of those books or to which the books relate: ASIC Act s 37(9). A person may not refuse to provide an explanation of the books which were produced in response to the notice on the ground that his or her explanation may constitute self-incrimination or expose that person to a penalty: ASIC Act s 68(3). The explanation, or the fact that the person provided it, is not admissible in a criminal proceeding or a proceeding for the imposition of a penalty (other than a proceeding relating to the falsity of the statement), if he or she claims that it might tend to incriminate the person or expose him or her to a liability to a penalty, before making that explanation, and the explanation might in fact tend to incriminate that person or expose him or her to a penalty: ASIC Act s 68(2)–(3). However, information provided under ASIC Act Pt 3 Div 3 subject to a claim for the statutory privilege under ASIC Act s 68 is admissible in proceedings for a disqualification or banning order, licence suspension or cancellation within specified provisions of the Corporations Act: s 1349(4)–(5).

Disclosure of information Information about dealing 2.58 ASIC Act Pt 3 Div 4 empowers ASIC to obtain certain information concerning dealings in financial products. Various provisions of the Corporations Act regulate behaviour in the securities markets. To police those provisions ASIC needs to be able to ascertain the identity of persons who dispose of, and those who acquire, securities. The normal course [page 83]

of trading on the stock exchange involves anonymous dealing between sellers and buyers who are usually not aware of the other’s identity. Section 41 of the ASIC Act gives ASIC power to require a person who carries on a financial services business (such as a broker or dealer) to disclose to it in relation to an acquisition or disposal of financial products the name of a principal and the nature of the instructions given to the dealer. Similar obligations are placed on marked operators and CS facilities. Under ASIC Act s 43, ASIC can obtain information about dealings in securities from the issuer or from certain other named persons, but only in the circumstances set out in s 43(3): that is, where ASIC considers that certain circumstances (such as contraventions of particular provisions or, in the case of a takeover, unacceptable circumstances) may have occurred. The disclosure is to be made in private: ASIC Act s 47. The dealer can have a legal representative present: ASIC Act s 48. Information regarding AFS licensees 2.59 Corporations Act s 912C provides that ASIC may, by written notice to an AFS licensee, direct the licensee to give to ASIC a written statement containing specified information about the financial services provided by the licensee or its representatives, or the financial services business carried on by the licensee. Section 912C is not a provision to which ASIC Act s 68 (which abrogates the privilege against self-incrimination in respect of ASIC’s information-gathering powers under ASIC Act Pt 3) applies. Information under the consumer laws 2.60 Changes to ASIC Act Pt 2 Div 2 made by the national consumer laws in 2010 conferred on ASIC the power to issue ‘substantiation notices’ under Subdiv GC. Section 12GY of the ASIC Act applies if a person has made a claim or representation promoting the supply of a financial service; ASIC may in this case require that the person give information or produce documents to ASIC that could be capable of substantiating or supporting the claim or representation. However, ASIC Act s 12GYB(3) expressly provides that an individual may refuse or fail to give particular information or produce a particular document on the grounds of selfincrimination.

Assistance from licensees

2.61 Certain licensees are required to ‘assist’ ASIC in the discharge of its functions. This assistance can take the form of providing access to books or giving ASIC other information. The holder of a market licence must give such assistance to ASIC as it reasonably requests in relation to the performance of ASIC’s functions: s 792D; it must give ASIC reasonable access to the market’s facilities under s 792E. Similar obligations are imposed on CS facility licensees by ss 821C and 821D and derivative trade repository licensees by ss 904D and 904E. Section 912E requires a financial services licensee and its representative to give such assistance to ASIC as it reasonably requests in relation to whether the licensee or its representatives are complying with the financial services laws, and in relation to the performance of ASIC’s other functions. The assistance may include showing ASIC the licensee’s books or giving ASIC other information. [page 84]

ASIC HEARINGS 2.62 Under ASIC Act s 51, ASIC has power to hold hearings for the purposes of the performance or exercise of any of its functions and powers under the corporations legislation (other than the excluded provisions), other than a function or power conferred on it by Pt 3 Div 1 (that is, in connection with an investigation) or by Corporations Act s 657C or s 657G (that is, as to whether unacceptable conduct has occurred in relation to a takeover, which is the function of the Takeovers Panel). ASIC uses its hearings power on various occasions. One is when it is considering the policy it should adopt for the exercise of a particular power it possesses to exempt persons or a class of persons from provisions of the Corporations Act. Hearings may also be held when ASIC is examining market practices or is canvassing law reform issues, although this is rare. Most hearings are held for the purposes of ASIC exercising its decision-making powers in the manner explained in 2.63. 2.63 Various provisions of the Corporations Act direct ASIC to give

particular persons an opportunity to appear at a hearing before it makes a decision affecting that person. For example, a person affected by a decision of ASIC to refuse, suspend or cancel an AFS licence is entitled to a hearing under Corporations Act s 913B(5) or s 915C. Another example is in Corporations Act s 739(2) under which ASIC can issue a stop order (see 2.98) preventing further offerings of securities under a defective disclosure document. In general, ASIC has a discretion as to whether hearings may be held in public or take place in private, except where the legislation specifies that the hearing must be private: ASIC Act s 52. For example, hearings held prior to the suspension or cancellation of an AFS licence must be private: Corporations Act s 915C(4). 2.64 In a hearing, ASIC may take evidence on oath or affirmation. Witnesses can be required to answer questions or produce documents: ASIC Act s 58. The privilege against self-incrimination is abrogated, but answers are admissible only in penal proceedings in respect of the falsity of an answer: ASIC Act s 68. That protection is available only where the witness claims that compliance with ASIC’s requirement might tend to incriminate the witness, and compliance might in fact tend to incriminate the witness. The practice is for a person who claims the privilege to say ‘privilege’ before each answer. There is no immunity in respect of other information that ASIC may obtain as a consequence of the person making the self-incriminating statement. A corporation does not enjoy the privilege against self-incrimination.75 Legal practitioners are entitled to refuse to give information or produce a book where compliance would involve a breach of legal professional privilege, the exemption being conditional on the furnishing of the client’s name and address: ASIC Act s 69. 2.65 At a hearing, ASIC is not bound by the rules of evidence. However, it is required to observe the rules of natural justice when it is conducting a hearing: ASIC Act s 59(2). Natural justice embodies two broad concepts: a fair hearing concept and [page 85]

an absence of bias. There are no fixed rules of natural justice: they vary in the light of the power exercised and legislation governing its exercise. The flexibility of the rules of natural justice is illustrated by National Companies and Securities Commission v News Corporation Ltd (1984) 8 ACLR 843. The National Companies and Securities Commission (NCSC) proposed to hold a hearing to investigate suspected offences. The NCSC, unlike ASIC, had that power. The hearing was to be in private. Witnesses were to be called for examination. Witnesses could be accompanied by a legal representative and they would be given a transcript of their evidence. The NCSC foreshadowed publication of its views to be arrived at after the hearing and after persons about whom there might be damaging material in the published material were given an opportunity to rebut the NCSC’s views. News Corporation claimed that the duty to observe the rules of natural justice required the NCSC to allow News Corporation and its legal representatives to be present throughout the whole hearing, to intervene in proceedings and to cross-examine witnesses, to call witnesses in reply and to make submissions. Those claims were rejected by the High Court. The court noted that the content of the obligation to observe the rules of natural justice was affected by the investigative rather than adjudicative nature of the hearing. A hearing in which an authority can make a decision directly affecting the rights of a person attracts a more intense application of the two concepts of natural justice. However, the court saw no merit in the proposed publication and warned that it could be unlawful. ASIC’s practice is to afford natural justice to each person likely to be adversely affected by a submission by ASIC to the Minister or ‘other external provision’ of a report arising from a s 51 hearing. ASIC provides such persons with a copy of the draft hearing report and gives them a chance to make written submissions within a reasonable time. That will not be done in favour of a person who will be adversely affected only by being a member of a class of persons or of the public. 2.66 ASIC’s Regulatory Guide 8 — Hearings Practice Manual, March 2000, explains the principles and procedures adopted by ASIC relating to administrative hearings. ASIC recognises that persons who may be affected by ASIC decisions must be given an opportunity to be heard. ASIC RG 8 deals with three broad categories of administrative hearings: protective

hearings (where ASIC is considering using its administrative powers to protect the public, particularly consumers and investors); initial licensing and occupational registration hearings (for example, where ASIC is deciding whether to license a securities dealer or register a person as an auditor); and application of security hearings (for example, where ASIC is considering a claim made by another person for payment of security lodged by a licensed securities dealer). Various ‘guiding principles’ are set out in RG 8. Principle 1 is the person’s opportunity to be heard, which includes the right to present written or oral submissions and evidence. Principle 2 is the person’s entitlement to know the subject matter of the hearing and the particular areas that are of concern to ASIC, to know the circumstances which might lead ASIC to make a decision against the person, and to have sufficient time to respond. Principle 3 is that decision-makers must be impartial. Principle 4 is that findings of fact must be based on relevant, credible and [page 86] probative material. Principle 5 is that there is no onus of proof. Principle 6 is that court rules of procedure and evidence are not applicable. Principle 7 is that although each matter must be decided on its merits, ASIC will consider policy and precedents. RG 8 explains ASIC’s policy of conducting hearings informally and quickly. ASIC considers that 28 days should in general be sufficient time for a person to prepare for a hearing. Although a delegate of ASIC is empowered to compel a person to attend a hearing, ASIC states that it cannot envisage any case where a delegate would compel a person affected by the decision to appear and that it would be rare for a delegate to summon a person to appear as a witness. A written statement from a witness will usually suffice. RG 8 emphasises that hearings are quite different from court proceedings. It describes the manner in which hearings are run as ‘inquisitorial’. The manual states that a delegate will generally draw attention to contradictory material or inconsistent evidence and give the

person who would be affected by the decision the opportunity to address these matters. It is the prerogative of the person affected by the decision to decide which material to present, the form in which it is presented, how much evidence to produce, whether to dispute the accuracy of the material on which ASIC is considering making its decision, and (if relevant) whether or not to ask the delegate to exercise power to permit ‘specified acts’ which would otherwise be prohibited. Although the concept of burden of proof is inapplicable, the manual emphasises that a hearing is a person’s opportunity to persuade ASIC to make a decision in his or her favour.

ASIC INVESTIGATIONS 2.67 As the foregoing discussion indicates, ASIC has power to make various inquiries in connection with the performance of its regulatory functions, and to require the production of books and other information. Its coercive powers to obtain information are further enlarged when it embarks on a formal investigation. In particular, a formal investigation instigated under ASIC Act Pt 3 Div 3 allows ASIC to conduct oral examinations and to require assistance from any person. ASIC has power to make such formal investigation as it thinks expedient in four cases: 1.

where it has reason to suspect a contravention of the corporations legislation (other than the unconscionable conduct and consumer protection provisions of the ASIC Act) or of any other law where the contravention concerns the management or affairs of a body corporate or managed investment scheme, or involves fraud or dishonesty and relates to a body corporate or managed investment scheme or to financial products: ASIC Act s 13(1);

2.

where it has reason to suspect that unacceptable circumstances have, or may have, occurred in relation to a takeover: ASIC Act s 13(2);

3.

where it has reason to suspect misconduct by a registered liquidator: ASIC Act s 13(3); and [page 87]

4.

where it has reason to suspect that a contravention of the unconscionable conduct or consumer protection provisions of the ASIC Act may have occurred: ASIC Act s 13(6).

ASIC is required to comply with a direction from the Minister that it conduct a formal investigation in relation to a particular matter under ASIC Act s 14: see 2.10 above. Once ASIC is entitled to undertake an investigation, the ambit of the investigation is not confined to determining whether the particular suspected contravention occurred. The investigation, once triggered, provides an occasion for ASIC to conduct an investigation at least wide enough to enable it to perform any of its functions under ASIC Act s 1(2).76

Conducting an investigation Commencement 2.68 In order to commence an investigation under ASIC Act s 13, ASIC or its delegate must have reason to suspect one or more of the requisite contraventions may have been committed. Although such a suspicion requires more than mere speculation, it can be formed on the basis of something less than prima facie evidence, and may take into account matters which are credible but would not be admissible in evidence.77 There is no express requirement under ASIC Act s 13 that ASIC or its delegate suspects that a particular provision of the corporations legislation may have been contravened; however, it may in practice be necessary for ASIC or its delegate to have identified such a provision in order to form the necessary suspicion.78 The requirements of this section are satisfied if, as a matter of fact, ASIC or its delegate holds the requisite suspicion and has grounds for holding that suspicion.79 It is sufficient if a duly authorised ASIC officer who has responsibility for the investigation has reason to suspect that the relevant contravention has been committed and considers it expedient to conduct an investigation, and it is not necessary that the commencement of the investigation be formally documented.80 The fact that an officer who formed the relevant suspicion was under a

misapprehension as to the source of ASIC’s statutory power to conduct the investigation would not of itself invalidate the exercise of that power.81 [page 88] ASIC’s practice is to document the scope of its intended investigation in a ‘s 13 file note’; the note may be varied over the course of the investigation as new issues come to light. The preparation of this note is not essential to the power to investigate, nor does it confine the permitted scope of the investigation.82 An investigation may be stayed if it can be established that ASIC or its delegate does not hold the necessary suspicion that a contravention has occurred.83 However, the party which is challenging the commencement of the investigation bears the onus of establishing that ASIC does not hold the requisite suspicion.84 ASIC is not required to notify the potential target of an investigation of its commencement.85 Nor does the potential target of an investigation have a right to be heard in relation to whether the investigation should be commenced.86 At common law, ASIC is not required to provide the subject of an investigation with a statement of its reasons for commencing the investigation.87 In Little River Goldfields NL v Moulds (1991) 6 ACSR 299 at 305, Davies J held that the exercise of ASIC’s powers under ASIC Act s 13 also does not constitute a decision which was an ‘ultimate or operative determination’ so as to be reviewable under the ADJR Act: see 2.26 above.

Procedural fairness 2.69 It is arguable that ASIC is obliged to afford procedural fairness in the course of an investigation, although the content of procedural fairness in an investigation will be limited by the nature of the investigative process.88 The contrary view is that ASIC is not required to provide procedural fairness at the investigative stage, where an investigation is part of a process which may ultimately result in legal proceedings which will allow the target an opportunity to be heard.89

Procedural fairness is unlikely to require an investigator to disclose the nature or source of any complaints made against the subject of the investigation, or the intended scope and course of the investigation, or to require the investigator to give notice of his or her intention to obtain or use information which is adverse to the subject of the investigation, since such requirements would generally be inconsistent with the [page 89] effective conduct of the investigation. It appears that it is not necessary to allow a further ‘procedural fairness’ process at the end of an investigation, if substantive procedural fairness has been given to the person under investigation in the course of the investigation.90 A decision to commence criminal proceedings would not normally require that procedural fairness be afforded to the person against whom charges are to be brought.91 Earlier authorities suggest that procedural fairness requires an investigator to avoid actual bias or the appearance of bias, either by reason of a pecuniary interest in the matter or by reason of circumstances which would give a reasonable bystander ground to entertain a reasonable apprehension that the investigator would not bring a fair or unprejudiced mind to the matter.92 However, there is authority that the existence of a conflict of interest affecting a consultant to an investigation would not affect the validity of that investigation, and the fact that an investigator has formed a preliminary view as to a matter arising in the investigation will not generally constitute bias.93

ASIC’s power to conduct oral examinations 2.70 ASIC Act Pt 3 Div 3 authorises ASIC to examine persons whom it suspects or believes can give information relevant to a matter which it is investigating, and sets out the manner in which such an examination is to take place and the persons who may be present at it. ASIC can conduct an examination of a person if it suspects or believes on reasonable grounds that the person can give information relating to a matter that it is investigating or proposes to investigate: ASIC Act s 19.

A person may be required to attend for examination on oath and to answer questions by giving him or her a written notice in a prescribed form, setting out the identity of the inspector and the general nature of the matter that is being investigated, and requiring the person to appear and answer questions under oath and to give all reasonable assistance in connection with the investigation: ASIC Act s 19(2); ASIC Regulations reg 4 Form 1. That notice must also set out the effect of ASIC Act s 23(1) (dealing with the examinee’s right to legal representation) and ASIC Act s 68 (dealing with self-incrimination). Information about the effect of ss 23(1) and 68 need not be repeated to the same person in subsequent notices in [page 90] respect of the same investigation.94 Section 19(3) does not require ASIC to set out the law relating to privilege against self-incrimination generally — rather, it only requires ASIC to explain the effect of s 68 which sets out the circumstances in which the privilege is not available.95 The notice requiring a person to attend an examination must state the ‘general nature of the matter’ under investigation: ASIC Act s 19(3)(b). The examinee is in turn required to answer questions at the examination which are ‘relevant to a matter that the Commission is investigating’: ASIC Act s 21(3). A notice must identify the ‘general nature of the matter’ in such a way that an examinee can ‘perceive the general ambit of the subject matter of the investigation’.96 It should state any possible offence with reference to a section of a particular statute, the names of the companies concerned, and the time period within which the relevant conduct was alleged to have occurred was sufficient, but need not identify the particular person or persons who were suspected of the contravention (which may be uncertain at the time of commencement of an investigation): ASIC Act s 19(3).97 The ‘matter’ referred to in s 19(3) is the matter which is the subject of the investigation under this section, namely whether a contravention of the kind to which the section is directed may have been committed.98 The statement of the nature of the matter under investigation does not have to

be sufficiently detailed to allow the relevance of particular questions at the examination to be established, for the purpose of ASIC Act s 21(3).99 A notice issued under this section is not invalidated by a failure to describe the transitional provisions which apply to the particular inquiry.100 ASIC may also exercise its power to require reasonable assistance under ASIC Act s 19(2)(a) with or without requiring a person to appear for examination under s 19(2) (b): see 2.76 below.101 The power to issue examination and reasonable assistance notices under Corporations Act s 19 continues after civil penalty proceedings have [page 91] commenced, and the use of such powers does not amount to an improper exercise of power.102

Conduct of an examination 2.71 An examination must take place in private, and the person conducting the examination (inspector) has the power to give directions as to who may be present during all or part of the examination: ASIC Act s 22(1). Persons who may be present at an examination include the inspector or inspectors conducting the examination, the examinee, a member of ASIC or a staff member approved by ASIC, the examinee’s lawyer and any other person approved by the investigator: ASIC Act s 22(2). A person other than the inspector conducting an investigation may put questions to an examinee at an examination, if authorised to do so by the inspector, and this may allow ASIC to, for example, retain counsel to conduct an examination.103 An examinee is required to answer all questions put to him or her at an examination which are relevant to any matter under investigation: ASIC Act s 21. An examinee cannot insist that he or she be provided with notice of the questions which are to be asked at the examination.104 In the course of an examination, an examinee may be asked questions which are not limited to his or her knowledge of factual matters, and which require that he or she express an opinion, even of a speculative character, about a

question of law.105 An examinee who refuses or fails to take the oath or affirmation, or who refuses or fails to answer questions, commits an offence unless he or she has a reasonable excuse: ASIC Act s 63(1), (3). 2.72 An examinee at a compulsory examination under ASIC Act Pt 3 Div 1 is not entitled to decline to answer a question on the ground that the answer might tend to incriminate the examinee or make the examinee liable to a penalty: ASIC Act s 68(1). This provision excludes the common law privilege against self-incrimination. However, if the examinee claims the statutory privilege under ASIC Act s 68, a self-incriminating answer is not admissible in evidence against the examinee in criminal proceedings or proceedings for the imposition of a penalty, other than proceedings relating to the falsity of the answer: ASIC Act s 68(3). That immunity is only available to the examinee, and not to other persons who are incriminated by the examinee’s statements. The immunity is also not available in civil proceedings, other than those which are directed to the imposition of a penalty against the examinee. An application by ASIC for a injunction does not involve the imposition of a penalty.106 A corporation is not entitled to claim the privilege against self-incrimination when an officer of a company is giving evidence at an examination which may incriminate the company: ASIC Act s 68(2). [page 92] 2.73 An answer at an examination given subject to a claim for the statutory privilege under ASIC Act s 68 is admissible in proceedings for a disqualification or banning order, licence suspension or cancellation: Corporations Act s 1349(4)–(5). As a matter of practice, ASIC often gives a direction to the examinee that he or she must not disclose matters upon which he or she was examined, except for the purposes of obtaining legal advice, and gives a direction to the examinee’s legal representative that he or she must not disclose the content of the examination except for the purpose of advising the examinee. The power to give that direction is implied by ASIC Act s 19(2)(a) (obligation to provide reasonable assistance); and ASIC Act s 22

(examination takes place in private).107 A non-disclosure direction can only continue for a reasonable time and as reasonably necessary for the purposes of the investigation.108

Examinee’s right to legal representation 2.74 An examinee is entitled to be legally represented at an examination and the examinee’s lawyer may, at such times as the inspector determines, address the inspector and examine the examinee: ASIC Act s 23(1). However, a particular lawyer may be excluded from representing an examinee at an examination if he or she is personally involved in the conduct under investigation and there is reason to suspect that he or she may have committed an offence, or where the representation of several examinees by the same lawyer would prejudice the investigation.109 The power to exclude the lawyer is conferred by s 22(1) of the ASIC Act on an inspector in his or her own right, not upon ASIC. The power to direct the exclusion of a lawyer is only enlivened where the inspector believes that exclusion is necessary for the purposes of the examination and that belief is held on reasonable grounds and in good faith. The right of attendance conferred on the examinee’s lawyer by s 23(1) is sufficient to attract the rules of procedural fairness. Because the right of the lawyer conferred by s 23(1) is generally a right in respect of which the lawyer will owe fiduciary duties to his or her client, the duties generate in the client a sufficient interest also to attract an obligation of procedural fairness. Accordingly, the giving of a direction excluding a lawyer from an examination will require the affording of procedural fairness both to the lawyer and to his or her client.110 [page 93]

Use of transcript of examination 2.75 The inspector may, and must if the examinee so requires, have a record made of statements at an oral examination: ASIC Act s 24(1). On his or her written request, an examinee is entitled to a copy of any written record of an examination without charge, but subject to any conditions

which the inspector may impose: ASIC Act s 24(2)(b). Those conditions may relate to maintaining the confidentiality of that transcript.111 ASIC may also be entitled to delay supplying a copy of a transcript of examination to an examinee if the release of that transcript would prejudice the investigation; for example, if an examinee sought to obtain a transcript of his or her prior evidence during the course of his or her examination.112 ASIC may use and disclose information contained in a written record of examination in connection with the commencement of a prosecution: ASIC Act s 49. ASIC may also use and disclose such information in connection with civil proceedings which it brings on behalf of a company or another person pursuant to ASIC Act s 50, or in the intervening proceedings brought by another person under Corporations Act s 1330. ASIC may give a copy of a record of examination and of any related book to a person’s lawyer, if ASIC is satisfied that that person is conducting, or contemplating in good faith, proceedings in relation to a matter to which the examination related: ASIC Act s 25(1). It appears that such a record of examination or copies of such books may be provided either to a lawyer acting for a plaintiff or a defendant in proceedings or contemplated proceedings.113 A record of examination or any such book may only be used for the purposes of those proceedings, and may not be published or communicated to any other person, except for those purposes: ASIC Act s 25(2). In Johns v Australian Securities Commission (1993) 173 CLR 408; 11 ASCR 467, the High Court held that ASIC’s right to release information to a litigant under ASIC Act s 25(1) was subject to an obligation that, as a matter of procedural fairness, ASIC should first provide the examinee with an opportunity to make submissions opposing the release of that information. In ASIC RG 103, ASIC indicates that, in exercising its discretion as to whether to release a record of an examination under ASIC Act s 25(1), it must first be satisfied that a person is carrying on or contemplating a proceeding and that the proceeding is in respect of a matter to which the examination or part of it related; and will consider whether ASIC’s enforcement functions would be jeopardised or any other person may be adversely affected by release of that record. ASIC notes that it also has a general discretion as to the release of such a record of examination, in

which it will take account of its functions and powers, the objects of the Corporations Act and the ASIC Act, and the public interest generally; but that, in the absence of compelling reasons to the contrary, it will generally assist litigants by disclosing [page 94] records of examination under ASIC Act s 25(1): RG 103.18. ASIC may impose conditions on the manner in which a record of examination or related books may be used, and will usually impose a condition requiring an applicant to give notice to any person whose interests would be affected by publication of that record or books, before using them in open court, to allow that person to seek orders protecting his or her interest from the court: RG 103.34–103.36, 103.42.

ASIC’s power to require reasonable assistance Assistance in connection with an investigation 2.76 When an investigation is underway, ASIC may require any person to ‘give ASIC all reasonable assistance in connection with the investigation’: ASIC Act s 19(2). The power to require reasonable assistance can include, for example, conducting diligent searches and inquiries for documents relating to a particular matter or information held on a computer, signing a power of attorney or giving authority for a third party to release information.114 It is not clear whether s 68(1) of the ASIC Act abrogates the privilege against self-incrimination in respect of assistance that goes beyond giving information, signing a record of interview or producing a book. In Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [47], White J was willing to assume that the privilege was not abrogated in respect of the requested assistance, without deciding the issue.

Assistance in connection with a prosecution

2.77 If ASIC, on reasonable grounds, suspects or believes that a person can give information relevant to a prosecution for an offence arising out of an investigation or examination, it can require that person to give ASIC all reasonable assistance in connection with the prosecution: ASIC Act s 49(3). That requirement does not apply to a person in respect of whom ASIC has formed the view, as a result of an investigation or an examination, that he or she may have committed an offence and ought to be prosecuted for that offence, or to that person’s lawyer: ASIC Act s 49(4). The obligation to render reasonable assistance may include answering questions, explaining documents and diligently searching for and producing documents.115 An overlapping power arises to require reasonable assistance in respect of all criminal proceedings for offences against the Corporations Act, under Corporations Act s 1317R(1)(b). The statutory duty to render reasonable assistance under ASIC Act s 49 arguably overrides an express or implied contractual duty of confidentiality.116. However, it is not clear whether the obligation to provide reasonable assistance under ASIC Act s 49 would prevent a person asserting a claim to legal professional privilege in relation to a communication. Nor is it clear that the obligation to provide reasonable assistance under ASIC Act s 49 displaces the privilege against selfincrimination at [page 95] general law. A failure to comply with a requirement by ASIC to give reasonable assistance, without reasonable excuse, is an offence: ASIC Act s 63(3). In the event of default, the court may order compliance with that requirement: ASIC Act s 70. ASIC may also require reasonable assistance from a partner, officer, employee or agent, including a present or past banker or auditor, of a defendant: Corporations Act s 1317.

Assistance in connection with civil penalty proceedings 2.78 Section 1317R(1)(a) of the Corporations Act extends ASIC’s power to require reasonable assistance to applications made by it for declarations of contravention or pecuniary penalty orders in respect of the civil penalty

provisions. Lawyers are exempted from s 1317R(1)(a) and (b) by s 1317R(5).117

ASIC’S ENFORCEMENT ROLE 2.79 The securities and financial services provisions of the Corporations Act and the ASIC Act work in such a way that a variety of consequences can follow where a person contravenes (by act or omission) a provision of the Act. The contravention may be an offence, punishable by criminal sanctions. If the provision is a civil penalty provision, the contravention may attract the civil penalty provisions in Corporations Act Pt 9.4B. The contravention may create civil liability, giving a person affected the right to recover the amount of loss or damage caused by the contravention or to obtain other orders, such as injunctions. In other cases, a contravention may give ASIC or the court the right to make orders affecting the activities of the person in contravention; for example, by revoking or suspending a licence or by banning a person from acting in a particular capacity (for example, as a representative of a financial services licensee or as a director of a company). Where there is a contravention of the laws it administers, ASIC has a range of enforcement options available to it. Depending on the circumstances these may include: referring matters to the Commonwealth Director of Public Prosecutions (CDPP) for criminal prosecution; making application to the court for declarations of contravention, pecuniary penalty orders, or compensation orders for breach of the civil penalty provisions; bringing civil proceedings on behalf of investors for recovery; bringing civil proceedings for injunctive or other relief; obtaining enforceable undertakings; issuing infringement notices; issuing stop orders; making banning orders against a person; and applying to a court for disqualification orders against a person.

[page 96] 2.80 ASIC’s approach to enforcement is outlined in its Information Sheet 151 — ASIC’s Approach to Enforcement, September 2013. Figure 2.2 in that document sets out its general approach to taking enforcement action.

Criminal prosecutions 2.81 The securities and financial services laws contained in the Corporations Act and Pt 3 Div 3 of the ASIC Act impose numerous statutory requirements and restrictions. Contravention of most, but not all, of these requirements and restrictions may be a criminal offence, depending on the circumstances of the contravention and, in some cases, the state of mind of the person concerned. The main exceptions are Corporations Act s 1041H and ASIC Act s 12DA, which prohibit misleading or deceptive conduct and which give rise to civil but not criminal liability. In some cases, the relevant statutory provision will specify whether contravention is an offence or not. Section 1311 of the Corporations Act is the general offence provision, which states that a person who does an act or thing that the person is forbidden to do by or under a provision of the Act, or does not do a thing that the person is required or directed to do by or under a provision of the Act, or otherwise contravenes the Act is guilty of an offence unless that or another provision of the Act provides that the person is guilty of an offence or is not guilty of an offence. Section 12GB of the ASIC Act is the general offence provision for ASIC Act Pt 2 Div 2 (unconscionable conduct and consumer protection). 2.82 The provisions of the Commonwealth Criminal Code apply to offences under the Corporations Act and the ASIC Act. The Criminal Code, which came into general effect in December 2001, is a schedule to the Criminal Code Act 1995 (Cth). The Code must be applied to offences under the Commonwealth law to determine what ‘the prosecution would need to prove in order to prosecute that offence’.118 The purpose of the Code is set out in s 2.1; it is ‘to codify the general

principles of criminal responsibility under laws of the Commonwealth. It contains all the general principles of criminal responsibility that apply to any offence, irrespective of how the offence is created’.

ASIC’s role in criminal matters 2.83 In criminal matters, ASIC’s role is generally confined to investigation, because the decision to lay criminal charges under the Corporations Act or the ASIC Act lies with the CDPP. The CDPP has carriage of criminal matters once they are on foot: see below. However, for certain minor offences, ASIC has power to serve a penalty notice on the person (effectively, a fine) under Corporations Act s 1313. [page 97] Figure 2.2: ASIC’s approach to enforcement119

[page 98]

Role of the CDPP 2.84 Where it appears that a criminal offence has been committed, ASIC prepares a brief for the CDPP for a decision whether to prosecute, and for the conduct of that prosecution. The CDPP is an independent prosecuting agency, established under the Director of Public Prosecutions Act 1983 (Cth); it has no investigative powers or functions. The decision to investigate matters and the decision to refer matters to the CDPP is a decision for the relevant referring agency (such as ASIC, APRA or the Federal Police). The CDPP considers briefs of evidence referred by investigating agencies; by this process the decision to prosecute is taken independently of those who were responsible for the investigation. The CDPP determines whether charges should be pursued, and if so, which charges can be appropriately made out by the available evidence.120 The relationship between ASIC and the CDPP is set out in a Memorandum of Understanding (MOU) dated 1 March 2006, which outlines the liaison arrangements between the two and agrees upon the bases on which different types of enforcement action will be undertaken. Under the MOU, when ASIC believes a criminal offence may have been committed and has gathered sufficient evidence to enable it to support that view, ASIC is required to refer a brief of evidence to the CDPP in a timely manner. The decision to prosecute rests with the CDPP; the MOU requires that the CDPP will give appropriate weight to ASIC’s views concerning the public interest in prosecuting matters. In addition, the MOU permits ASIC to prosecute some summary regulatory offences as are agreed from time to time between ASIC and the CDPP at the national level. ASIC may conduct these proceedings where there is a guilty plea without reference to the CDPP and, where agreed, in such proceedings where there is not a guilty plea. The MOU also requires that ASIC will consult with the CDPP before making an application for a civil penalty order.

Civil penalty proceedings

2.85 Certain provisions of the Corporations Act are ‘civil penalty provisions’ for the purposes of Corporations Act Pt 9.4B. The civil penalty provisions are set out in Corporations Act s 1317E, and include ss 674 and 675 (continuous disclosure), 798H (complying with market integrity rules), 901E (complying with derivative transaction rules), 903D (complying with derivative trade repository rules), 961K and 961Q (financial services best interest duties), 962P and 962S (financial services fees), 963E, 963F, 963G, 963J and 963K (financial services conflicted remuneration), 964A (financial services shelf-space fees), 964D and 964E (financial services asset-based fees), 965 (financial services anti-avoidance), 985E, 985H, 985J, 985K, 985L, 985M (margin lending), 1041A (market manipulation), 1041B and 1041C (false trading and market rigging), 1041D (dissemination of information about illegal transactions) and 1043A (insider trading). The civil penalty regime [page 99] in the Corporations Act allows for the ‘punishment’ of contraventions that have a material impact, or are serious, through the imposition of a penalty that can be handed out by a civil (rather than criminal) court. The purpose of the penalties themselves is punitive. In ALRC Discussion Paper 65: Securing Compliance: Civil and Administrative Penalties in Australian Federal Regulation, April 2003, at [3.44] the Australian Law Reform Commission said: Civil pecuniary penalties are more closely aligned with criminal fines than with private law civil damages. Civil damages aim to compensate individuals for harm caused. Civil pecuniary penalties, on the other hand, serve a punitive purpose and are payable whether or not any harm was actually caused by the unlawful action. Whilst civil pecuniary penalties are thought not to entail the moral sanction of a criminal conviction, they do not serve as merely the tax or price on an illegal act.

The relationship between criminal proceedings and civil penalty proceedings is set out in ss 1317M, 1317N and 1317P of the Corporations Act. Under s 1317M, a court must not make a declaration of contravention or a pecuniary penalty order against a person for a contravention if the person has been convicted of an offence constituted by conduct that is substantially the same as the conduct constituting the

contravention. Proceedings under the civil penalty provisions must be stayed while a criminal prosecution is on foot. Criminal proceedings may be instigated after civil penalty proceedings. The nature and purpose of civil penalty provisions is discussed in Morley v Australian Securities and Investments Commission (2010) 247 FLR 140; 81 ACSR 285; [2010] NSWCA 331; and the materials to which the Court of Appeal refers: at [694].121

ASIC’s standing to bring proceedings 2.86 Where it believes that there has been a contravention of a civil penalty provision, ASIC has standing under Corporations Act s 1317J to make an application to a court for a declaration of contravention, a pecuniary penalty order, and a compensation order. Under Corporations Act s 1317E, if the court is satisfied that a person has contravened one of these provisions, it must make a declaration of contravention. The declaration of contravention specifies the provision that was contravened, the person who contravened it, the conduct constituting the contravention, and the corporation or registered scheme to which it related, and is conclusive evidence of those matters. The declaration of contravention may be accompanied by an order [page 100] that the person pay a civil penalty, or that they compensate a person affected by their contravention, or both.

Applicable rules of evidence and procedure 2.87 Proceedings for a declaration of contravention or pecuniary penalty order are civil proceedings; Corporations Act s 1317L specifies that ‘the Court must apply the rules of evidence and procedure for civil matters’ when hearing them.122 The civil burden of proof applies to proceedings brought under Pt 9.4B, including proceedings for the imposition of a civil penalty: see also Corporations Act s 1332. 2.88 Courts have consistently stated that the burden of proof is to be

applied in the manner described by Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at 362–3, that is, that ‘the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the satisfaction of the tribunal’.123 After referring to s 140(1) of the Evidence Act 1995 (Cth), Edelman J in ASIC v Cassimatis (No 8) [2016] FCA 1023 at [38]–[39] usefully summarised the principle in the following terms: Part of [the Briginshaw] principle is the consideration of the ordinary experience of people that the more grave the allegation, the less likely it might be expected to be (all other things being equal) that a respondent would, on the balance of probabilities, have committed the act. An assessment of the gravity of the allegations will include consideration of the likely consequences if the allegations are made out. As Mansfield and Gilmour JJ said in Ashby v Slipper [2015] FCAFC 15; (2014) 219 FCR 322, 345 [69] the more grave the allegations and their potential consequences, ‘the stronger is the evidence required to conclude that the allegations have been established which will give rise to those consequences’.

2.89 Because an order for a pecuniary penalty involves the imposition of a penalty, the privilege against exposure to a penalty applies. This means that the defendant cannot be compelled to provide proof against himself or herself.124 Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; [2004] HCA 42 involved the applicability of the privilege against self-exposure to penalty which could arise at various stages of case management of a civil case, including discovery and the filing of evidence. The High Court determined that provisions of the character identified as ‘civil penalty provisions’ in the Act were punitive. Their characterisation as protective, which had often been applied to such provisions, [page 101] was not an appropriate, or at least not a complete, statement of their character for purposes of the penalty privilege.

ASIC’s obligation to act fairly 2.90 In all proceedings ASIC as a government agency is expected to be a model litigant, and as such is expected to ‘adhere to those standards of fair dealing in the conduct of litigation that courts … have come to expect —

and where there has been a lapse therefrom, to exact — from the Commonwealth and from its officers and agencies’.125 This obligation manifests itself in different ways depending on the circumstances; examples given by the Full Federal Court in Scott v Handley [1999] FCA 404 include ensuring conscientious compliance with procedures designed to minimise cost and delay, assisting the court to arrive at the proper and just result, and not taking purely technical points of practice or procedure. The nature of civil penalty proceedings and the extent of ASIC’s ‘duty of fairness’ in relation to the conduct of those proceedings was discussed at length by the New South Wales Court of Appeal in Morley v Australian Securities and Investments Commission (2010) 247 FLR 140; 81 ACSR 285; [2010] NSWCA 331 at [626]–[777]. The Court of Appeal concluded that ASIC’s obligation of fairness gave rise to a duty to call particular evidence and that breach of this duty by not calling the evidence required discounting of whatever evidence ASIC did call in proof of its case. However, in Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345; 88 ACSR 246; [2012] HCA 17 at [147] the High Court held that neither the source of a duty of that kind, nor the source of the rule which was said to apply if that duty was breached, was sufficiently identified. In any event, ASIC’s failure to call the solicitor as a witness in its case was held to have occasioned no unfairness: at [156].126

Consequences of a declaration of contravention 2.91 Once a declaration of contravention has been made, Corporations Act s 1317G(1) allows a court to require the payment of a pecuniary penalty if the contravention has a material impact, or is (otherwise) serious. Under Corporations Act s 1317G, the court may order the person to pay the Commonwealth a [page 102] pecuniary penalty of up to $200,000 ($1 million in the case of a corporation) if the contravention: materially prejudices the interests of the company or the scheme, or

their respective members; materially prejudices the company’s ability to pay its creditors; or is serious. A contravention is ‘serious’ if ‘the default or neglect which constitutes a breach of the requisite duty’ is ‘grave or significant’.127 Various commentators have concluded that the test of seriousness involves an element of moral wrongdoing. The amount of the penalty is determined by reference to the same principles that underlie sentencing: ‘general deterrence and personal deterrence (where punishment is imposed to avert future harm), and rehabilitation and retribution (where punishment is imposed simply because the offender deserves it)’.128 In Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 at [125], Santow J noted that ‘the principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct’. Further, the penalty should be no greater than is necessary to achieve the objective of compliance with the appropriate standards of commercial conduct within the management of corporations by deterrents.129

Civil proceedings 2.92 ASIC also has standing to bring or intervene in various types of civil proceedings in respect of contraventions of the Corporations Act or the ASIC Act.

Injunction 2.93 ASIC has standing to seek injunctive relief with respect to contraventions of the Corporations Act (under Corporations Act s 1324) or the ASIC Act Pt 2 Div 2 (under ASIC Act s 12GD).130 The court may grant a permanent injunction even when a winding up order has already been made against a corporate defendant.131 Like the [page 103]

making of a declaration, the grant of an injunction under s 1324 may serve to mark the court’s disapproval of the defendant’s conduct and operate as a deterrent to others.132 The principles governing exercise of the court’s power under s 1324 are summarised by Palmer J in Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605; [2002] NSWSC 741; they are that the jurisdiction which the court exercises under s 1324 is statutory, and not the court’s traditional equity jurisdiction; the court is not to be confined by the considerations which would be applicable if it was exercising its traditional equity jurisdiction; the court should consider whether the injunction will have some utility or will serve some purpose within the contemplation of the Corporations Act, and that is so whether the application is for a permanent injunction under subs (1) or an interim injunction under subs (4); and when the application is made by ASIC rather than a private litigant, the court is likely to give greater weight to the question of whether the injunction will serve a purpose within the contemplation of the Corporations Act.133 These principles were accepted in relation to final relief by Martin J in Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 58 at [248];134 however, his Honour considered that ordinarily principles (serious question to be tried, and balance of convenience) apply to the grant of interim or interlocutory injunctions under s 1324.135 Section 1324(1) gives the court power to grant an injunction to restrain a breach or potential breach of the Corporations Act; the injunction may be granted in respect of conduct that is a contravention of the Act or that amounts to involvement in a contravention of the Act. The relevant principles and considerations were addressed by Santow J in ASIC v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 at [56]; that case concerned disqualification orders, but the same principles have been held to apply to restraint orders made under s 1324.136 Section 1324(2) gives the court power to grant an injunction requiring a person to do an act or thing required by the Corporations Act. Section 1324(10) gives the court power to order the payment of damages, either in addition to or in substitution for the grant of the injunction.137

Section 12GD of the ASIC Act provides for prohibitory injunctions to restrain contraventions of ASIC Act Pt 2 Div 2 (that is, unconscionable conduct and consumer [page 104] protection in relation to financial services). As with s 1324(1) of the Corporations Act, s 12GD of the ASIC Act gives the court power to restrain conduct that contravenes the relevant provisions, or amounts to involvement in a contravention. Section 12GD does not provide for mandatory injunctions or damages in the alternative.

Representative proceedings brought by ASIC 2.94 ASIC may bring civil proceedings for damages or the recovery of property in the name of a third party, if as a result of an investigation it appears to it that it is in the public interest that such proceedings should be brought: ASIC Act s 50.138 This section has a remedial purpose, and ASIC’s decision whether it is in the public interest that proceedings should be brought involves the exercise of a wide discretion as to which matters, such as the regulatory purpose of the proceedings, their prospects of success and the likelihood of recovery, will be relevant.139 An action can be brought under this section in relation to breach of trust by a trustee, which constitutes a breach of duty for the purposes of the section.140. Proceedings can be commenced under this section even if ASIC’s investigation has not been completed.141 ASIC may commence such proceedings in the name of a company, with or without the consent of that company, and in the name of natural persons, but only with their written consent given prior to the proceedings being commenced: s 50(c)–(d). A decision made by ASIC or its delegate to bring proceedings under this section may be reviewable under the ADJR Act: see 2.23 above.142 That decision would also be reviewable in proceedings under Judiciary Act 1903 (Cth) s 39B, on the basis that that decision was made by an officer of the Commonwealth.143

Application for compensation on behalf of persons affected

2.95 ASIC may, in certain circumstances, make application to the court for orders compensating people affected by contraventions of Chs 5C (managed investments), 6CA (continuous disclosure), 6D (fundraising) or Pt 7.10 (market misconduct) of the Corporations Act. Where a person is found to have engaged in conduct in contravention of these provisions, ASIC may make an application under Corporations Act s 1325(2) on behalf of ‘one or more persons identified in the application who have suffered, or are likely to suffer, loss or damage by the conduct’. However, ASIC must not make the application except with the consent in writing given before the application is made by the person, or by each of the persons, on whose behalf the application is made. [page 105] ASIC may make an application on a similar basis under ASIC Act s 12GM, in respect of contraventions of ASIC Act Pt 3 Div 3 (unconscionable conduct and consumer protection).

Other orders 2.96 ASIC has standing to make application for a variety of other specific orders in connection with contraventions of the securities and financial services law, including under Corporations Act ss 983A (for restraining orders in relation to accounts of financial services licensees), 1101B (for contraventions of Ch 7 or market operating rules), 1323 (for orders prohibiting payment or transfer of money or property),144 1324B (for orders to disclose information or publish advertisements), 1325A (for contraventions of Chs 6, 6A, 6B or 6C), 1325B (in relation to takeover bids) and 1325C (in relation to unfair or unconscionable arrangements); and ASIC Act ss 12GLA (for non-punitive orders), 12GLB (for punitive orders requiring adverse publicity) and 12GN (for orders prohibiting payment or transfer of money or property). ASIC may also intervene in proceedings as to matters arising under Corporations Act s 1330.145 ASIC’s Information Sheet 180 — ASIC’s Approach to Involvement in Private Court Proceedings, June 2013 explains when ASIC will intervene in private court proceedings.

Administrative actions 2.97 ASIC also has available a range of administrative options that may be utilised in connection with enforcement. These include its power to issue stop orders and infringement notices, to accept enforceable undertakings, to vary or suspend an AFS licence, or to make orders excluding persons from the financial services industry.

Stop orders 2.98 ASIC can prevent the dissemination of, and issue of securities or financial products pursuant to, defective disclosure documents using its stop order powers in Corporations Act ss 739 (for disclosure documents issued under Ch 6D) and 1020E (for Product Disclosure Statements issued under Pt 7.9). The circumstances in which ASIC is authorised to act under Corporations Act s 739(1) are explained in Thompson v Australian Securities and Investments Commission (2002) 117 FCR 159; 41 ACSR 456; [2002] FCA 512 at [31]. An order may be made where, and only where: a disclosure document (see s 705) in respect of an offer of securities (see s 700) has in fact been lodged with ASIC; ASIC is satisfied that an offer of securities under that disclosure document would contravene s 728; and [page 106] it remains possible for an order under the subsection to operate according to its terms in the sense that an offer, issue, sale or transfer of securities under the disclosure document lodged with ASIC may still be made. Where ASIC is authorised to act under s 739(1), it must, before making any order other than an interim order, hold a hearing and give a reasonable opportunity to any interested people to make oral or written

submissions to ASIC on whether an order should be made: see s 739(2). Where ASIC considers that any delay in making a stop order pending the holding of a hearing would be prejudicial to the public interest, it may make an interim order under s 739(3). Before ASIC may issue an interim order under s 739(3) it must be authorised to act under s 739(1). It must have decided (subject to the outcome of the hearing under s 739(2)), to exercise the discretion given to it by s 739(1) in favour of making an order under s 739(1); and consider that any delay in making an order under s 739(1) pending the holding of the hearing required by s 739(2) would be prejudicial to the public interest.

Infringement notices 2.99 Part 9.4AA of the Corporations Act allows for the issue by ASIC of infringement notices for alleged contraventions of the continuous disclosure provisions in ss 674 and 675 of the Corporations Act. The purpose of the Part is ‘to provide for the issue of an infringement notice to a disclosing entity for an alleged contravention of s 674(2) or s 675(2) as an alternative to proceedings for civil penalties under Pt 9.4B’: s 1317DAB. Infringement notices are discussed in Chapter 7 below. A disclosing entity that receives an infringement notice has two options open to it. It can comply with the notice (which includes paying the amount of the penalty specified in the notice), in which case ASIC is precluded from bringing certain proceedings against the entity in respect of the alleged contravention: see Corporations Act s 1317DAF(5). Or it can choose not to comply with the notice, in which case ASIC is free to pursue the normal remedies for non-compliance against the entity: Corporations Act s 1317DAG.

Enforceable undertakings 2.100 Another of the enforcement options open to ASIC is to accept an enforceable undertaking under ASIC Act s 93AA. ASIC is able to accept enforceable undertakings ‘in connection with a matter in relation to which the Commission has a function or power’ under the ASIC Act. The provision was introduced by the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth) and is modelled on s 87B of the former Trade Practices Act 1974 (Cth). An undertaking given in

accordance with s 93AA can be enforced by ASIC through the courts. Section 93AA says that, if ASIC considers that a person who gave the undertaking has breached any of its terms, ASIC may apply to the court for orders, including orders that the person comply with the undertaking, disgorge to the Commonwealth any benefit arising from the breach, or compensate a person suffering loss or damage as a result of the breach. ASIC’s policy on enforceable undertakings is contained in ASIC Regulatory Guide 100 — Enforceable Undertakings, February 2015. The Guide indicates that ASIC may accept an enforceable undertaking instead of seeking a civil order from [page 107] a court (for example, an award of damages or compensation, or an injunction), taking administrative action (for example, cancelling a licence), or referring a matter to another administrative body. ASIC will not accept an enforceable undertaking instead of commencing criminal proceedings, to secure payment of a pecuniary civil penalty, in respect of deliberate misconduct or fraud, for trivial matters, or as an alternative form of relief. Nor will it accept an undertaking once a matter has been referred to a specialist body such as the Financial Reporting Panel or the Takeovers Panel. Importantly, undertakings are used only where ASIC has formed the view that a breach has occurred. ASIC’s policy indicates that it ‘will not consider an enforceable undertaking unless we have reason to believe there has been a contravention of relevant legislation and have commenced an investigation into the conduct we believe gives rise to the suspected breach. We will not contemplate an undertaking to forestall an investigation’: RG 100.17. The policy goes on to state that ASIC will use an ‘enforceable negotiated settlement only if we consider it provides a more effective regulatory outcome than non-negotiated, administrative or civil sanctions’: RG 100.18.

Licensing actions

2.101 Part 7.6 Div 4 of the Corporations Act sets out ASIC’s (extensive) powers under the Australian financial services licensing regime. These powers are discussed in 13.48 below. They include power to impose, vary or revoke conditions on an AFS licence under Corporations Act s 914A, and power to suspend or cancel a licence either immediately (Corporations Act s 915B) or after a hearing: Corporations Act s 915C. ASIC’s powers in relation to licensing are subject to limitations where the licensee is an APRA regulated body (such as a bank).

Banning orders 2.102 Under Corporations Act Pt 7.6 Div 8, ASIC has power to make a banning order against a person in certain circumstances, including where the person becomes an insolvent under administration, or is convicted of fraud. A banning order is a written order that prohibits a person from providing any financial services or specified financial services in specified circumstances or capacities: Corporations Act s 920B(i). Importantly, ASIC also has power to make a banning order where the person has not complied with a financial services law, or ASIC has reason to believe the person will not comply with a financial services law. The banning order may be made only after giving the person an opportunity to appear, or be represented, at a hearing before ASIC that takes place in private and to make submissions to ASIC on the matter (except where the banning follows the person’s conviction for serious fraud): Corporations Act s 920A(2). The banning order must be accompanied by a statement of reasons for the order: Corporations Act s 920F. As with all of ASIC’s decision-making powers, its power to make banning orders is subject to review under applicable principles of Commonwealth administrative law. The banning order may be for a specific period, or operate permanently. Banning orders are discussed in 13.56–13.59 below. [page 108]

OTHER ASIC ACT BODIES

2.103 The ASIC Act provides for the establishment of a number of bodies with responsibility for particular policy and administrative functions in relation to corporate and financial services regulation. The bodies with responsibilities related to the subject matter of this book are ASIC (see 2.12), the Takeovers Panel, CAMAC, and the Parliamentary Joint Committee on Corporations and Financial Services (PJC). The other bodies established under the ASIC Act are the Financial Reporting Council, the Australian Accounting Standards Board, and the Auditing and Assurance Standards Board (which perform various functions related to financial reporting) and the Companies Auditors and Liquidators Disciplinary Board.

Corporations and Markets Advisory Committee 2.104 CAMAC is provided for in ASIC Act Pt 9; its purpose is to provide a source of independent advice to the government on issues that arise from time to time in corporations and financial markets law and practice: see ASIC Act s 1(1)(c). In spite of widespread opposition from across the business and legal community, CAMAC was defunded by the Commonwealth Government in 2014 and is, at the time of writing, not operating.

Parliamentary Joint Committee 2.105 The PJC is established under ASIC Act Pt 14; it consists of five members of the House of Representatives and five Senators who are not Ministers. Its duties are set out in ASIC Act s 243: among other things it inquires into, and reports on, the activities of ASIC and the Takeovers Panel, and the operation of the relevant legislation. The PJC exercises its oversight function by holding hearings twice yearly at which the operations of ASIC are scrutinised. ___________________________ 1.

In NSW v Commonwealth (1990) 169 CLR 482; 1 ACSR 137; [1990] HCA 2 (Corporations Act case) the majority of the High Court (Deane J dissenting) affirmed that s 51(xx) did not confer power on the Commonwealth to provide for the incorporation of companies. For a discussion of the extent of

the Commonwealth’s power under s 51(xx) to make laws with respect to constitutional corporations already formed, see NSW v Commonwealth (2006) 229 CLR 1; [2006] HCA 2 (Workchoices case). 2.

CAMAC was defunded by the Commonwealth Government in 2014 and, while it remains in the ASIC Act, at the time of writing it is not operating.

3.

Available at , viewed 4 September 2016.

4.

The excluded provisions include ASIC Act s 12A and Pt 2 Div 2, which deal with unconscionable conduct and consumer protection in relation to financial services.

5.

See , go to ‘Our role’, and ‘Statements of expectation and intent’.

6.

See ASIC Annual Report 2009–10, p 6.

7.

ASIC Capability Review Panel, Fit for the Future, A Capability Review of the Australian Securities and Investments Commission, 2015, Figure 10.

8.

For a discussion of ASIC’s accountability framework, see ASIC Capability Review Panel, Fit for the Future, A Capability Review of the Australian Securities and Investments Commission, above [1.2]. See also D Nestorovska, ‘Assessing Effectiveness of ASIC’s Accountability Framework’ (2016) 34 C&SLJ 193.

9.

ASIC Act ss 11(4) and 12A(6).

10.

For a discussion of the range of powers conferred on ASIC in connection with enforcement, see, for example, Morley v Australian Securities and Investments Commission (2010) 247 FLR 140; 81 ACSR 285; [2010] NSWCA 331 at [725].

11.

In December 2015, the ASIC Capability Review Panel recommended changes to the governance of ASIC: see Fit for the Future, A Capability Review of the Australian Securities and Investments Commission, A Report to Government, above.

12.

Acts Interpretation Act 1901 (Cth) s 34AA; Re BPTC Ltd (in liq) (No 2) (1992) 8 ACSR 533 at 537; aff’d Burns Philp & Co Ltd & Burns v Murphy (1993) 29 NSWLR 723; 10 ACSR 244.

13.

See, for example, Re Civic Capital Ltd and Australian Securities and Investments Commission (2007) 99 ALD 658; [2007] AATA 2042; Hneidi v Minister for Immigration and Citizenship (2010) 182 FCR 115; [2010] FCAFC 20 at [41]–[44]; Lantern Hotel Group v Australian Securities and Investments Commission [2015] AATA 428 at [104]–[105].

14.

Re Green (as voluntary administrators of Bevillesta Pty Ltd) (2011) 84 ACSR 215; [2011] NSWSC 417 at [29].

15.

Minister for Immigration v Gray (1994) 50 FCR 189 at 208; Australian Securities and Investments Commission v Administrative Appeals Tribunal (2011) 195 FCR 485; 85 ACSR 227; [2011] FCAFC 114 at [129].

16.

Australian Securities and Investments Commission v Administrative Appeals Tribunal (2011) 195 FCR 485; 85 ACSR 227; [2011] FCAFC 114 at [130].

17.

Instruments made before 2015 used the prefix ‘CO’ before their number. For example, instrument 03/67 is a class order, and is referred to as [CO 03/67]. From 2015 legislative instruments are cited using their full title, for example, ASIC Corporations (Advertising by Product Issuers) Instrument 2015/539.

18.

ASIC Regulatory Guide 108 — No-action Letters, December 2009.

19.

See generally, P Hanks and S Newman, ‘Standing in the Australian Securities Commission’s Shoes:

The Administrative Appeals Tribunal and the Corporations Law’ (1992) 10 C&SLJ 318. 20.

See, for example, Jeffers v Australian Securities and Investments Commission (2015) 67 AAR 50; [2015] AATA 537; O’Sullivan v Australian Securities and Investments Commission (2015) 66 AAR 296; [2015] AATA 265. See also S Rosewarne, Individual Rights and Protection of the Public: The Corporate Regulator, the AAT and Balancing the Competing Interests (online), AIAL Forum (65), May 2011, pp 55–62.

21.

See Shi v Migration Agents Registration Authority (2008) 235 CLR 286; [2008] HCA 31 at [35] (Kirby J); at [98]–[99] (Hayne and Heydon JJ); see also Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 at 588 (Bowen CJ and Deane J).

22.

Re Queensland Power Trading Corporation and Australian Securities and Investments Commission (2005) 89 ALD 346 at 362.

23.

See Australian Securities and Investments Commission v Donald (2003) 136 FCR 7; 48 ACSR 394; [2003] FCAFC 318 at [24] (Kenny J).

24.

Australian Securities and Investments Commission v Murdaca (2008) 105 ALD 461; 68 ACSR 66; [2008] FCA 1399 (Gordon J).

25.

See TNT Skypak International (Aust) Pty Ltd v Commr of Taxation (1988) 82 ALR 175 at 178; Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321; [2003] FCAFC 232 at [11], [16]; Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290; 47 ACSR 649; [2003] FCAFC 244 at [42], [107]; Australian Securities and Investments Commission v Administrative Appeals Tribunal (2011) 195 FCR 485; 85 ACSR 227; [2011] FCAFC 114 at [82].

26.

Vetter v Lake Macquarie City Council (2001) 202 CLR 439; [2001] HCA 12 at [24] (Gleeson CJ, Gummow and Callinan JJ).

27.

Vetter v Lake Macquarie City Council (2001) 202 CLR 439; [2001] HCA 12 at [27].

28.

Australian Securities and Investments Commission v Administrative Appeals Tribunal (2011) 195 FCR 485; 85 ACSR 227; [2011] FCAFC 114 at [112].

29.

See Australian Broadcasting Tribunal v Bond (1990) 70 CLR 321; 94 ALR 11; [1990] HCA 33; Panganiban v Australian Securities and Investments Commission (2016) 113 ACSR 452; [2016] FCA 510.

30.

Attorney-General (NSW) v Quin (1990) 170 CLR 1 at 35–6; 93 ALR 1 at 25.

31.

Panganiban v Australian Securities and Investments Commission (2016) 113 ACSR 452; [2016] FCA 510 at [69].

32.

Australian Securities and Investments Commission v Edensor Nominees Pty Ltd (2001) 204 CLR 559; 37 ACSR 1; [2001] HCA 1.

33.

Hongkong Bank of Australia Ltd v Australian Securities Commission (1992) 108 ALR 70 at 75; 7 ACSR 724 at 728; Australian Securities and Investments Commission v Edensor Nominees Pty Ltd (2001) 204 CLR 559; 37 ACSR 1; [2001] HCA 1.

34.

See East Australian Pipeline Pty Ltd v Australian Competition and Consumer Commission (2007) 233 CLR 229; 63 ACSR 404; [2007] HCA 44.

35.

In addition, Corporations Act s 911A(2)(l) provides that a person is exempt from the requirement to hold an AFS licence for a financial service that is covered by an exemption specified by ASIC in writing and published in the Gazette. The source of ASIC’s power to grant an exemption from the AFS licensing requirement is probably Corporations Act s 926A, rather than s 911A(2)(l) itself: see Re Queensland Power Trading Corporation and ASIC (2005) 89 ALD 346 at 360. However, this is not clear, as s 911A(2)(1) has been in the Act since the commencement of the Financial Services Reform

Act 2001 (Cth), while s 926A was inserted by the Financial Services Reform Amendment Act 2003 (Cth). 36.

The reports are available at , and go to ‘Publications’, ‘Reports’ and ‘Reports on relief applications’.

37.

Re Prudential Investment Co of Australia Ltd (2003) 49 ACSR 147; [2003] ATP 36 at ACSR 160.

38.

See M J Whincop, ‘The Institutional Politics of Corporate Law in Australia: From Gambotto to DB Management’ (2000) 11 AJCL 1.

39.

The power in Corporations Act s 907D is only an exemption power.

40.

Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 496; [1948] 1 ALR 89 (Latham CJ).

41.

See Drake v Minister for Immigration and Ethnic Affairs (No 1) (1979) 24 ALR 577 at 590–1 (Bowen CJ and Deane J).

42.

Johns v Australian Securities Commission (1992) 7 ACSR 703; aff’d: (1992) 8 ACSR 156; further aff’d: (1993) 178 CLR 408; 11 ACSR 467; [1993] HCA 56.

43.

Johns v Australian Securities Commission (1993) 178 CLR 408; 11 ACSR 467.

44.

That is, s 12A or Div 2 Pt 2 of the ASIC Act.

45.

The power in s 30A, under which an auditor can be required to produce books, can only be exercised for the purposes of performing or exercising ASIC’s functions and powers relating to audit-related matters or overseas audit requirements, and is not further discussed here.

46.

The term ‘books’ is widely defined in ASIC Act s 5(1) as including a register; accounts or accounting records, however compiled, recorded or stored; a document; banker’s books; or any other record of information. The terms ‘accounts’, ‘accounting records’ and ‘banker’s books’ are each defined in Corporations Act s 9. The term ‘document’ is also defined in s 9 and includes information stored on tape, microfiche, computer disc, or by some other electronic or mechanical means. Production of information held on computer may occur by production of a document which reproduces that information: Ace Custom Service Pty Ltd v Collector of Customs (1991) 3 FCR 576 at 585.

47.

That is, the Corporations Act or the ASIC Act or a law of the Commonwealth or of a state or territory that concerns the management or affairs of a body corporate, or involves fraud or dishonesty and relates to a body corporate: ASIC Act s 28(c).

48.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [31].

49.

If the person specified is a body corporate, then ASIC can also require production from a person who is or has been an officer or employee of the body, because of ASIC Act s 84.

50.

Dunlop Olympic Ltd v Trade Practices Commission (1982) 62 FLR 145.

51.

See also McDonald v Australian Securities Commission (1993) 30 ALD 71 (Davies J).

52.

See also Melbourne Home of Ford Pty Ltd v Trade Practices Commission (1980) 31 ALR 514 at 529; Pyneboard Pty Ltd v Trade Practices Commission (1982) 39 ALR 565 at 572.

53.

Curlex Manufacturing Pty Ltd v Carlingford General Insurance Ltd [1987] 2 Qd R 335; Grofam Pty Ltd v ANZ Banking Group Ltd (1993) 43 FCR 408; GE Capital Corporate Finance Group Ltd v Bankers Trust Company [1995] 1 WLR 172; 2 All ER 993.

54.

O’Reilly v Commissioners of State Bank of Victoria (1983) 153 CLR 1 at 48; 46 ALR 225 at 234–5 (Mason, Murphy, Brennan and Deane JJ).

55.

The word ‘affairs’ in that context has the same meaning as in Corporations Act s 232: ASIC Act s 5(1): see General Benefits Pty Ltd v Australian Securities and Investments Commission (2001) 161 FLR 82; [2001] SASC 137 at [42]. The ‘affairs of a body corporate’ is in turn defined in s 53 of the Corporations Act to include a wide range of matters: Bond Corporation Holdings v Sulan (1990) 2 ACSR 435 at 441.

56.

Australian Securities Commission v Lucas (1992) 7 ACSR 676 at 682.

57.

See Australian Securities Commission v Zarro (1991) 32 FCR 546; 6 ACSR 385; General Benefits Pty Ltd v Australian Securities and Investments Commission (2001) 161 FLR 82; [2001] SASC 137 at [44], [48].

58.

See FCT v ANZ Banking Group Ltd (1979) 143 CLR 499; 23 ALR 480, where the High Court held that a notice under s 264 of the Income Tax Assessment Act 1936 (Cth) could validly require a bank to produce documents which it held in a safe deposit box on behalf of its client. Gibbs ACJ noted that such a notice could be given to a person who had physical possession of documents, whether or not that person had a legal right to those documents; and could also be given to a person who had legal control over the documents or a legal right to possession of the documents, whether or not they were in his or her physical custody.

59.

Australian Securities Commission v Dalleagles Pty Ltd (1992) 8 ACSR 109.

60.

Integrated Financial Group Pty Ltd v Australian Securities and Investments Commission (2004) 183 FLR 8; 49 ACSR 509; [2004] WASC 75 at [70]; aff’d (2004) 187 FLR 7; 50 ACSR 673; [2004] WASCA 213.

61.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [56].

62.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [96].

63.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [103].

64.

Australian Securities Commission v Lucas (1992) 7 ACSR 676; Kotan Holdings Pty Ltd v Trade Practices Commission (1991) 102 ALR 51.

65.

Spargos Mining NL v Standard Chartered Australia Ltd (No 2) (1989) 1 ACSR 314.

66.

Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2004) 50 ACSR 406; [2004] NSWSC 859.

67.

Corporate Affairs Commission (NSW) v Yuill (1991) 172 CLR 319; 4 ACSR 624.

68.

von Doussa v Owens (1982) 6 ACLR 692.

69.

See Australian Securities Commission v Zarro (1991) 105 ALR 227; 6 ACSR 385.

70.

At general law, the privilege against self-incrimination has the effect that a person may not be required to answer a question which would have a tendency to expose that person to a reasonably likely risk of a criminal charge, penalty or forfeiture: Blunt v Park Lane Hotel Ltd [1942] 2 KB 253 at 257; Sorby v Commonwealth (1983) 152 CLR 281. See also Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; T Middleton, ‘The High Court’s Decision in Rich v ASIC and its Potential Impact upon ASIC’s Disqualification Orders, Banning Orders and Oral Examinations’ (2005) 23 C&SLJ 248; J P Knackstredt, ‘The Evolution of Civil Penalty Proceedings’ (2006) 24 C&SLJ 56. The privilege against self-incrimination can also be raised in civil cases; see Australian Securities and Investments Commission (ASIC) v Mining Projects Group Ltd (2007) 164 FCR 32; 65 ACSR 264; [2007] FCA 1620 at [7]–[9] (Finkelstein J).

71.

The decision is summarised in Re Australian Property Custodian Holdings Ltd (in liq) (recs and mgrs

apptd) (controllers apptd) (No 3) (2013) 93 ACSR 382; [2013] VSC 154 at [120]–[121]. 72.

Under ss 118 and 119 of the Evidence Act 1995 (Cth), the circumstances in which legal professional privilege may be claimed, in relation to proceedings in a federal court or a court in the Australian Capital Territory or New South Wales, also include a document or advice which was brought into existence with the dominant purpose of a client being provided with legal advice or professional legal services relating to actual or contemplated legal proceedings.

73.

Esso Australia Resources Ltd v Federal Commr of Taxation (1999) 74 ALJR 339.

74.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [34].

75.

Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477; 118 ALR 392.

76.

Australian Securities Commission v Lucas (1992) 7 ACSR 676; Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [78].

77.

Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; Hussein v Chung Fook Cam [1967] 3 All ER 1626.

78.

Sim v National Companies and Securities Commission (1988) 13 ACLR 191.

79.

National Companies and Securities Commission v Sim (No 2) (1986) 11 ACLR 171 at 176.

80.

Little River Goldfields NL v Moulds (1991) 32 FCR 456; 6 ACSR 299 at 305; Australian Securities Commission v Rohani (1998) 29 ACSR 106 at 107; Boys v Australian Securities Commission (1997) 24 ACSR 1; aff’d (1998) 152 ALR 219; 26 ACSR 464; Kennedy v Australian Securities and Investments Commission (2005) 142 FCR 343; 52 ACSR 301; [2005] FCAFC 32 at [104].

81.

Johns v Australian Securities Commission (1993) 178 CLR 408 at 426; Kennedy v Australian Securities and Investments Commission (2005) 142 FCR 343; 52 ACSR 301; [2005] FCAFC 32 at [104].

82.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [58].

83.

National Companies and Securities Commission v Sim (No 2) (1986) 11 ACLR 171; Sim v National Companies and Securities Commission (1988) 13 ACLR 191.

84.

Little River Goldfields NL v Moulds (1991) 32 FCR 456; 6 ACSR 299 at 309.

85.

Karounos v Corporate Affairs Commission (1989) 7 ACLC 567.

86.

Norwest Holst v Dept of Trade and Industry [1978] Ch 201; News Corporation Ltd v National Companies and Securities Commission (No 3) (1983) 8 ACLR 338; 49 ALR 719; Karounos v Corporate Affairs Commission (1989) 7 ACLC 567.

87.

News Corporation Ltd v National Companies and Securities Commission (No 3) (1983) 8 ACLR 338 at 351; 49 ALR 719 at 754.

88.

National Companies and Securities Commission v News Corporation Ltd above; Kioa v West (1985) 159 CLR 550 at 584–5; Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 at 90; Bond Corporation Holdings Ltd v Sulan (1990) 26 FCR 580; 3 ACSR 172; Annetts v McCann (1990) 170 CLR 596; National Companies and Securities Commission v Bankers Trust Australia Ltd (1989) 24 FCR 217; 1 ACSR 330.

89.

Australian Securities and Investments Commission v Plymin (No 3) (2002) 42 ACSR 670; [2002] VSC 358 at [25]–[26].

90.

See Maxwell v Dept of Trade and Industry [1974] QB 523 at 524; Bond v Australian Broadcasting Tribunal (No 2) (1988) 84 ALR 646; Bond v Sulan (1990) 3 ACSR 172 at 179.

91.

See Commr of Police v Reid (1989) 18 ALD 439; R v Serious Fraud Office; Ex parte Nadir (1991) 1 All ER 730.

92.

R v Commonwealth Conciliation and Arbitration Commission; Ex parte Angliss Group (1969) 122 CLR 546 at 553; R v Watson; Ex parte Armstrong (1976) 136 CLR 248 at 262–3; R v Maurice; Ex parte AttorneyGeneral (Northern Territory) (1987) 73 ALR 123; Laws v Australian Broadcasting Tribunal (1990) 170 CLR 70 (Mason CJ and Brennan J at 87–8; Gaudron and McHugh JJ at 99–102).

93.

Boys v Australian Securities Commission (1997) 24 ACSR 1; aff’d (1998) 152 ALR 219; 26 ACSR 464; Clements v Bower (1990) 2 ACSR 573; Richmond River Pty Ltd v Australian Broadcasting Tribunal (1992) 34 FCR 385; Winter v Australian Securities Commission (1995) 56 FCR 107; 16 ACSR 61; McLachlan v Australian Securities Commission (1995) 28 ACSR 473.

94.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [45].

95.

Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [47].

96.

Australian Securities Commission v Graco (1991) 29 FCR 491; 5 ACSR 1 (Jenkinson J).

97.

Australian Securities Commission v Graco (1991) 29 FCR 491; 5 ACSR 1; Johns v Connor (1992) 35 FCR 1; 7 ACSR 519 at 532; Johns v Australian Securities Commission (1992) 35 FCR 146; 8 ACSR 156 at 176–9, on appeal (1993) 178 CLR 408; 11 ACSR 467; Stockbridge v Ogilvie (1993) 43 FCR 244; 10 ACSR 688; Australian Securities Commission v Avram (1996) 70 FCR 481; 22 ACSR 307; Australian Securities and Investments Commission v Sigalla (No 2) (2010) 79 ACSR 198; [2010] NSWSC 792 at [77].

98.

Australian Securities Commission v Graco (1991) 29 FCR 491; 5 ACSR 1; Johns v Connor above at ACSR 530; Johns v Australian Securities Commission (1992) 35 FCR 146; 8 ACSR 156 at ACSR 177; Kennedy v Australian Securities and Investments Commission (2005) 142 FCR 343; 52 ACSR 301; [2005] FCAFC 32 at [109].

99.

Australian Securities Commission v Graco (1991) 29 FCR 491; 5 ACSR 1 at ACSR 5; Johns v Connor (1992) 35 FCR 1; 7 ACSR 519 at ACSR 532; Stockbridge v Ogilvie (1993) 43 FCR 244; 10 ACSR 688.

100. Kennedy v Australian Securities and Investments Commission (2005) 142 FCR 343; 52 ACSR 301; [2005] FCAFC 32 at [109]–[112]. 101. Australian Securities Commission v Kutzner (1998) 25 ACSR 723. 102. Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2004) 186 FLR 295; 50 ACSR 406. 103. Australian Securities and Investments Commission v Loiterton (2000) 101 FCR 370; [2000] FCA 973 at [20], [24]–[27]. 104. Re Davies-Roe and the Companies Act [1965] NSWR 767; Re Pergamon Press [1971] Ch 388; Harper v Costigan (1983) 50 ALR 665 at 675 (Morling J). 105. See Perron Investments (1989) 89 ATC 4310; H R Sorenson, ‘The Section 264(1) Examination’ (1996) 25 ATR 5 at 17. 106. Australian Securities and Investments Commission v Activesuper Pty Ltd (2015) 105 ACSR 116; [2015] FCA 342 at [79]. 107. National Companies and Securities Commission v Bankers Trust Australia Ltd (1989) 24 FCR 217; 1 ACSR 330 at 336, 346–7; Gangemi v Australian Securities and Investments Commission (2003) 45 ACSR 383; [2003] FCA 494 at [30].

108. Wood v National Companies and Securities Commission (1990) 2 WAR 176; 1 ACSR 779; National Companies and Securities Commission v Bankers Trust Australia Ltd (1989) 24 FCR 217; 1 ACSR 330. 109. Wood v National Companies and Securities Commission (1990) 2 WAR 176; 1 ACSR 779; Australian Securities Commission v Bell (1991) 32 FCR 517; 6 ACSR 281 (not upholding the exclusion on the facts); Stockbridge v Ogilvie (1993) 43 FCR 244; 10 ACSR 688 (upholding the exclusion); Re Macquarie Advisory Group Pty Ltd (rec appt’d); Macquarie Advisory Group Pty Ltd (rec appt’d) v Australian Securities and Investments Commission (1999) 33 ACSR 106 (not upholding the exclusion); Gangemi v Australian Securities and Investments Commission (2003) 129 FCR 284; 45 ACSR 383 (upholding the exclusion). 110. Collard v Australian Securities and Investments Commission (2008) 252 ALR 353; [2008] FCA 1681. 111. Ex parte Wardley Australia Ltd; Ex parte Bond Corporation Holdings Ltd (1991) 9 ACLC 1565. 112. National Companies and Securities Commission v News Corporation Ltd (1984) 52 ALR 417; Connell v National Companies and Securities Commission (1989) 14 ACLR 765. 113. Ex parte Wardley Australia Ltd; Ex parte Bond Corporation Holdings Ltd (1991) 9 ACLC 1565; ASIC RG 103.16. 114. Re ABM Pastoral Co Pty Ltd (1978) 3 ACLR 239; Australian Securities Commission v Kutzner (1998) 25 ACSR 723; Smith v Papamihail (1998) 88 FCR 80; 29 ACSR 184. 115. Re ABM Pastoral Co Ltd (1978) 3 ACLR 239. 116. ANZ Bank Ltd v Ryan (1968) 88 WN(NSW) (Pt 1) 368 at 373. 117. Australian Securities and Investments Commission v Hellicar (2012) 88 ACSR 246; [2012] HCA 17 at [243]. 118. For a general discussion of the application of the Code to offences under the Corporations Act and the ASIC Act, see P Hanrahan, Funds Management in Australia: Officers’ Duties and Liabilities, LexisNexis Butterworths, Sydney, 2007, Ch 13. For a discussion of the Code and Pt 7.10 of the Corporations Act, see J Longo, ‘Market Misconduct Provisions of the Financial Services Reform Act: Challenges for Market Regulation’, paper presented at the Centre for Corporate Law and Securities Regulation seminar on Market Misconduct and the Financial Services Reform Bill, 25 July 2001, Melbourne and 14 August 2001, Sydney, available at . 119. ASIC, Information Sheet 151 – ASIC’s Approach to Enforcement, 2013. 120. For a useful discussion of the relationship between ASIC and the CDPP, see Public Submission by the Commonwealth Director of Public Prosecutions (CDPP) to the Senate Economics References Committee Inquiry into the Performance of the Australian Securities and Investments Commission, 13 December 2013. 121. Senate Standing Committee on Legal and Constitutional Affairs (Cooney Committee), Company Directors Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors, 1989, [10.21]–[10.24], [13.05]–[13.15]; Australian Law Reform Commission, Principled Regulation: Federal Civil and Administrative Penalties in Australia, ALRC Report 95, December 2002, [2.45]–[2.63]. For background, see K Mann, ‘Punitive Civil Sanctions: The Middle Ground between Criminal and Civil Law’ (1992) 101 Yale LJ 1795; and G Santow, ‘The Trial of Complex Corporate Transgressions — The United Kingdom Experience and the Australian Context’ (1993) 67 ALJ 265. The history and significance of this regime continues to be discussed; see, for example, T Middleton, ‘The Difficulties of Applying Civil Evidence and Procedural Rules in ASIC Civil Penalty Proceedings under the Corporations Act’ (2003) 8 C&SLJ 507; V Comino, ‘Civil or Criminal Penalties for Corporate Misconduct — Which Way Ahead?’ (2006) UQLRS 1; (2006) 34 ABLR 428; V Comino, ‘The Challenge of Corporate Law Enforcement in Australia’ (2009) 23 AJCL 233. 122. See generally, Australian Securities and Investments Commission v Hellicar (2012) 88 ACSR 246; [2012]

HCA 17. 123. See, for example, Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; [2003] NSWCA 131 at [146]–[149]; Whitlam v Australian Securities and Investments Commission (2003) 57 NSWLR 559; 46 ACSR 1; [2003] NSWCA 183 at [117]–[118]; Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 at [437]; Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 at [404]–[412]; Morley v Australian Securities and Investments Commission (2010) 247 FLR 140; 81 ACSR 285; [2010] NSWCA 331 at [745]. 124. See TPC v Abbco Ice Works Pty Ltd (1994) 52 FCR 96 at 129; Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 43 ACSR 189; Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; 50 ACSR 242; [2004] HCA 42. 125. Scott v Handley [1999] FCA 404 at [45]; Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1; [2009] NSWSC 1229 at [166]. 126. At issue was the failure by ASIC to call as a witness a solicitor who was present at the board meeting at which, ASIC alleged, a defective disclosure notice to the ASX was approved by the James Hardie board. The Court of Appeal had concluded (at [768]) that ‘… [the solicitor] should have been called by ASIC. A body in the position of ASIC, owing the obligation of fairness to which it was subject, was obliged to call a witness of such central significance to critical issues that had arisen in the proceedings. The scope of its powers and the public interest dimensions of its functions, most relevantly with respect to ensuring proper internal governance of corporations and that the market for securities in shares was fully informed, was such that resolution of the civil penalty proceedings required it to call, if only with a view to showing (if it were the case) that he could not in fact recall anything on the factual issues and for cross examination by the appellants, a witness of such potential importance’. ASIC’s failure to call the solicitor ‘significantly undermine[d] the cogency of ASIC’s case on the passing of this Draft ASX Announcement Resolution’. 127. Australian Securities Commission v Donovan (1998) 28 ACSR 583 at 608; see also Tasmanian Spastics Association; Australian Securities and Investments Commission v Nandan (1997) 23 ACSR 743 at 752. 128. Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57; 54 ACSR 394; [2005] FCA 1037 at [33] (Finkelstein J); see also Australian Securities and Investments Commission v Beekink (2007) 61 ACSR 305; [2007] FCAFC 7 (Mansfield, Jacobson and Siopis JJ). 129. For a discussion of the approach of courts to imposing civil penalties, see J Farrar and P Hanrahan, Corporate Governance, LexisNexis Butterworths, 2016, Ch 18. 130. See, for example, Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114; Australian Securities and Investments Commission v Parkes (2001) 38 ACSR 355; [2001] NSWSC 377; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310; Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605; [2002] NSWSC 741; Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 58. 131. Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 205 FCR 120; 90 ACSR 523; [2012] FCA 630 at [48]–[49]. 132. Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (in liq) (No 2) [2011] FCA 858 at [49]; Re Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 at [66] and [69]; Australian Securities and Investments Commission v Activesuper Pty Ltd (2015) 105 ACSR 116; [2015] FCA 342 at [623]. 133. Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605;

[2002] NSWSC 741 at [36]. 134. See also Australian Securities and Investments Commission v Activesuper Pty Ltd (2015) 105 ACSR 116; [2015] FCA 342 at [622]. 135. See also CME Properties (Australia) Pty Ltd v Prime Capital Securities Pty Ltd [2016] WASC 231 at [10]– [13]. 136. Re Idylic Solutions; ASIC v Hobbs (2013) 93 ACSR 421; [2013] NSWSC 106 at [92]–[106]; Australian Securities and Investments Commission v Activesuper Pty Ltd (in liq) (No 2) (2015) 106 ACSR 302; [2015] FCA 527 at [30]. 137. See McCracken v Phoenix Constructions (Qld) Pty Ltd (2014) 289 ALR 710; [2012] QCA 129 at [21]– [40]; Re Colorado Products Pty Ltd (in prov liq) (2014) 101 ACSR 233; [2014] NSWSC 789. 138. T Middleton, ASIC Corporate Investigations and Hearings, [8.2160]ff. D Richardson, ‘Section 50 of the Australian Securities Commission Act 1989: White Knight or White Elephant?’ (1994) 12 C&SLJ 418; J Austin, ‘Does the Westpoint Litigation Signal a Revival of the ASIC s 50 Class Action?’ (2008) 22 AJCL 8. 139. Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93; 21 ACSR 332. 140. Walsh v Permanent Trustee Australia Ltd (1996) 21 ACSR 213. 141. Deloitte Ross Tohmatsu v Australian Securities Commission (1995) 54 FCR 562; 15 ACSR 652; on appeal Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 70 FCR 93; 21 ACSR 332. 142. Somerville v Australian Securities Commission (1993) 11 ASCR 595; 11 ACLC 1132. 143. Somerville v Australian Securities Commission (1993) 11 ACSR 595 at 599–600. 144. See P von Nesson, ‘The Section 1323 Injunctive Power of the Australian Securities Commission: Its Operation and Shortcomings’ (1996) 22 Mon LR 140. 145. See, for example, Permanent Trustee Australia Ltd v Dowd (1993) 11 ACSR 68; Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd (No 2) [2007] FCA 36.

[page 109]

Chapter 3 DEFINING FINANCIAL PRODUCTS Introduction Securities Shares in a body Debentures of a body Legal or equitable rights or interests in securities Options Depository interests Interests in Managed Investment Schemes Statutory definition of ‘managed investment scheme’ Exclusions from the definition When a scheme must be registered with ASIC Interests in (non-private) unregistered schemes Derivatives Margin Lending Facilities Other Financial Products Underlying policy Structure of the Corporations Act definition Functional definition Incidental financial products Financial instruments expressly included Financial instruments expressly excluded ASIC Act Definition of Financial Product

3.1 3.5 3.6 3.8 3.13 3.14 3.16 3.17 3.18 3.32 3.33 3.35 3.36 3.38 3.39 3.40 3.42 3.43 3.48 3.50 3.58 3.60

INTRODUCTION 3.1 Securities and financial services law is built around certain key definitions that mark out the boundaries of regulation. Particular conduct (such as dealing or operating a market) that occurs in relation to a ‘security’ or other ‘financial product’

[page 110] as defined is or may be within the scope of the legal and regulatory framework explained in this book. Therefore, understanding the reach of those definitions is an important first step to understanding when, and how, the relevant laws apply. This task is not without difficulty. First, the structure of the relevant definitions in the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) is convoluted. Identical terms have different meanings depending on where they are used in the legislation, and interpreting the statutory definitions of those terms often involves tracing threads of subsidiary definitions through numerous sections of the Act or of relevant regulations.1 Second, the approach adopted by the legislature to the structure of the key definitions (which endeavours to focus on the commercial function of relevant arrangements, rather than their legal features or form) involves broad, and often imprecise, language. The drafting approach is a wide, general definition with express exceptions.2 As a result, the outer boundaries of some parts of the definitions (such as the definitions of ‘managed investment scheme’ and ‘derivative’, or the functional definitions in Corporations Act ss 763B, 763C and 763D) are difficult to locate. Courts will not read down the broad language of the definitions by reference to any preconception as to the intended policy (that is, what might be assumed to be appropriately subjected to the applicable law). As Giles JA observes in International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] NSWCA 50 at [74], wide capturing language narrowed in its operation by specific exemptions ‘may not be a desirable way to legislate, quite apart from the difficulty of tracking through the provisions and seeking to apply sometimes imprecise and convoluted language’.3 3.2 This chapter explains the key definitions relevant to matters covered in this book: the different definitions of ‘securities’ in Corporations Act ss 92, 700 and 761A, the definition of managed investment scheme in s 9, the definition of derivative in s 761G, the definition of margin lending facility

in s 761EA, and the two differing definitions of financial product in Corporations Act Pt 7.1 Div 3 and ASIC Act s 12BAA. [page 111] 3.3 The cornerstone concept used in Ch 6D of the Corporations Act is ‘securities’. What is meant by securities differs depending on where the expression is used in the Corporations Act. It always includes a ‘share in a body’ and a ‘debenture of a body’, as well as options to acquire a share or debenture by way of issue. Beyond that, depending on the context, it may also include other instruments such as government bonds, interests in registered or unregistered managed investment schemes, units of shares, legal or equitable rights or interests in the various types of securities, options to acquire already issued securities, or rights to acquire securities under a rights issue. Section 92(4) defines securities for the purposes of Ch 6D (fundraising) and security for the purposes of Ch 7 (financial services and markets). It provides that, in Ch 6D, securities has the meaning given by Corporations Act s 700 and, in Ch 7, security has the meaning given in Corporations Act s 761A. Section 700 says that, in Ch 6D, ‘securities has the same meaning as it has in Ch 7, but does not include a security referred to in paragraph (e) of the definition of security in s 761A’. Section 761A in turn provides that security means: (a) a share in a body; or (b) a debenture of a body; or (c) a legal or equitable right or interest in a security covered by paragraph (a) or (b); or (d) an option to acquire, by way of issue, a security covered by paragraph (a), (b) or (c); or (e) a right (whether existing or future and whether contingent or not) to acquire, by way of issue, the following under a rights issue: (i)

a security covered by paragraph (a), (b), (c) or (d);

(ii) an interest or right covered by paragraph 764A(1)(b) or (ba); or (f)

a CGS depository interest; or

(g) a simple corporate bond depository interest; but does not include an excluded security. In Part 7.11, it also includes a managed

investment product.4

Section 92(3) is also important — it defines ‘securities’ for the purposes of Chs 6–6CA and Pt 1.2A (takeovers, information about ownership of listed entities and continuous disclosure). The definition of securities used for these purposes includes managed investment scheme interests. 3.4 The cornerstone concept used in Ch 7 of the Corporations Act and Pt 2 Div 2 of the ASIC Act is ‘financial product’. For Corporations Act purposes, it is defined expressly to include a wide range of financial instruments and arrangements, including most securities, derivatives, general insurance products, life insurance products, superannuation interests, retirement savings accounts, bank deposits, government bonds, foreign exchange products and margin lending facilities.5 Further, [page 112] it extends to other facilities through which, or through the acquisition of which, a person makes a financial investment, manages a financial risk, or makes a non-cash payment, other than arrangements expressly excluded by the Corporations Act or the Corporations Regulations 2001 (Cth) (Corporations Regulations). In the ASIC Act, the definition also includes certain credit facilities.

SECURITIES 3.5 This part explains the things that are securities for, among others, the purposes of the prospectus laws in Ch 6D of the Corporations Act. The different components of the definitions of securities and security in Corporations Act s 92(3) and (4) are summarised in the following table. Table 3.1: Elements of the definition of ‘securities’ and ‘security’ Section 92(3): definition of ‘securities’ that

Sections 92(4) and 700: definition of

Sections 92(4) and 761A: definition of

Sections 92(4) and 761A: definition of ‘security’ that applies

applies for the purposes of Chs 6–6CA and Pt 1.2A

‘securities’ that applies for the purposes of Ch 6D

‘security’ that for the purposes of Pt applies for the 7.11 purposes of Ch 7 (excluding Pt 7.11) Shares in a body Shares in a body Share in a body Share in a body Debentures of a Debentures of a Debenture of a Debenture of a body body body body Legal or equitable Legal or equitable Legal or equitable Legal or equitable right rights or interests rights or interests right or interest or interest in a share in shares or in shares or in a share or or debenture debentures debentures debenture Interests in a Interest in a registered registered MIS MIS (managed investment scheme) Legal or equitable Legal or equitable right rights or interests or interest in interests in interests in a in a registered MIS registered MIS Options to Options to Option to Option to acquire, by acquire, by way acquire, by way of acquire, by way way of issue, a share, of issue, a share, issue, a share or of issue, a share debenture or interest debenture or debenture or a or debenture or in a registered MIS, or interest in a legal or equitable legal or equitable a legal or equitable registered MIS, right or interest in right or interest right or interest in any or a legal or either of them in either of them of them equitable right or interest in any of them [page 113] Options to







acquire, by way of transfer, a share, debenture or interest in a registered MIS, or a legal or equitable right or interest in any of them









Excludes a

Excludes an

A right (whether existing or future and whether contingent or not) to acquire, by issue, any of the following under a rights issue: a share, a debenture, an interest in a registered or unregistered MIS, a legal or equitable right or interest in any of them, or an option to acquire any of them by way of issue A CGS depository interest A simple corporate bonds depository interest Excludes an

A right (whether existing or future and whether contingent or not) to acquire, by issue, any of the following under a rights issue: a share, a debenture, an interest in a registered or unregistered MIS, a legal or equitable right or interest in any of them, or an option to acquire any of them by way of issue

A CGS depository interest A simple corporate bonds depository interest Excludes an excluded

derivative (other than an option to acquire a share, debenture or interest in a registered MIS or a legal or equitable right or interest in any of them) and a market traded option

excluded security (that is, a right to participate in a retirement village scheme)

excluded security (that is, a right to participate in a retirement village scheme)

security (that is, a right to participate in a retirement village scheme)

Shares in a body 3.6 In all cases the statutory definition of securities includes shares in a body. As a result, shares in a body are also financial products, because of Corporations Act s 764A(1)(a) and ASIC Act s 12BAA(7)(a). Until 1999, a ‘share’ was defined in the (then) Corporations Law as ‘a share in the share capital of a body, [including] stock except where a distinction between [page 114] stock and shares is express or implied’. That definition was repealed by the Financial Sector Reform (Amendments and Transitional Provisions) Act (No 1) 1999 (Cth) with effect from 1 July 1999, and the legislation no longer defines what a share is. Accordingly, the general law definition of a share applies. The legal nature of a share is discussed in 1.5 above.6 In Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 16 ACSR 148 at 166 (the LEPO case), Lockhart J described a share in a company as ‘a right to a specified amount of the share capital of a company, carrying with it rights and liabilities when the company is a going concern and in the

course of its winding up’. Those rights and liabilities arise under the company’s internal governance rules (that is, the replaceable rules or the constitution of the company or both), the general law and the applicable legislation.7 A company may create and issue shares of different classes, with different rights and liabilities attaching; the classes of shares on issue may, for example, include ordinary shares and preference shares. 3.7 The statutory definition of securities refers to shares in ‘a body’, and therefore is not limited to shares in a company registered or taken to be registered under the Corporations Act. ‘Body’ is defined in Corporations Act s 9 and means ‘a body corporate or an unincorporated body and includes, for example, a society or association’. ‘Body corporate’ is a generic expression which includes any incorporated body formed in Australia or elsewhere, whether under legislation for the formation of companies (such as the Corporations Act) or under other legislation (such as associations incorporation statutes or specific Acts of Parliament). By virtue of the extended definition in Corporations Act s 9, body corporate also includes a foreign company and ‘an unincorporated registrable body’, which in turn includes an unincorporated body that, under the law of its place of formation, may sue or be sued or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose: see Corporations Act s 9. Not all bodies have share capital. However, where they do, shares in that share capital will be within the statutory definition of securities.

Debentures of a body 3.8 In all cases the statutory definitions of securities also include debentures of a body. As with shares, debentures are also financial products, because of Corporations Act s 764A(1)(a) and ASIC Act s 12BAA(7)(a). The wide definition of body is explained above. ‘Debenture’ is defined in Corporations Act s 9, and means (subject to a number of specific exclusions) ‘a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body’. A chose in action is a personal right of property which can only be claimed or enforced by action

[page 115] as distinct from taking physical possession.8 The statutory definition of ‘debenture’ goes on to provide that ‘the chose in action may (but need not) include a security interest over property of the body to secure repayment of the money’. What distinguishes a debenture from other types of financial instruments is that there is an obligation on the issuer to repay money deposited with or lent to the body as a debt. A debenture issued by a company may be ‘irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long’: see Corporations Act s 124(1)(b). 3.9 The emergence of a variety of complex or structured products, often issued by investment banks, gave rise to the question whether such products are properly characterised as debentures, or as some other form of investment product. In Re Macquarie Bank Ltd and Australian Securities and Investments Commission (2001) 39 ACSR 508; [2001] AATA 868, the Administrative Appeals Tribunal (AAT) took the view that a product known as ‘high yield equity notes’ (HYENAs), issued by Macquarie Bank, was not a debenture for the purposes of the Corporations Act. On their terms, the repayment obligation assumed by Macquarie in the HYENAs could involve ‘a placement of shares with the investor, rather than the repayment of the principal itself’. The AAT concluded that the HYENA was a put option over shares, rather than a debenture. Accordingly, it was not a security.9 For the most part, complex or structured products are treated by the Australian Securities and Investments Commission (ASIC) and their issuers as financial products that are not debentures.10 3.10 The difficulty in applying the definition of debenture to complex instruments is illustrated by the treatment by the courts of certain complex products marketed to municipal councils before the Global Financial Crisis. In Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2012) 301 ALR 1; [2012] FCA 1028, Rares J was asked to decide whether certain instruments acquired by the applicant councils were

debentures or derivatives.11 The instruments in question were synthetic collateralised debt obligations (SCDOs). After considering the nature of the instruments [page 116] (at [1180]–[1185]) and the elements of the statutory definition of debenture (at [1186]–[1202]) his Honour concluded that the obligation of the issuer under the instrument was in substance an undertaking to repay as a debt money deposited with it or lent to it; albeit an obligation to pay such money, if any, as would be calculated later as due by reference to the outcome of a speculative investment in another arrangement. In this particular case, however, the trust deed under which the product was issued included a restriction on the issuer that meant that borrowing money and providing credit did not form part of its business. For this reason, Rares J considered that exception (a) (ii) to the definition of debenture operated, and the instruments were not debentures because ‘the principal trust deed had the effect of preventing [the issuer] from carrying on a business that could issue a debenture’: at [1204]. Instead, the products were derivatives: at [1214]. However, in ABN AMRO Bank NV v Bathurst Regional Council (2014) 309 ALR 445; [2014] FCAFC 65 (Jacobson, Gilmour and Gordon JJ) the Full Federal Court came to a different conclusion on whether similar instruments were, in substance, an undertaking to repay as a debt money deposited or lent. After considering the nature of the instruments (at [624]–[641]) and the relevant law (at [642]–[660]) the court took the view that the instruments did not have this character. In so doing the court recognised ‘the force of the observations of Rares J [in Wingecarribbee] who reached a different conclusion as to the nature of instruments, which are similar to those in the present case’: at [686]. The court went on to say (at [687]–[690]): We accept his Honour’s observation at [1201] that the word ‘repay’ in the definition of ‘debenture’ does not suggest that the concept of ‘as a debt’ necessarily requires equivalence between the loan and what the borrower must repay. We also accept that a debenture may, in certain circumstances comprise a limited recourse borrowing … But in our view the observations of Rares J … do not take into account the question of whether the

undertaking to repay as a debt embraces an undertaking to pay a sum of money (which may be zero) at a time and in an amount that is dependent on the performance of something that is separate from the conduct of the operations of the business of the company that received the loan. As the High Court said in Handevel at 196, not every document creating or acknowledging a debt of a company was a debenture. Similarly, not every chose in action which includes an undertaking to make payment of a sum of money, dependent upon any form of contingency, constitutes a debenture of the type contemplated by the definition in s 9. … [The] obligation to redeem the … notes at a time and in an amount contingent upon the performance of the indices, is not an obligation to repay the moneys deposited, as a debt.

In its discussion of the definition of debenture, the Full Court in ABN AMRO made a number of significant observations about the definition of debenture. These were, in summary: First, when the words of the chapeau to the definition in s 9, ‘to repay as a debt money deposited with or lent to’ the company, are read in light of the regulatory provisions of Ch 2L and Ch 6D, it is evident that those words import the notion of an undertaking to repay a debt comprising a loan made to the company as part of its working capital (at [675]).

[page 117] Second, it is true that a debt is capable of including a debt that is repayable on a contingency. But the word ‘debt’ is not one of precise and inflexible denotation. It must be applied in a practical and common sense fashion, consistent with its context and statutory purposes … Similarly, any attempt to formulate a universally applicable definition of a contingent debt is difficult, if not impossible. What is, or what is not, a contingent debt depends largely upon the statutory context and the commercial usages in which the question arises (at [684]). Third, as a general rule, the term debenture was not applied at common law to an instrument unless it purported to be a debenture … That is not to say that the question is to be determined as a matter of form over substance, but the form and structure of the document provides some guidance as to the intentions and commercial objectives of the parties (at [691]). There is a strong case for party autonomy in construing complex financial instruments (at [693]). Fourth, it is fundamental to the nature of a debenture that it be issued by the company which borrowed the funds … It is that company which must acknowledge the debt and undertake to repay it. (at [694]).

This approach to interpreting the definition differs from that adopted by the Full Court in Brookfield Multiplex12 in interpreting the definition of managed investments scheme, discussed in 3.21 below.

3.11 Section 9 of the Corporations Act expressly excludes various arrangements from the definition of debenture. Paragraph (a) excludes ordinary commercial loans made to bodies that are not finance companies; it provides that ‘an undertaking to repay money deposited with or lent to the body by a person’ is not a debenture if the person ‘deposits or lends the money in the ordinary course of a business carried on by the person’ and ‘the body receives the money in the ordinary course of carrying on a business that neither comprises nor forms part of a business of borrowing money and providing finance’. Exception (a)(ii) was relied upon by Rares J in Wingecarribee but its application was not considered in ABN AMRO.13 Paragraph (b) excludes the ordinary deposit-taking activities of banks; it provides that ‘an undertaking by an Australian authorised deposit-taking institution (ADI)14 to repay money deposited with it, or lent to it, in the ordinary course of its banking business’ is not a debenture. It seems that ‘banking business’ will be treated in this context as referring to the ordinary deposit-taking and lending activities of banks.15 Banking business includes both banking and investing.16 However, the issue of [page 118] complex or structured investment products by an Australian ADI is probably outside the ordinary course of its banking business.17 Paragraph (c) of the definition excludes from the definition an undertaking to pay money under a cheque, an order for the payment of money, or a bill of exchange. Paragraph (e) excludes from the definition of debenture an undertaking by a body corporate to pay money to a related body corporate.18 ‘Related body corporate’ is defined in Corporations Act s 50. Until 2009, the definition of debenture expressly excluded ‘an undertaking to pay money under a promissory note that has a face value of at least $50,000’.19 Paragraph (d), which contained the carve-out, was repealed with effect from 6 November 2009; the effect of its repeal is discussed in Australian Securities and Investments Commission v Great

Northern Developments Pty Ltd: (2010) 79 ACSR 684; [2010] NSWSC 1087. 3.12 Ch 2L of the Corporations Act applies to debentures issued to the retail market, or as part of an off-market takeover bid under Corporations Act Ch 6 or an arrangement or reconstruction under Pt 5.1.20 The pattern of Ch 2L is to require the issuing body to appoint an approved trustee for debenture holders and to enter into a trust deed containing certain prescribed covenants. Debentures issued on this basis may, according to their terms, be described as ‘mortgage debentures’ or ‘debentures’ (if the repayment of investors’ moneys is secured) or ‘unsecured notes’ or ‘unsecured deposit notes’ (if it is not). Rather than specialist financiers, the moneys advanced to the body under a debenture issue regulated under Ch 2L typically come from ‘investors’, who acquire the debentures and either hold them to maturity or trade them in the secondary market for debt securities. Debentures may be listed for quotation on the Australian Securities Exchange (ASX) or traded over-the-counter.

Legal or equitable rights or interests in securities 3.13 The various definitions of securities and security used in the legislation also include a ‘legal or equitable right or interest’ in a share or debenture and, in the case of Corporations Act s 92(3)(d)(iii), in an interest in a registered managed investment scheme. The language is very broad, and it is likely that courts will adopt a purposive interpretation of it, having regard to the context in which the definition is used (for example, to require the issue of a prospectus). The legislative history of this part of the definitions, which can be traced back to the 1981 Companies Codes, suggests that the concept is related to that of a ‘unit’, which when used ‘in relation to a share, debenture or other interest, means a right [page 119] or interest, whether legal or equitable, in the share, debenture or other

interest, by whatever term called, and includes an option to acquire such a right or interest in the share, debenture or other interest’: see Corporations Act s 9. Unit is used in s 92(1) and (2), but not (3) or (4), suggesting that the intention was not to include options in the latter case.21 A legal or equitable right or interest in a security is likely to be treated as a security in its own right where an investment arrangement contemplates that an investor will hold something less than full beneficial ownership in the ordinary sense. For example, the interest held under a paperless debenture issue might be caught.22 The interests of a beneficiary of a trust over the security may also fall into this category; however, this appears to depend on the nature of the trust. If there is a single beneficiary with a beneficial interest in particular shares or debentures, then the interest of the beneficiary may be treated as falling within this definition. However, if this is not the case the interest is more likely to be treated as an interest in a managed investment scheme.

Options Options over unissued securities 3.14 Options to acquire securities by way of issue are themselves securities under Corporations Act s 92(3) and (4). The definition in Corporations Act s 92(3), which applies for the purposes of Corporations Act Chs 6–6CA and Pt 1.2A, covers options to subscribe for shares, debentures, interests in registered managed investment schemes or legal or beneficial rights or interests in any of them. The definition in Corporations Act s 92(4), which applies for the purposes of Corporations Act Chs 6D and 7, covers options to subscribe for shares, debentures or legal or beneficial rights or interests in either.

Options over issued securities 3.15 Call options over issued securities are themselves securities under Corporations Act s 92(3), which applies for the purposes of Chs 6–6CA and Pt 1.2A. Section 92(3)(c) captures ‘options to acquire (whether by way of issue or transfer) a security covered by paragraph (a), (b), (c) or (d)’. The securities covered by these paragraphs are shares, debentures, interests

in managed investment schemes, and legal or beneficial rights or interests in any of them. Only options to acquire (rather than dispose of) securities are caught: that is, the definition captures call but not put options. Options over issued securities are not securities under Corporations Act s 92(4) (which applies for the purposes of Chs 6D and 7); instead they are classified as derivatives for Ch 7 purposes: see 3.36 below.

Depository interests 3.16 Section 761A also includes within the definition of ‘securities’ both a CGS depository interest, and a simple corporate bond depository interest. A CGS depository interest is a depository interest, as defined in the Commonwealth Inscribed Stock Act [page 120] 1911 (Cth), that can be transferred through a licensed clearing and settlement (CS) facility. A simple corporate bonds depository interest is a beneficial interest in simple corporate bonds (as defined in s 713A) where the interest is or was issued by a simple corporate bonds depository nominee. Depository interests provide retail investors with a beneficial ownership in an underlying security. The Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012 (Cth) utilises depository interests to facilitate retail trading of Commonwealth Government Securities. The use of depository interests for simple corporate bonds was introduced in 2014 by the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth).

INTERESTS IN MANAGED INVESTMENT SCHEMES 3.17 This part deals with interests in managed investment schemes. Interests in registered managed investment schemes are treated as securities

for the purposes of Chs 6–6CA and Pts 1.2A and 7.11 of the Corporations Act, but not otherwise. Interests in all registered schemes and some unregistered schemes are financial products for the purposes of Ch 7 of the Corporations Act and Pt 2 Div 2 of the ASIC Act. The circumstances in which a scheme is required to be, and is, registered with ASIC are explained in 3.33 below. The generic term ‘managed investment scheme’ is used in Australia to refer to a variety of structures for the issue of interests that are not traditional company securities (such as shares or debentures) or prudentially-regulated investments (such as investment life insurance products, bank deposits or superannuation products).23 Until 1998, such arrangements were referred to in legislation as ‘prescribed interest schemes’. Prior to 1955, these alternative investment structures were largely unregulated. In 1954, an inquiry conducted by the Victorian Statute Law Revision Committee ‘heard considerable evidence, with regard to unit and option certificates, lots, concessions, and other forms of interests in or in the undertaking of business’. Noting that such forms of interest were issued outside the legislation controlling the issue of shares to the public, the Committee concluded that ‘this field provides opportunity for fraudulent practice’24 and recommended reform.25 Regulatory [page 121] arrangements modelled in some respects on the requirements for debenture issuers were adopted in each state, and then nationally, from the mid1950s onwards. The regulatory requirements governing the structure and operation of such schemes were then fundamentally reformed in 1998 by the Managed Investments Act 1998 (Cth) and are now contained in Ch 5C of the Corporations Act.26 Typically, registered managed investment schemes are collective investment arrangements that are open to passive investors and offer returns on a best-endeavours (rather than capital-backed) basis. That said, lending transactions with fixed returns can fall within the managed investment scheme definition.27 Managed investment schemes may be registered or unregistered, and registered schemes may be listed or unlisted.

The statutory definition in Corporations Act s 9 is framed broadly; it is intended to capture all forms of collective investments that are not otherwise regulated or expressly excluded from regulation. This reflects the historical development of the regulation of such arrangements as essentially an anti-avoidance measure.28 Examples of the types of commercial arrangements that come within the statutory definition of a managed investment scheme include public unit trusts, managed funds, ASX listed trusts (such as A-REITs, or Australian Real Estate Investment Trusts), trustee company common funds, limited partnerships, investment pools and clubs, cash management trusts, mortgage funds, serviced strata schemes, some investor-directed portfolio services, film schemes, horse-racing and horse-breeding syndicates, unlisted property trusts and syndicates, and agribusiness schemes such as forestry or horticultural schemes. These are only examples.

Statutory definition of ‘managed investment scheme’ 3.18 The statutory definition of ‘managed investment scheme’ is contained in Corporations Act s 9. It begins with a broad, inclusive formulation (in para (a)) which is then followed by a list of express exclusions from the definition (in paras (c)–(n)).29 Paragraph (a) of the definition captures a scheme that has the following features: [page 122] people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); and the members do not have day-to-day control over the operation of

the scheme (whether or not they have the right to be consulted or to give directions).

Interpreting the definition 3.19 The different elements of para (a) of the definition are interpreted broadly.30 Drawing on earlier High Court authority on the meaning of the predecessor definition of ‘prescribed interest’,31 courts have approached the definition on the basis that the words should not be read down, given the context (which is of prohibiting the offering of such arrangements unless the statutory requirements are met) and the fact that there is a power under the legislation to exempt (by regulation or ASIC instrument) arrangements that are caught in the broad definition but should not be subject to regulation under the Act. In Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) 148 CLR 121; 6 ACLR 45; [1981] HCA 49, Mason J observed (at ACLR 51): … there is no very good reason for reading the words down. The context is that of prohibitions against issuing or offering to the public for subscription or purchase or inviting the public to subscribe for or purchase ‘interests’ unless there is in force in relation to them an approved deed and unless there is provided information similar to that which is prescribed in connexion with an offer to the public of shares … That a very wide meaning should be given to ‘interest’ is attested by the exclusion from the statutory definition of shares and debentures, interests in life insurance policies, and, subject to some qualifications, interests in partnership agreements. The presence of the power to exempt by regulation other rights or interests from the definition is also of telling significance.

This formulation has been adopted by the courts in interpreting the definition of managed investment scheme.32 [page 123] Therefore, it seems unlikely that the definition can be read down on the basis that the legislation could not have intended to catch and proscribe a given transaction, even having regard to ss 15AA and 15AB of the Acts Interpretation Act 1901 (Cth).33 The approach in Australian Softwood Forests ‘stresses the literal meaning of the words used in the definition, giving to them any broad application indicated by such a meaning’.34 As a

result, it is not appropriate to read down what would otherwise follow from the application of that general approach, by reference to what might be ‘the supposedly unintended consequences of a literal reading on everyday commercial transactions’.35 It is not possible to exclude an arrangement from the definition on the basis that the consequences of treating it as caught were ‘such as to show that the legislation could not have intended to catch by the definition schemes’ of that kind; this approach ‘discourage[s] reading down the broad words of the definition here in question “influenced by any preconception as to the intended policy”’.36 3.20 The broad approach adopted by courts in interpreting the definition is consistent with the legislative history, considered in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd: (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [1]–[27] (Sundberg and Dowsett JJ) and [144]–[158] (Jacobson J, dissenting). In particular, it reflects the reluctance on the part of the Australian Law Reform Commission and the Companies and Securities Advisory Committee, in their 1993 review of collective investments, to limit the statutory definition by reference to what might be appropriately subjected to regulation.37 The review expressly accepted that ‘it is not possible to replace the existing definition of “prescribed interest” with a more precise definition of “collective investment scheme” which applies to fund raising schemes other than those which are prudentially supervised or schemes in which the investors themselves are primarily responsible for the conduct of their scheme’.38 At first instance in Brookfield Multiplex,39 Finkelstein J had acknowledged the difficulties in applying the different components of the definition but found that ‘those difficulties … fall away when the construction takes account of the purpose of Ch 5C, where the regulation of managed investment schemes is to be found’. [page 124] In finding that the litigation funding arrangement was not a managed investment scheme, the primary judge had observed (at [37]):

… with the evident purpose of the legislation in mind, the essence of a managed investment scheme, stripped of all its technicalities, is a scheme in which people invest money (or money’s worth) in a common venture with the expectation of profit that will result from the efforts of others.

However, on appeal in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 the majority cautioned against this approach saying (at [29]): In our view, that statement as to the ‘essence of a managed investment scheme’ is of little assistance in construing the Act and may be misleading. We have referred to the difficulties experienced by the commission in seeking to identify with precision the subject matter of such a generalization. It abandoned the task as too difficult. With all respect, his Honour’s approach seems not to recognise those difficulties. Further, it is difficult to infer an intention to exclude an undefined category of schemes which would otherwise be within subpara (a) of the s 9 definition in light of the extensive list of express exclusions contained in the definition and the power to exclude or exempt others administratively.

3.21 Difficulties of construction often arise in connection with schemes that, although within the language of the definition, have none of the features or characteristics (such as an operator, or scheme property) that would be required if they were registered under Ch 5C. In Brookfield Multliplex, Sundberg and Dowsett JJ considered that the fact that an arrangement as structured did not have these features was not relevant in considering whether it falls within the statutory definition; rather, if a scheme requires registration then it must be constituted and conducted so as to permit registration. On this view it is not helpful, or possible, to limit the operation of para (a) of the s 9 definition by reference to some implied limitation to be derived from the Ch 5C regulatory scheme itself: Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [33], [55]– [56] and [64]. However, in Australian Securities and Investments Commission v Great Northern Developments Pty Ltd (2010) 79 ACSR 684; [2010] NSWSC 1087 at [90], White J declined to follow this approach, taking the view that: … [it] does not give full weight to the fact that not only does s 601ED(5) provide that a person must not operate a managed investment scheme that is required to be registered unless the scheme is so registered, but s 601ED(1) requires the managed investment scheme to be registered if other provisions of that section are satisfied.

The implication in Great Northern is that, if the arrangement cannot be

made registrable without ‘transforming’ the fundamental nature of the relationship between the parties, it is not caught by the definition. His Honour says (at [89]), that ‘it is incongruous that a scheme should need to be registered when it does not have the features that would pertain to the scheme once it was registered’. White J relies on the observations of Gilmour J (with whom Spender J agreed) in National Australia Bank Ltd v Norman (2009) 180 FCR 243; 74 ACSR 561; [2009] FCAFC 152 at [183], that s 601ED(5) ‘envisages that the unregistered managed [page 125] investment scheme is of a kind which ought to have been, and could in fact have been, registered’. Nevertheless the view of the majority in Brookfield Multiplex, above, is to be preferred. 3.22 Some guidance as to the scope of the definition can be gleaned from proceedings brought by ASIC against those said to be operating unregistered schemes in breach of s 601ED, including in relation to private mortgage funds,40 property development (including retirement village development) schemes,41 dubious offshore ‘trading systems’,42 and novel projects.43 However, reasoning by analogy has its limitations, as Macrossan J observed in R v Commons (1986) 4 ACLC 551 at 554: It can be misleading to endeavour to form an accurate impression of the full scope of the intended statutory coverage by looking too single mindedly at the precise details of the particular schemes which the limited number of court decisions to date have indicated are caught. While analogy can be illuminating, there is a danger that the decisions which are, after all, mere examples, can induce the observer to believe that they define the limits of the scope of the definition. While certain points of principle may emerge from the decisions upon particular schemes, it is the broad words of the statute which must be returned to and, with respect, it is the deliminations of the correct approach which has been settled for

[page 126] us in Wade v A Home Away Pty Ltd (1980) CLC ¶40-669 and, authoritatively for us, Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) CLC ¶40-734 which is of the greatest utility, together with the pronouncements of principle in the latter case.

Elements of the definition 3.23 The definition in para (a) of s 9 is properly approached by addressing each of the subparagraphs separately, and in accordance with their terms. 3.24 First, there must be a ‘scheme’. The High Court held in relation to the earlier definition of prescribed interest that ‘all the word “scheme” requires is that there should be some programme, or plan of action’.44 In Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388; (2002) 43 ACSR 46; [2002] NSWSC 834 at [15], Barrett J said: The essence of a ‘scheme’ is a coherent and defined purpose, in the form of a ‘programme’ or ‘plan of action’, coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan. In some cases, the scope of the scheme will readily be gathered from some constitutive document in the nature of a blueprint setting out all relevant matters. In others, there may be no writing or such as there is may tell only part of the story, leaving the remainder to be supplied by necessary implication from all the circumstances. Profit-making will almost invariably be a feature or objective of the kind of scheme with which the s 9 definition of managed investment scheme is concerned, given the definition’s references in several places to ‘benefits’. Whatever is incidental and necessary to the pursuit of the profit (or ‘benefits’) will therefore be comprehended by the scheme …

Finkelstein J in Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699; 60 ACSR 447; [2006] FCA 1415 at [2], observed that a ‘scheme … is the combination of these things necessarily connected by design’, while ‘[t]he scheme may also include those things or attributes that “contribute to the coherence and completeness” of the three essential elements’.45 3.25 Next, the elements of subpara (a)(i) of the statutory definition must be demonstrated. This requires: that people contribute money or money’s worth; as consideration to acquire rights to benefits; such benefits being produced by the scheme. Earlier authority had given a broad meaning to ‘contribute’, as meaning to ‘make available’ or ‘supply’.46 In Brookfield Multiplex Ltd v

International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [page 127] [53], the majority took a narrower view, concluding that the notion of contribution required payment or supply for a common purpose, foreshadowing the requirement for pooling or use in a common enterprise identified in subpara (a)(ii) of the s 9 definition. The contribution must be as consideration to acquire rights and benefits produced by a scheme. 3.26 Subparagraph (ii) of the definition requires that the contributions either be pooled, or used in a common enterprise. Sometimes both will be evident, and sometimes only one. For example, in Brookfield Multiplex, the majority considered that the litigation funding arrangement in place between the various parties was a scheme that involved: … both pooling of contributions and use in a common enterprise. We should say something about the distinction between the two. Pooling will frequently be a question of degree. There may be cases in which relevant assets are utilized by individual members in such a way that it cannot readily be said that they are pooled. Using discrete parcels of land to produce crops which are pooled may be an example. In such a case, there may be use in a common enterprise but no pooling of the land.47

3.27 The first alternative is that the contributions are ‘pooled’. Two key questions arise in deciding whether this requirement is met. The first is whether the contributions must be physically pooled, for example by being comingled in a bank account. The second is whether there must be some intention on the part of the putative members that pooling occur, and if so how that intention is to be ascertained. In Brookfield Multiplex (at [92]), Sundberg and Dowsett JJ considered that the definition is not concerned with physical pooling, such as that which occurs with water, but rather with pooling with a purpose. In their Honours’ view the definition would be satisfied if contributions were available, and known to be available, for a relevant purpose, regardless of physical location. This is because the contributions to the scheme may be money’s worth that is not capable of being combined or comingled.

3.28 The case law indicates that there must be an intention that the contributions be pooled. In National Australia Bank Ltd v Norman (2009) 180 FCR 243; 74 ACSR 561; [2009] FCAFC 152 at [95], Graham J expressly rejected the conclusion of Buss JA Burton v Arcus (2006) 32 WAR 366; 57 ACSR 468; [2006] WASCA 71 that pooling could occur without the express or implied approval or knowledge of the investors. In Norman, Gilmour J emphasised that the phrase ‘contributions are to be pooled’ in para (a)(ii) require an intention, objectively discerned, forming part of the ‘scheme’ and formed prior to the making of contributions, that the contributions are to be pooled. The intention may be discerned objectively and variously from documents, discussions or conduct; the subjective evidence of members as to what, and by what means, they understood was the scheme prior to making their contributions would be relevant but not necessarily determinative of this question: at [148]. Absent proof [page 128] of such intention that they are to be pooled, Gilmour J did not consider that the mere fact that moneys were collected into one bank account met the definition of a ‘scheme’ for the purposes of s 9: at [152]–[153]. As Barker J observes Findlay v Next Financial Ltd [2012] FCA 1350 at [21]: Norman stands for the proposition that the necessary intention may be discerned both objectively and subjectively. The intention may be discerned objectively and variously from documents, discussions or conduct. Subjective evidence of members as to what they understood of the scheme may also be relevant, but not necessarily determinative. It cannot be ruled out in these circumstances, that evidence of how contributions were actually used may possibly be relevant in determining whether there was a relevant intention to pool when the contributions were made if they help explain or confirm other evidence to that effect, although of itself it may be considered not to be determinative of any such intention.

3.29 Even if there is no pooling, a managed investment scheme may exist if the contributions are used in a ‘common enterprise’. A common enterprise was described by Mason J in Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) 148 CLR 121; 6 ACLR 45; [1981] HCA 49 at CLR 133:

The argument is that in order to constitute a common enterprise, there must be a joint participation in all the elements and activities that constitute the enterprise. I do not agree. An enterprise may be described as common if it consists of two or more closely connected operations on the footing that one part is to be carried out by A and the other by B, each deriving a separate profit from what he does, even though there is no pooling or sharing of receipts of profits. It will be enough that the two operations constituting the enterprise contribute to the overall purpose that unites them. There is then an enterprise common to both participants and, accordingly, a common enterprise.

The Explanatory Memorandum to the Managed Investments Bill says (at [19.7]) that ‘the term “used in a common enterprise” may include arrangements described as enterprise or agricultural schemes’. For example, in Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd (2002) 20 ACLC 1; [2001] FCA 1402, contracts entered into by varying parties related to an arrangement for stud cattle breeding that were ‘interdependent with each other’ were held to amount to a common enterprise. It appears that the enterprise need not be an enterprise in common with other investors, but may be an enterprise common to the investor and the promoter.48 In Brookfield Multiplex, Sundberg and Dowsett JJ said that ‘separate actions by different participants, deriving separate profits, may constitute a joint enterprise if the actions are sufficiently closely connected and contribute to a shared purpose’: at [97]. 3.30 As noted, one or other of pooling or a common enterprise must be present. In Wingecarribee, discussed at 3.10 above, Rares J concluded that the complex financial products acquired by the local councils were not part of a managed investment scheme because: [page 129] There was no scheme or plan of action for Grange’s clients to pool, or to use, their purchase money in any common enterprise. The investors bought bearer notes from Grange in individual transactions. Grange had previously acquired those notes itself as sole noteholder when they were issued. Grange increased the price it charged for the notes over its purchase price and sold the notes to the investors. Grange’s investment, that it paid to the issuer, was not the face value of the notes but of a lesser sum than face value. That sum had to be used as the transaction documents provided. But that payment by Grange was not a pooling of Grange’s clients’ funds or a use of them in any scheme.49

3.31 Subparagraph (iii) of the definition requires that at least some of the investors must be passive (in the sense that they do not have day-to-day control over the operation of the scheme). Schemes over which all investors have day-to-day control are not managed investment schemes. Arrangements that allow for the day-to-day involvement of investors, such as joint ventures, intra-group schemes, franchises, general partnerships, and direct investment arrangements, are not caught: see ALRC/CASAC Report No 65, p 25. In deciding whether investors have day-to-day control, it is important to look to the substance and not the form of the arrangement. In Enviro Systems Renewable Resources Pty Ltd v Australian Securities and Investments Commission (2001) 80 SASR 1; 36 ACSR 762; [2001] SASC 11 Martin J held that investors did not have day-to-day control of the operation of the relevant scheme, even though the documentation had been structured in such a way as to suggest that the arrangement was a franchise under which each investor would be operating its own business. His Honour said ‘when the scheme documentation is analysed in its entirety, the intent of the scheme is that [the promoter] will control the day-to-day operations of the scheme from beginning to end’. In that case, Martin J found that although it was possible that some participants in the scheme may have chosen to take an active role, the scheme was in reality designed to attract passive investors. He noted (at [37]) that: … [the] purpose or object of the legislation and the regulatory regimes created pursuant to the legislation would be easily defeated if the court felt obliged to rely solely upon a strict view of the legal rights and duties created by the documentation and was required to ignore the realities of the scheme as it is designed to operate in practice.

In Burton v Arcus (2006) 32 WAR 366; 57 ACSR 468; [2006] WASCA 71 at [80], cited with approval in Australian Securities and Investments Commission v West (2008) 66 ACSR 143; [2008] SASC 111 at [127], Buss JA concluded that the members of a scheme will have day-to-day control over the operation of the scheme if the members as a whole participate in making the routine, ordinary, everyday business decisions relating to its management, and the members as a whole are bound by the decisions which are made. Conversely, if the members as a whole do not participate in making the routine, ordinary, everyday business decisions relating to the management of the scheme, or if the members as a whole are not bound by

the decisions which are made, they will not have day-to-day control over its operation. [page 130]

Exclusions from the definition 3.32 Paragraphs (c)–(n) of the definition then go on to exclude a number of forms of collective investment, and other arrangements and vehicles, from the broad definition of a managed investment scheme contained in para (a). The following are expressly excluded from the definition by the legislation: Large partnerships are excluded by para (c) of the definition. A partnership that has more than 20 members but does not need to be incorporated or formed under an Australian law because of regulations made for the purposes of Corporations Act s 115(2) is not a managed investment scheme. Bodies corporate (other than a body corporate that operates as a time-sharing scheme) are excluded by para (d). Intra-group schemes are excluded by para (e), which covers any scheme in which all the members are bodies corporate that are related to each other and to the body corporate that promotes the scheme. Franchises are excluded by para (f). ‘Franchise’ is defined in s 9 of Corporations Act as ‘an arrangement under which a person earns profits or income by exploiting a right, conferred by the owner of the right, to use a trade mark or design or other intellectual property or the goodwill attached to it in connection with the supply of goods or services. An arrangement is not a franchise if the person engages the owner of the right, or an associate of the owner, to exploit the right on the person’s behalf’.50 Life companies’ statutory funds maintained under the Life Insurance Act 1995 (Cth) are excluded by para (g). Regulation 5C.11.01 of the Corporations Regulations excludes an ‘approved benefit fund’ within the meaning of s 16B of the Life Insurance Act.

Most forms of superannuation are excluded by para (h). The exclusion covers regulated superannuation funds, approved deposit funds, pooled superannuation trusts, and public sector superannuation schemes within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth). Schemes operated by Australian authorised deposit-taking institutions (ADIs) in the ordinary course of their banking business are excluded by para (i). The ordinary course of banking business is discussed in 3.11 above. The issue of debentures or convertible notes by a body corporate is also excluded, under para (j). While the issue of debentures or notes by a body corporate is not itself a managed investment scheme, it can be part of a managed investment scheme. In Australian Securities and Investments Commission v Karl Suleman Enterprises Pty Ltd (2003) 45 ACSR 401; [2001] NSWSC 400 at [6], Barrett J held that ‘although the investment product concerned was a “debenture”, the relevant acts of the first defendant in relation to solicitation of investment occurred in the course of and within [page 131] the scope of the operation by the first defendant of a managed investment scheme’. Paragraph (k) excludes barter schemes, under which each participant may obtain goods or services from another participant for consideration that is wholly or substantially in kind rather than in cash. Retirement village schemes are excluded by para (l). The exclusion covers any scheme operating within or outside Australia: (i) under which the participants, or a majority of them, are provided, or are to be provided, with residential accommodation within a retirement village (whether or not the entitlement of a participant to be provided with accommodation derives from a proprietary interest held by the participant in the premises where the accommodation is, or is to be, provided); and (ii) which is not a time-sharing scheme.

Paragraph (m) excludes a scheme that is operated by a Western Australian co-operative company registered under Pt VI of the Companies (Cooperative) Act 1943 (WA) or under a previous law of Western Australia that corresponds to that Part. Litigation funding schemes and litigation funding arrangements (including schemes like that held by the Full Federal Court in Brookfield Multiplex Ltd v International Litigation Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 to be a managed investment scheme) are excluded by Corporations Regulations reg 5C.11.01(1)(b), (c), and (d). Paragraph (n) allows for further exclusions by regulation.

When a scheme must be registered with ASIC 3.33 The regulatory scheme created by Ch 5C of the Corporations Act requires that certain arrangements coming within the definition of managed investment scheme be registered with ASIC. The registration requirement is triggered if three criteria are met: 1.

The scheme satisfies any one of the following: (a) it has more than 20 members; (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or (c) it is one of a number of schemes that ASIC has determined, in accordance with Corporations Act s 601ED(3) are related and that between them have more than 20 members: see Corporations Act s 601ED(1).

2.

Interests in the scheme have been issued in circumstances that would have required the giving of a Product Disclosure Statement under Corporations Act Pt 7.9 Div 2 if the scheme had been registered when the issues were made and the division applied to the interests at that time: Corporations Act s 601ED(2) and Corporations Regulations reg 5C.11.05A.

[page 132] 3.

The scheme has not been granted an exemption from registration by ASIC in accordance with Corporations Act s 601QA.51

The effect of Corporations Act s 601ED is that managed investment schemes that are operated by professional operators and open to retail investors will ordinarily be registered with ASIC under Ch 5C of the Corporations Act. All listed schemes (including those whose units are part of a stapled security)52 are registered. Chapter 5C imposes a significant number of structural and governance requirements on the scheme and its operator (referred to in the legislation as its ‘responsible entity’). These include that the responsible entity must hold an Australian financial services licence authorising it to operate the scheme, must hold scheme property on trust for the members of the scheme, and must act in the best interests of the members in exercising its powers and carrying out its duties in relation to the scheme. 3.34 As at 30 June 2015 there were 3642 ‘active’ managed investment schemes registered with ASIC.53 These include a disparate range of business and investment models. Most schemes (by number and value of funds under management) are unlisted managed funds.54 The other main categories of scheme include listed managed funds (that is, exchange traded funds and listed investment trusts);55 A-REITs;56 unlisted [page 133] property schemes;57 mortgage funds;58 infrastructure funds;59 agribusiness schemes;60 and time-share and serviced strata schemes. There are a small number of ‘other’ schemes, including horse racing and horse breeding syndicates. The managed investment scheme laws do not mandate a particular legal structure for registration. However, registered schemes that hold assets (such as financial assets or real estate) for investment purposes are generally structured as trusts, largely for taxation reasons. In listed

property and infrastructure, interests in a trust-based scheme are often stapled to shares in an operating company. In trust-based structures the contributions of the members are generally pooled and their interest is in the nature of a beneficial interest in the whole of the property of the trust.61 In contrast, ‘enterprise-type’ schemes (particularly agribusiness schemes) are often structured as a series of bilateral executory contracts between the investor, the scheme operator and various other entities. The scheme in that case is not a pool of assets; it is the undertaking carried out over time in accordance with those contracts. The nature of the members’ interest in those schemes is quite different. This is the distinction that was drawn by the Companies and Securities Law Review Committee (CSLRC) in 1987 between ‘fiduciary and non-fiduciary prescribed interests’.62 The nature of the investors’ rights in such schemes was the subject of extensive judicial and parliamentary consideration in the aftermath of the collapse of the Timbercorp and Great Southern agribusiness schemes in 2009, and the subject of a reference to the Corporations and Markets Advisory Committee in November 2010.63

Interests in (non-private) unregistered schemes 3.35 Only registered schemes are subject to the structure and governance requirements in Ch 5C of the Corporations Act. However, the definition of financial product in Ch 7 extends beyond interests in registered schemes, to capture some interests in some unregistered schemes. Corporations Act s 764A(1)(ba) includes in the definition of financial product: … any of the following in relation to a managed investment scheme that is not a registered scheme, other than a scheme (whether or not operated in this jurisdiction) in relation to which none of paragraphs 601ED(1)(a), (b) or (c) are satisfied: (i)

an interest in the scheme

(ii) a legal or equitable right or interest in an interest covered by subparagraph (i);

[page 134] (iii an option to acquire, by way of issue, an interest or right covered by subparagraph (i) or (ii).

A scheme satisfies one of the paragraphs of s 601ED(1) if: (a) it has more than 20 members; or (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or (c) a determination under s 601ED(3) is in force in relation to the scheme and the total number of members of all the schemes to which the determination relates exceeds 20. A managed investment scheme of the kind referred to in s 764A(1)(ba) might be unregistered because it is exempted from the registration requirement by s 601ED(2) or by ASIC exemption (see 3.33 above), or because it is being operated in contravention of the registration requirement. An interest described in s 764A(1)(ba) is a financial product, but it is not a security.

DERIVATIVES 3.36 ‘Derivative’ is defined in Corporations Act s 761D. The definition of derivative covers, among other things, futures contracts as defined under s 9 of the (pre-FSR)64 Corporations Act, option contracts that were previously within the definition of securities in ss 9 and 92(1) of the preFSR Corporations Act, and over-the-counter (OTC) derivatives. As with the definition of financial product discussed below, the legislature has attempted to focus on ‘the functions or commercial nature of derivatives, rather than trying to identify each product that will be regarded as a derivative’.65 The nature of derivatives was described by the Parliamentary Joint Committee on Corporations and Securities, in its Report on Derivatives handed down on 20 November 1995, in the following broad terms: Derivatives are financial products which derive changes in their value from the price of an underlying commodity, security, currency, cash flow or index. The main types of derivatives are futures,66 options67 and swaps,68 although the range of derivatives products is continually expanding and many derivatives contracts combine features of more than one type.

[page 135] Derivatives can be divided into two categories depending on how they are traded. Exchange traded derivatives are standard products traded on exchanges. These transactions are subject to rules of the exchange and securities legislation. Over the counter (OTC) derivatives are not traded on exchanges and are usually tailored for a client by a financial institution … Derivatives are used as a method of risk management, to rapidly adjust the balance of an investment portfolio, or for speculation …69

The definition of derivative in Corporations Act s 761D, as extended by Corporations Regulation 7.1.04, attempts to capture these concepts in a generalised definition. It is based in significant part on the recommendations of the Companies and Securities Advisory Committee in its Report on the Regulation of On-Exchange Derivatives Markets, 1996: see 1.48 above. Section 761D(1) provides that, subject to subs (2), (3) and (4) a derivative is an arrangement in relation to which the following conditions are satisfied: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity. In International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] NSWCA 50, the court was divided on the question of whether a litigation funding agreement was caught by the wide definition of derivative contained in the Act. In so doing, Giles JA took the view (at [66]) that ‘the definition of “derivative” is extraordinarily wide,

one which could catch many arrangements not ordinarily thought of as derivatives’. In contrast, Hodgson JA (at [238]) concluded that: … even giving full weight to the reluctance to read down words in a statute for the protection of investors, it seems to me that … the appellant’s construction would make the operation of the definition of ‘derivative’ so broad that it would be virtually meaningless. This is reinforced by the fact that, absent the definition, the present interest comes nowhere near the category of derivative as commercially understood.70

[page 136] 3.37 Section 761D goes on expressly to exclude a number of arrangements from the definition of derivative. Under s 761D(4): … an arrangement under which one party has an obligation to buy, and the other has an obligation to sell, property is not a derivative for the purposes of this Chapter merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index.

More broadly, s 761D(3) provides that certain arrangements, described in paras (a)–(d) are not derivatives for the purposes of Ch 7 even if they are covered by the definition in s 761D(1). Under para (a), an arrangement is excluded from the definition if (i) a party has, or may have, an obligation to buy, and another party has, or may have, an obligation to sell, tangible property (other than Australian or foreign currency) at a price and on a date in the future; and (ii) the arrangement does not permit the seller’s obligations to be wholly settled by cash, or by set-off between the parties, rather than by delivery of the property; and (iii) neither usual market practice, nor the rules of a licensed market or a licensed CS facility, permits the seller’s obligations to be closed out by the matching up of the arrangement with another arrangement of the same kind under which the seller has offsetting obligations to buy; but only to the extent that the arrangement deals with that purchase and sale. The effect of s 761D(3)(a) was described by the Full Federal Court in Keynes v Rural Directions Pty Ltd (2010) 79 ACSR 405; [2010] FCAFC 100 at [28], in which forward contracts for the sale and delivery of grain were held to be excluded, in the following terms: The term ‘financial product’ is critical to the operation of the chapter. The express

exclusions contained in s 765A are designed to ameliorate the effect of the very broad language used in the other definition sections which seek to capture many kinds of financial transactions. Section 765A narrows the operation of Ch 7 so as to keep it within the intended bounds. Section 761D(3) is important because it leads to the exclusion of a very large number of everyday transactions, namely sales of tangible property for future delivery. Such transactions are not generally thought to be financial transactions. However, it is well-known that there are markets in which contracts for the sale and purchase of ‘tangible property’ are traded. Such markets are more readily seen as being ‘financial’ and therefore appropriately regulated. Where the price of tangible property fluctuates significantly over time, there is always the likelihood that people will seek to profit from such fluctuations. For that reason s 761D(1) catches ‘arrangements’ for the supply of tangible property where the prices are not fixed or the ‘values’ of the arrangements may fluctuate. However, s 761D(3) narrows that effect. Broadly speaking, it does so by excluding from the definition of ‘derivative’ arrangements for the supply of tangible property where one of the parties is actually expected to deliver the relevant property, and where rights and obligations under such arrangements are not usually traded, or not traded in a recognizable market.

Paragraph (b) excludes a contract for the future provision of services. The litigation funding agreement in International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] FCAFC 50 was held by Giles JA (at [88]) and Hodgson JA (at [242]) not to be a contract for the future provision of services, although Young JA (at [133]) took the view that it was. [page 137] Paragraph (c) excludes anything that is covered by a paragraph of s 764A(1), other than para (c) of that subsection.71 The effect of s 761D(3) (c) when read with s 764A(1)(a) and (c) is that a financial product which is otherwise a derivative is not treated as a derivative for the purposes of Ch 7 if it also amounts to a debenture,72 an interest in a managed investment scheme or other specified financial product. Paragraph (d) excludes anything declared by the regulations not to be a derivative for the purposes of Ch 7.

MARGIN LENDING FACILITIES 3.38 Most forms of credit are not treated as financial products for the purposes of the Corporations Act,73 although the position is different

under the ASIC Act.74 The exception is margin lending facilities made available to clients who are natural persons. The definition of margin lending facility was introduced into the legislation in 2009 when margin lending was brought within the regulatory remit of ASIC.75 It includes both ‘standard’ and ‘non-standard’ arrangements. The key elements of the definition of standard margin lending facilities include: the provision of credit by a person (the ‘provider’) to a client who is a natural person (s 761EA(2)(a)); a requirement that the borrower must use the loan (wholly or partly) to acquire shares or other financial products (s 761EA(2)(b)(i)) or to refinance a margin lending facility (s 761EA(2)(b)(ii)); that the loan must be wholly or partly secured over shares or other defined securities (‘marketable securities’). ‘Marketable securities’ is defined by existing Corporations Act s 9 (s 761EA(2)(c) and (d)); and that the client is subject to a ‘margin call’ in circumstances where the ‘current LVR’ of the facility exceeds the agreed threshold: s 761EA(2)(e). The current LVR is defined as the ratio of the outstanding debt to the security provided for the loan: s 761EA(3). [page 138] The type of margin loan targeted by the definition of a ‘non-standard margin lending facility’ is not based on a loan agreement, but uses a type of securities lending agreement (with variations) to achieve a similar economic outcome as would a standard margin loan. This type of structure was used by lenders such as Opes Prime and Tricom and provided as a ‘margin loan’, ‘equity finance’ or ‘securities finance’.76 The key difference, from the client’s point of view, is that in a non-standard margin loan, title to the security provided for the loan passes out of the client’s hands.77 The Explanatory Memorandum to the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 at [1.41] indicates that the definition is intended to capture, among other things:

the basic or ‘vanilla’ margin loan; Opes Prime and Tricom style arrangements, where appropriate. This is to ensure that products that are functionally similar to a margin loan (and advertised as a margin loan) are also captured; hybrid products that utilise the key features of a margin loan; a limited or non-recourse margin loan (where the amount the lender can recover is restricted to the mortgaged financial product); or a margin loan where the assets securing the loan are more than just the financial products purchased through the loan, such as residential property.

OTHER FINANCIAL PRODUCTS 3.39 For the reasons explained above, the key definition relevant to Chs 6–6D of the Corporations Act (which deal with fundraising, takeovers, information about ownership of listed entities, and continuous disclosure) is that of securities, contained in Corporations Act ss 92(3) and (4) and 700. Whether or not a particular financial instrument is a security as defined is fundamental in deciding whether that law applies. In Ch 7 of the Corporations Act (which deals with financial services and markets, and mandatory disclosure for financial products other than securities) and Pt 2 Div 2 of the ASIC Act (which deals with unconscionable conduct and consumer protection for the financial sector) the key definition is that of financial products. Whether or not a particular financial instrument is a financial product as defined determines whether conduct in relation to that instrument is regulated under the relevant legislation. The differing definitions of ‘financial product’ are contained in Corporations Act Pt 7.1 Div 3 and ASIC Act s 12BAA. In each case the definition used in the legislation is very broad. Both include securities, along with a wide variety of other investment, [page 139] risk management and payment arrangements. In the ASIC Act the

definition of financial product extends to certain types of credit facilities also.

Underlying policy 3.40 The Corporations Act and the ASIC Act adopt a broad, functional definition of financial product. The decision to adopt this approach to the definition reflects the policy position taken by the Financial System Inquiry (FSI) made in March 1997 and adopted in the CLERP 6 project (explained in 1.44–1.50 above) to the structure of financial regulation generally. It is important, in interpreting and applying the definition of financial product, to understand this underlying policy. In particular, the broad definition was intended to overcome gaps and remove opportunities for regulatory arbitrage that might result from more institutionally-focused approaches, and to create a flexible, principles-based framework that could capture new types of financial instruments as they evolved. FSI involved a comprehensive review of the regulatory framework for the Australian financial system. Its key findings included that, at the time of the Inquiry, conduct and disclosure regulation in relation to the financial sector was being undertaken by a variety of agencies, by reference to the institutional form of the service provider. FSI took the view that this was inconsistent with the broadening structure of markets, had resulted in inefficiencies, inconsistencies and regulatory gaps, and was not conducive to competition in the financial system. FSI’s recommendations therefore included that a single market integrity and consumer protection regulator be established, combining the then functions of the Australian Securities Commission, that part of the Insurance and Superannuation Commission dealing with disclosure, sales and advice, and the codes of practice overseen by the Australian Payments System Council. FSI also recommended that the regulator be given powers (exercisable within its jurisdiction) that mirrored those provided under the consumer protection provisions of the (then) Trade Practices Act 1974 (Cth), and exclusive responsibility for their administration. This was done in 1998 with the establishment of ASIC. FSI also recommended that the regulator seek to establish a consistent and comprehensive disclosure regime for the whole financial system, based

on product profile statements. The regulator was to have responsibility for the regulation of sales and advice on retail financial products including the licensing (within a single licensing regime) of all financial advisers. Further, FSI recommended that the distinction between securities and futures contracts then reflected in Chs 7 and 8 of the Corporations Law should be replaced by a single regime for financial markets and instruments.78 Another concern of FSI relevant to the eventual drafting of the definition of financial product was to ensure that it was flexible and adaptive enough to [page 140] encompass new developments in financial engineering and financial instruments. FSI had concluded that: Innovations in financial, technological developments and deregulation have heralded significant changes in products traded in financial markets and in the methods of trading those products. As a result, the regulatory regime lacks the flexibility required to deal fully with these developments and does not offer legal certainty for financial market participants in some areas. Since the pace of innovation in financial markets is unlikely to abate, there is a need to reconsider the regulatory framework.79

3.41 This policy shift towards an integrated regulatory framework underlies the broad definition of financial product used in Ch 7. The Explanatory Memorandum to the Financial Services Reform Bill states that ‘the proposed regulatory framework covers a wide range of financial products including securities, derivatives, general and life insurance, deposit accounts and means of payment facilities’.80 The definition of financial product in Ch 7 purports to respond to the need for flexible and adaptive coverage in four ways. First, it adopts a broad, functional definition of financial product in Corporations Act s 761A, that defines whether a facility is a financial product for the purposes of the chapter by reference to what the facility is used for, rather than its legal form. Second, it allows for particular facilities to be expressly included or excluded from the definition of financial product without reference to the functional definition, by Corporations Act ss 764A and 765A and regulations made from time to time under those sections. Third, it excludes facilities that,

while technically caught by the functional definition, are only incidentally financial products, under Corporations Act s 763E. Fourth, it gives ASIC the power to liberate particular facilities from the definition by declaration under Corporations Act s 765A(2). As the High Court observed in International Litigation Partners Pte Ltd v Chameleon Mining NL (recs and mgrs apptd) (2012) 246 CLR 455; 91 ACSR 473; [2012] HCA 45 at [5]: The legislative scheme implemented by the Reform Act has two significant characteristics. One is overinclusiveness. Rights and liabilities are drawn in overtly broad terms, on the footing that instances of overreach which become apparent in the administration of the legislation may be remedied by adjustments to the Act made not by remedial legislation but by exercise of powers conferred upon the Executive Government or bodies such as the Australian Securities and Investments Commission. The second characteristic is the creation by the legislation of rights and liabilities by means of criteria which reflect fluid market and economic usage rather than any ascertainable and stable meaning in the law.

Structure of the Corporations Act definition 3.42 The definition of financial product is contained in Pt 7.1 Div 3 of the Corporations Act. It comprises four subdivisions. Subdivision A is introductory. Subdivision B contains a functional definition of broad application that defines an [page 141] arrangement as a financial product by reference to what the arrangement is commonly used for, rather than its legal form or structure. Subdivision C then contains a list of express inclusions — arrangements defined by reference to their legal form that are financial products whether or not they come within the functional definition. Subdivision D then contains express exclusions — arrangements defined by reference to their legal form that are excluded from the definition of financial products even if they come within the functional definition. The structure of the definition means that individual components of other, broader transactions or arrangements may be financial products. The definitional structure deals with this in various ways. First, things that

may be caught by the functional definition in Corporations Act s 763A can be excluded under the ‘incidental products’ exception in Corporations Act s 763E, although the incidental products exclusion cannot be used for arrangements that appear on the list of express inclusions in Corporations Act s 764A: see 3.50 below. Second, where an arrangement that is a financial product is a ‘component of a facility that also has other components’ Ch 7 applies only in relation to the component that is a financial product: Corporations Act s 762B.81

Functional definition 3.43 Section 763A(1) provides that something is a financial product if it is a facility82 through which, or through the acquisition of which, a person does one or more of the following: makes a financial investment; manages financial risk; or makes non-cash payments. This definition is expressed to be subject to Corporations Act s 763E, which excludes from the definition arrangements that are financial products only incidentally (other than arrangements expressly included in the definition by Corporations Act s 764A). In looking at the purpose or use of a facility, to see whether it comes within the functional definition, the use or purpose to which it is commonly put, rather than the use or purpose of the person using or acquiring it, is relevant: Corporations [page 142] Act s 763A(2). A financial product, once it has that character, does not lose it merely because it is on-sold and the person acquiring it was not making a financial investment or managing financial risk: Corporations Act s 763A(3).

Making a financial investment 3.44 Section 763B defines when a person makes a financial investment for the purposes of Ch 7. A person, referred to in the section as an investor, makes a financial investment if they give money or money’s worth (called the contribution) to another person and the other person uses the contribution to generate a financial return, or other benefit, for the investor, or either party intends that this will occur. However, the investment is only caught by the definition of a financial product if the investor has no day-to-day control over the use of the contribution to generate the return or benefit. The drafting shows some commonality with the definition of managed investment scheme, discussed in 3.17 above. The difference is that, for an arrangement to be a managed investment scheme, there must be pooling or a common enterprise: see 3.26 above. An arrangement that does not involve pooling or a common enterprise (and therefore is not a managed investment scheme) may nevertheless be a financial product, if it satisfies the other elements of the definition. 3.45 Examples of a person making a financial investment include acquiring shares or debentures, acquiring interests in a managed investment scheme, superannuation trust or investment-linked policy of life insurance, or depositing money with an ADI. However, the legislation explains in a note to the section that the definition would not catch ‘a person purchasing real property or bullion (while the property or bullion may generate a return for the person, it is not a return generated by the use of the purchase money by another person)’. Investments that involve a person taking active day-to-day control of the use of their contribution (such as general partnerships and joint ventures in the ordinary course) would also fall outside the definition. However s 763B(b) applies: … wherever the investor has, as a matter of fact, no day-to-day control over the use of the contribution for the purpose of generating a financial return or other benefit. The fact that the structure of the arrangement pursuant to which an investor gives another person money contemplates or provides that the investor will have an element of day-to-day control does not, … exclude the contribution from constituting a financial investment if, as a matter of fact, the investor has no day-to-day control over the investment of the contribution.83

A financial investment will be made in accordance with s 763B even if no benefit or return is in fact generated, where: A participant gives money to another person who uses that contribution to generate a financial return or other benefit for the participant; [page 143] The participant intends that the other person will use the contribution to generate a financial return or other benefit for him or her; and The other person intends the contribution will be used to generate a financial return or other benefit for the participants.84

Managing a financial risk 3.46 The second part of the functional definition is explained in Corporations Act s 763C. That section states that a person manages a financial risk if they manage the financial consequences to them of particular circumstances happening, or avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices or interest rates). The notes to the section give as examples of managing financial risk taking out insurance, or hedging a liability by acquiring a futures contract or entering into a currency swap. However, the following is said to be an arrangement that does not constitute managing a financial risk: ‘employing a security firm (while that is a way of managing the risk that thefts will happen, it is not a way of managing the financial consequences if thefts do occur).’ While it is clear that this part of the definition was intended to catch insurance in various forms, and derivatives when used for hedging, the extent to which it extends beyond this is unclear. For example, pre-paid service contracts and extended warranty arrangements could potentially fall within the definition (although in practice many such arrangements, depending on the identity of the provider, and whether they are contracts of insurance for the purposes of the Corporations Act s 764A, may be

excluded by the incidental products exemptions discussed below).85 Concern over the breadth of this part of the definition led to the express exclusion from the definition of financial product of surety bonds (Corporations Regulations reg 7.1.07) and loss limiting arrangements in goods leases, including collision damage waivers: Corporations Regulations reg 7.1.07A. Certain structured investment and credit products may have elements of risk management embedded in them. This raises the possibility that such products may be subject to dual regulation, with the risk managements parts subject to, for example, the disclosure requirements in Pt 7.9 and the other parts of the product subject to different disclosure requirements (such as the consumer credit code or the prospectus requirements in Ch 6D). In International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] NSWCA 50, all members of the Court of Appeal concluded that a litigation funding agreement was within the scope of s 763C. Giles JA (at [42]–[44]) took the view that, by entering into the agreement, the respondent had managed the financial consequences to it (such as an adverse costs order) of litigation by passing them, initially and perhaps forever, to the funder. This was done through the acquisition of the agreement, which his Honour considered was a facility within [page 144] the definition in the Act. The operation of the agreement, rather than the parties’ purpose in entering into it, is relevant. Hodgson JA took the view (at [122]) that: … plainly the funding agreement was a facility through which [the respondent] managed financial risk (within s 763A(1)(b) of the Act), in that it managed the financial consequences to itself of certain things happening (namely, adverse costs orders and loss of litigation, and possibly also the incurring of its own costs through pursuit of the litigation).

However, on appeal the High Court decided that the arrangement was outside the definition of financial product, because it was a ‘credit facility’ and therefore covered by the overarching exclusion in s 765A(h).86

Making non-cash payments 3.47 The functional definition of financial product in s 763A includes ‘a facility through which … a person … makes non-cash payments’. Section 763D says that, for the purposes of Ch 7, a person makes non-cash payments if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins.87 Examples of actions that constitute making noncash payments given in the legislation are: making payments by means of a facility for direct debit of a deposit account; or making payments by means of a facility for the use of cheques; or making payments by means of a purchased payment facility within the meaning of the Payment Systems (Regulation) Act 1998 (Cth), such as a smart card; or making payments by means of travellers’ cheques (whether denominated in Australian or foreign currency). Of course, non-cash payment arrangements that involve the provision of credit by the supplier or a third party are not caught by Corporations Act s 763A, because of express exclusion of credit, including ‘an article known as a credit card or charge card’, from the definition of financial product by operation of s 765A(1)(h) and Corporations Regulations reg 7.1.06 (which overrides s 763D). There are various other non-cash payment arrangements that are specifically excluded from the definition of financial product by Corporations Act s 765(1)(y) and the related regulations, including money orders issued by Australia Post and telegraphic transfers and international money transfers offered by banks and remittance dealers: see Corporations Regulations regs 7.1.07F and 7.1.07G. The Explanatory Memorandum suggests that the technology through which the payment facility is offered is not itself a non-cash payment facility. The Explanatory Memorandum to the Financial Services Reform Bill states (at [6.59]): [page 145]

Who is the issuer of a particular financial product, including a noncash payment facility, is dealt with in proposed section 761E. In particular, proposed subsection 761E(4) makes it clear that the issuer of the product is the person who is responsible to the client or for the obligations owed under the terms of the product. In relation to noncash payments such as direct debit facilities, the issuer of the facility (who is subject to certain obligations under proposed Chapter 7, including financial service provider licensing and product disclosure) is the financial institution with which the account to be debited is held, rather than the person to whom payments can be made using the facility. Similarly, in relation to Automated Teller Machines (ATMs) it would be the financial institution with which the account being credited or debited through the use of the machine that would be the provider of the facility, not the supplier of the ATM.

Section 763D(2)(a)(i) expressly excludes from the definition a facility under which payments can be made to only one person (for example, a gift voucher from a particular retailer). There is provision in subpara (ii) of that section for facilities for payment by a limited number of payers, or to a limited number of payees, to be exempted by regulation. Section 763D(2)(b) and Corporations Regulations reg 7.1.08 have the effect of excluding from the definition a facility that is a letter of credit from a financial institution, a cheque drawn by a financial institution on itself or another financial institution, or a guarantee from a financial institution. Non-cash payment facilities are discussed in ASIC Regulatory Guide 185 — Non-Cash Payment Facilities, November 2005 ASIC has issued a number of exemptions relating to non-cash payment facilities, including Class Orders 03/705 (licensing relief), 05/736 (low value facilities), 05/737 (loyalty schemes), 05/738 (gift facilities), 05/740 (road toll facilities), and 05/740 (pre-paid mobile facilities).

Incidental financial products 3.48 Given the breadth of the functional definition in Pt 7.1 Div 3 Subdiv B, it is clear that it could catch things that are technically within the definition, but are part of a broader arrangement that, when viewed as a whole, does not have as its primary purpose investment, financial risk management, or payments. An example would be a manufacturer’s warranty provided in connection with the sale of goods. The primary purpose of the transaction is the sale of goods — the manufacturer’s

warranty (which might potentially fall within Corporations Act ss 763A(1) (b) and 763C) is only incidental to that sale. Section 763E therefore provides that if something that would otherwise be a financial product because of the general definition in Corporations Act s 763A is ‘an incidental component of a facility that also has other components, or is a facility that is incidental to one or more other facilities’ and it is reasonable to assume that the main purpose of the components or facilities viewed as a whole is not a financial product purpose, it is not a financial product. ‘Financial product purpose’ means a purpose of making a financial investment, managing financial risk, or making non-cash payments: Corporations Act s 763E(2). It is important to note that Corporations Act s 763E asks us to look to the main [page 146] purpose of the components or facilities viewed as a whole, rather than just to any substantial purpose. Section 763E is discussed in the Explanatory Memorandum to the Financial Services Reform Bill (at [6.46]) in the following terms: Proposed section 763E is intended to ensure that the definition of ‘financial product’ does not pick up a range of consumer transactions that have an element, but not the primary purpose, of for example managing a financial risk. For example, the definition of ‘managing a financial risk’ could potentially cover warranty periods or guarantees in contracts for the sale of goods, or card registration services with the incidental benefit that the consumer will not be liable for any unauthorised use of a credit card between the time the service is notified of the loss and the time the service notifies the issuing bank. Similarly, a security bond arrangement by a telecommunications provider, which provided for the payment of interest, could be a facility for the making of a financial investment. Under proposed section 763E where the financial product purpose (making a financial investment, managing a financial risk, or making a noncash payment) is incidental to the main purpose of a facility, it is not to be regarded as a financial product.

3.49 Section 763E will not exclude from the definition of financial product anything that is expressly included by Subdiv C. This means that the products and arrangements specified in Corporations Act s 764A will always be financial products, even where the main purpose for entering

into them is not a financial product purpose. The Explanatory Memorandum states (at [6.47]) that: Proposed section 763E only applies to the general definition of ‘financial product’. Thus to the extent that a product comes within the list of specific inclusions in proposed section 764A, it will come within the regime whether or not it is incidental to the main purpose of a facility. This means that products such as insurance associated with taking out a home loan or consumer credit insurance would be regulated under the regime, as would superannuation associated with a contract of employment.

Financial instruments expressly included 3.50 Section 764A contains a list of express inclusions: that is, things that are financial products whether or not they come within the functional definition in Subdiv B.

Securities 3.51 Securities are expressly included in the definition of financial products: see s 764A(1)(a). For this purpose the definition of ‘security’ in Corporations Act s 761A applies. Accordingly, the reference to securities is to shares in a body, debentures of a body, legal or equitable rights or interests in shares or debentures, and options to acquire, by way of issue, a security of this type. Where the expression ‘security’ is used in Ch 7 of the Corporations Act, it has the meaning set out in Corporations Act s 761A. This includes, in para (e): … a right (whether existing or future and whether contingent or not) to acquire, by way of issue, the following under a rights issue: (i) a security covered by

[page 147] [s 761A(1)] (a), (b), (c) or (d); (ii) an interest or right covered by paragraph 764A(1)(b) or (ba).

Rights under a rights issue are not treated as securities for any other purposes (for example, they are not securities for the purposes of the fundraising provisions in Corporations Act Ch 6D). Section 9A of the

Corporations Act contains a technical definition of ‘rights issue’ that applies for this purpose; in broad terms, a rights issue is an offer, made on the same terms to every person who owns securities in a particular class, to issue them (or their assignee, in the case of a renounceable rights issue) with the percentage of the securities to be issued that is the same as the percentage of the securities in that class that they hold before the offer. Because these rights are treated as securities for Ch 7 purposes, they are financial products by operation of Corporations Act s 764A(1)(a) and ASIC Act s 12BAA(7)(a).

Managed investment scheme interests 3.52 The definition of financial products includes an interest in a registered managed investment scheme, or in a managed investment scheme that, while not registered, has more than 20 members, is promoted by a professional promoter, or is one of a group of schemes declared by ASIC to be related that between them have more than 20 members: Corporations Act s 764A(1)(b) and (ba). The definition of managed investment scheme is discussed in 3.16 above. Interests in private schemes (that is, managed investment schemes in relation to which none of paras 601ED(1)(a), (b) or (c) is satisfied) are not financial products for the purposes of Ch 7 of the Corporations Act (although they are financial products for the purposes of ASIC Act Pt 2 Div 2: see 3.35 above).

Derivatives 3.53 The definition of financial product also includes a derivative: Corporations Act s 764(1)(c). The definition of ‘derivative’ is contained in Corporations Act s 761D, and is discussed at 3.36 above.

Prudentially regulated products 3.54 The list of financial arrangements expressly included in the definition also includes a variety of prudentially regulated insurance, superannuation and banking products. These products are not generally traded on financial markets. The express inclusions in s 764(1)(d)–(i) include:

Insurance: this includes a general insurance product, a life risk insurance product, or an investment life insurance product, but excludes benefits provided by an association of employees that is an organisation for the purposes of the Workplace Relations Act 1996 (Cth), superannuation benefits, pensions and payments to employees provided by an employer, funeral benefits, or policies issued by an employer to an employee. Superannuation: this includes an interest in a regulated superannuation fund, an approved deposit fund, or a pooled superannuation trust. Certain superannuation products are, however, expressly excluded from the definition: see below. A retirement savings account within the meaning of the Retirement Savings Account Act 1997 (Cth), is also included. [page 148] Bank deposits: that is, any deposit-taking facility made available by an ADI in the course of its banking business.

Government securities 3.55 The definition of financial product also includes ‘a debenture, stock or bond issued or proposed to be issued by a government’: Corporations Act s 764(1)(j). Government securities are also included in the definition of securities contained in Corporations Act s 92(1). The effect of including government securities in the definition of financial product is primarily to regulate the conduct of secondary markets in those products, as Ch 7 does not apply to the activities of governments as issuers. Section 5A(4) of the Corporations Act provides that ‘a provision of Chapter 6A or 7 only binds the Crown in a particular capacity in circumstances (if any) specified in the regulations’ (of which there are none). For this purpose, a reference to the Crown in a particular right ‘includes a reference to an instrumentality or agency (whether a body corporate or not) of the Crown in that right’: Corporations Act s 5A(1). As to whether a government-owned corporation that issues financial products is acting as the Crown, see Re Queensland

Power Trading Corporation and Australian Securities and Investments Commission (2005) 89 ALD 346 (AAT).

Foreign exchange 3.56 Section 764A(1)(k) treats certain foreign exchange contracts as financial products. In particular, foreign currency transactions where currency is not immediately exchanged are treated as financial products. However, foreign exchange contracts that are derivatives are treated as derivatives.

Emission units 3.57 Finally, s 764A(1)(ka) includes ‘an Australian carbon credit unit’ as defined in the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) and s 764A(1)(kb) includes an ‘eligible international emissions unit’ as defined in the Australian National Registry of Emissions Units Act 2011 (Cth).

Financial instruments expressly excluded 3.58 Section 765A contains a list of express exclusions from the definition of financial product. Things that are on this list are not financial products even if they come within the functional definition in Subdiv B. They include: an excluded security (that is, a retirement village interest); an undertaking by a body corporate to pay money to a related body corporate. This would exclude from the definition debentures issued to a related body corporate; health insurance; certain government insurance, including insurance provided by the Commonwealth, state insurance and Northern Territory insurance, and export finance insurance; reinsurance; [page 149]

credit facilities (the definition of ‘credit facility’ is discussed below); certain netting and settlement systems, and financial markets; foreign currency exchange (but note that this does not exclude foreign currency derivatives); certain contracts for the sale or purchase of tangible property at a future time that are not derivatives because they cannot be cash settled or set off. Contracts of this kind that allow for the price to be adjusted in the future by reference to an index such as Consumer Price Index (CPI) are also excluded; an interest in an exempt public sector superannuation scheme; interests in general partnerships, managed investment schemes comprised wholly of related bodies corporate, franchises, barter schemes, retirement village schemes, and Western Australian cooperatives; deposit-taking facilities used for state banking; certain union-related benefits, and insurances issued by employers to employees; funeral benefits; and physical equipment or physical infrastructure by which something else that is a financial product is provided. So, for example, an ATM through which non-cash payments can be made is not itself a financial product. The legislation allows for other facilities, interests and things to be declared by regulation to be excluded from the definition of financial product. Things excluded by regulation include: interests in exempt public sector superannuation schemes; surety bonds; waivers and loss reduction arrangements in rental agreements (for example, collision damage waiver insurance for a rental car); bank drafts: that is, cheques drawn by a financial institution on itself or on another financial institution; overseas student health insurance contracts; funeral expenses policies; rights of a debenture holder against the trustee; Australia Post money orders and electronic fund transfers; and Australian Capital Territory insurance: see Corporations Regulations regs 7.1.05–7.1.05H. ASIC also has power to declare that things are excluded from the definition of financial product, under Corporations Act s 765A(2).

Credit facilities 3.59 The definition of financial product in the Corporations Act expressly excludes credit facilities (other than margin lending): s 765A(1) (h). The definition of ‘margin lending facilities’ in s 761EA is discussed at 3.38 above. As the Explanatory Memorandum to the Financial Services Reform Bill notes, credit facilities would not ordinarily be caught by the functional definition of financial product in Pt 7.1 Div 3 Subdiv B, if they are not a means or facility by which a person makes a financial investment, manages a financial risk or makes non-cash payments. However, the line between credit and other forms of financial instruments or arrangements is not always clear. The Explanatory Memorandum notes, for example, that ‘fixed rate loans could have been regarded as a facility for managing financial risk and credit [page 150] cards would have been facilities for making non-cash payments’.88 Accordingly, it was thought appropriate to make it clear that any form of facility that would be regarded as credit is outside the regulatory reach of Ch 7. Corporations Act s 765A(1)(h) excludes from the definition of financial product ‘a credit facility within the meaning of the regulations’ and ‘a facility for making non-cash payments … if payments made using the facility will all be debited to a credit facility’. The definition of ‘credit facility’ is set out in Corporations Regulations reg 7.1.06(1) and includes various arrangements for the provision of credit. ‘Credit’ is defined in Corporations Regulations reg 7.1.06(2)(a) as a contract, arrangement or understanding under which payment of a debt owed by one person to another person is deferred, or one person incurs a deferred debt to another person, including the following: any form of financial accommodation; a hire–purchase agreement; credit provided for the purchase of goods or services; certain arrangements for the hire, lease or rental of goods or services;

an article known as a credit card or charge card; an article, other than a credit card or a charge card, intended to be used to obtain cash, goods or services; an article, other than a credit card or a charge card, commonly issued to customers or prospective customers by persons who carry on business for the purpose of obtaining goods or services from those persons by way of a loan; a liability in respect of redeemable preference shares; a financial benefit arising from, or as a result of, a loan; assistance in obtaining a financial benefit arising from, or as a result of, a loan; issuing, indorsing or otherwise dealing in a promissory note; drawing, accepting, indorsing or otherwise dealing in a negotiable instrument (including a bill of exchange); granting or taking a lease over real or personal property; and a letter of credit. A litigation funding agreement was held to be a credit facility for this purpose by the High Court in International Litigation Partners Pte Ltd v Chameleon Mining NL (2012) 246 CLR 455; 91 ACSR 473; [2012] HCA 45. Importantly, both the plurality (French CJ, Gummow, Crennan and Bell JJ) and Heydon J emphasised the broad scope of the definition of credit. The plurality noted (at [26] and [28]) that: … the term ‘credit’ is defined in reg 7.1.06(3)(a) as meaning a contract, arrangement or understanding under which payment of a debt to the credit provider ‘is deferred’, and as including ‘any form of financial accommodation’ (reg 7.1.06(3)(b)(i)). The use in this way of the concept ‘means and includes’ is

[page 151] to avoid any doubt that what is identified by the inclusion falls within the scope of the designated meaning of ‘credit’. The result is that a contract, arrangement or understanding that is any form of financial accommodation is ‘credit’, and its provision ‘for any period’ will be a ‘credit facility’. … The expression ‘a contract, arrangement or understanding … [for] any form of financial

accommodation’ (emphasis added) is of considerable width of denotation. For example, an agreement by a bank to lend its name to a bill of exchange for the accommodation of its customer provides a form of financial accommodation, as is reflected in the expression ‘accommodation bill’. The same may be said for the provision of a guarantee of the obligations to the creditor of the principal debtor. The extension by a bank to a customer of an overdraft facility provides a form of financial accommodation in respect of the presently undrawn portion of the overdraft. Further, the inclusion of the words ‘arrangement or understanding’ indicates that regard may be had to matters of substance as well as of form.

Heydon J rejected the submission that ‘credit’ required: an ‘element of a definite unavoidable obligation but with a concept of deferral’, taking the view that ‘this construction imposes restrictions on the definition of credit considered in the context of a facility for providing credit in the form of “financial accommodation” which are not present in the statutory language’. His Honour concluded that ‘“Accommodation” is a wide expression … the words “any” and “form” in the expression “any form of financial accommodation” indicate that it is an expression to be construed amply’: at [44].

ASIC ACT DEFINITION OF FINANCIAL PRODUCT 3.60 Part 2 Div 2 of the ASIC Act contains the unconscionable conduct and consumer protection laws that apply to the financial sector as a whole, to the exclusion of the Australian Consumer Law as it applies as a law of the Commonwealth pursuant to ss 131 and 131A of the Competition and Consumer Act 2010 (Cth) (CCA).89 The scope of ASIC Act Pt 2 Div 2 is determined by the definition of financial product and, in turn, financial service contained in ASIC Act ss 12BAA and 12BAB. The definition of financial product contained in ASIC Act s 12BAA is not identical to that contained in Pt 7.1 Div 3 of the Corporations Act. Importantly, certain things that are excluded from the definition of financial product for the purposes of Ch 7 of the Corporations Act are not excluded from the ASIC Act definition. The most significant difference is that the ASIC Act definition of financial product expressly includes credit facilities (see ASIC Act s 12BAA(7)(k) and ASIC Regulations reg 2B) while the Corporations Act definition of financial product expressly excludes

them (see Corporations Act s 765A(1)(h) and Corporations Regulations reg 7.1.06): see 3.59 above. [page 152] In broad terms, ASIC Act s 12BAA(1), (2) and (3) correspond to Corporations Act s 763A(1), (2) and (3), and ASIC Act s 12BAA(4), (5) and (6) to Corporations Act ss 763B, 763C and 763D respectively. The exceptions to the definition of non-cash payment facilities in Corporations Act s 763D(2) are not mirrored in the ASIC Act. The ASIC Act does not contain a provision corresponding to Corporations Act s 763E, carving out arrangements that are financial products only incidentally. Section 12BAA(7) contains a list of things that are financial products for the purposes of ASIC Act Pt 2 Div 2; the list broadly corresponds to that in Corporations Act s 764A(1) but is not identical to it. The most important difference is ASIC Act s 12BAA(7)(k), which has the effect of including credit facilities in the ASIC Act definition of financial product. There are other differences also. For example, ASIC Act s 12BAA(7)(b) includes all interests in managed investment schemes, while Corporations Act s 764A(1)(b) and (ba) only include interests in registered or unregistered non-private schemes. Some contracts of insurance, life policies and sinking fund policies that are not caught by the Corporations Act definition are included in the ASIC Act definition: compare ASIC Act s 12BAA(7)(d) and (e) and Corporations Act s 764A(1)(d), (e) and (f). A broader range of superannuation interests and foreign exchange contracts is caught by the definition in the ASIC Act: compare ASIC Act s 12BAA(7)(f) and (j) and Corporations Act s 764A(1)(g) and (k). Section 12BAA(8) of the ASIC Act provides that certain financial arrangements are not financial products for the purposes of ASIC Act Pt 2 Div 2. The list is not identical to that contained in Corporations Act s 765A(1). The various things that are excluded from the definition of financial product by Corporations Regulations regs 7.1.05–7.1.05H, mentioned in 3.58 above, are not excluded from the ASIC Act definition.

___________________________ 1.

As Graham J observed in Ku v Song (2007) 63 ACSR 661 at 705 in relation to the share transfer provisions in Corporations Act Pt 7.11, the legislation often requires reference to ‘numerous definitions, often shrouded in obfuscation, and, needless to say, strewn throughout the Corporations Act and the Corporations Regulations in various places such as ss 9 and 761A and regulations 1.0.02 and 7.11.01’, leading his Honour to observe that ‘why the law had to be expressed in such an obscure way beggars belief’. In International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] FCAFC 50, Young JA said (at [152]–[153]): ‘It might be remarked at this initial stage that Ch 7 of the Corporations Act is drafted in the most obscure and convoluted manner … I know it is our job to make plain what is obscure, and I know that commercial lawyers are thought by the legislature to be so able to find loopholes that every possible eventuality must be thought of and covered. However, the main aim is to protect the investing public and the investing public gain little comfort from obscure legislation.’

2.

Keynes v Rural Directions Pty Ltd (2010) 186 FCR 281; 79 ACSR 405; [2010] FACFC 100; International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] NSWCA; reversed International Litigation Partners Pte Ltd v Chameleon Mining NL (2012) 246 CLR 455; (2012) 292 ALR 233; (2012) 86 ALJR 1289; (2012) 91 ACSR 473; [2012] HCA 45.

3.

Reversed International Litigation Partners Pte Ltd v Chameleon Mining NL (2012) 246 CLR 455; (2012) 292 ALR 233; (2012) 86 ALJR 1289; (2012) 91 ACSR 473; [2012] HCA 45.

4.

‘Managed investment product’ is defined in s 761A and means a financial product described in s 764A(1)(b): that is, an interest in a registered scheme, a legal or equitable right or interest in such an interest, or an option to acquire either by way of issue.

5.

First home owner savings accounts, which were previously included in the definition of ‘financial product’, were abolished in July 2015.

6.

See also Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 at 288.

7.

The rights and liabilities attaching to shares are discussed in J H Farrar and P F Hanrahan, Corporate Governance, LexisNexis Butterworths, 2016, Ch 20.

8.

Loxton v Moir (1914) 18 CLR 360 at 379 per Rich J; Torkington v Magee [1902] 2 KB 427 at 430; J G Starke, Assignment of Choses in Action in Australia, Butterworths, Sydney, 1972, pp 1–9; Emu Brewery Mezzanine Ltd v Australian Securities and Investments Commission (2006) 32 WAR 204; 57 ACSR 752; [2006] WASCA 105 at [31] per McLure JA.

9.

Macquarie was concerned that the HYENAs may be ‘securities’, and sought comfort relief from ASIC under Corporations Act s 741 to the effect that disclosure under Ch 6D was not required. ASIC refused the relief and concluded that HYENAs were securities; Macquarie then applied to the AAT for a review of ASIC’s decision. The HYENA was described by the AAT (at 516) as ‘a complex hybrid product which is relatively difficult to understand and involves a number of contingencies’. The holder of the HYENA was entitled to receive payments from Macquarie in the nature of ‘interest paid … by reference to individual shares listed on ASX and their perceived volatility’ and ‘repayment of the principal … by reference to the market value of the share at the date of maturity’. See J Donnan, ‘Debentures, Derivatives and Managed Investment Schemes — The Characterisation and Regulation of Investment Instruments’ (2002) 13 JBFLP 28–35.

10.

ASIC Report 201 — Review of Disclosure for Capital Protected Products and Retail Structured or Derivative Products, July 2010.

11.

It is an either/or question, because if an instrument is a debenture it is carved-out of the definition

of derivative, see 3.36 below. 12.

Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [23]–[24].

13.

ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; (2014) 309 ALR 445; (2014) 99 ACSR 336; [2014] FCAFC 65 at [700].

14.

An ADI is an authorised deposit-taking institution within the meaning of the Banking Act 1959 (Cth) and a person who carries on state banking within the meaning of para 51(xiii) of the Commonwealth Constitution.

15.

See Royal Bank of Canada v Inland Revenue Commrs [1972] Ch 665.

16.

Commr of Taxation v Hyteco Hiring Pty Ltd (1992) 39 FCR 502 at 513.

17.

See Re Macquarie Bank Ltd and Australian Securities and Investments Commission (2001) 39 ACSR 508; [2001] AATA 868 at ACSR 516.

18.

See New Cap Reinsurance Corporation Ltd v Daya (2008) 66 ACSR 95; [2008] NSWSC 64.

19.

See, for example, Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168; [2004] WASC 241; Financial Industry Complaints Service Ltd v Deakin Financial Services Pty Ltd (2006) 157 FCR 229; 60 ACSR 372; [2006] FCA 1805; Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358; 64 ACSR 1; [2007] FCA 992.

20.

For a detailed discussion of Ch 2L see R Austin and I Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law, 16th ed, LexisNexis Butterworths, Sydney, 2015, Ch 19.

21.

See Bond Corporation Pty Ltd v White Industries Ltd [1980] 2 NSWLR 351.

22.

See ASIC Regulatory Guide 30 — Paperless Issues and Transfers under a Global Debenture, June 2009.

23.

See P Hanrahan, Funds Management in Australia: Officers’ Duties and Liabilities, LexisNexis Butterworths, Sydney, 2007, Ch 1.

24.

Parliament of Victoria Report from the Statute Law Revision Committee on Amendments of the Statute Law to Deal with Fraudulent Practices by Persons Interested in the Promotion and/or Direction of Companies and by Firms, 26 October 1954.

25.

In response, the Victorian Parliament introduced measures to regulate the promotion of these alternative investment arrangements. These measures prohibited the offer of interests in such schemes by anyone other than a public company, and required the issue of a prospectus in relation to the offer, the appointment of an approved trustee, and the adoption of an approved deed. The operator of the scheme was required to use its best endeavours to carry on and conduct the business of the company in a proper and efficient manner and to ensure that any business or scheme to which the deed related was carried on and conducted in a proper and efficient manner. It was also required to provide certain information to the trustee and to convene a meeting of the investors on their requisition.

26.

For an overview of the requirements of Corporations Act Ch 5C see P Hanrahan, Funds Management in Australia: Officer’s Duties and Liabilities, LexisNexis Butterworths, Sydney, 2007, Ch 4.

27.

See Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387; [2001] NSWSC 522; Australian Securities and Investments Commission v Emu Brewery Mezzanine Pty Ltd (2004) 52 ACSR 168; [2004] WASC 241; Australian Securities and Investments Commission v Great Northern Developments Pty Ltd (2010) 79 ACSR 684; [2010] NSWSC 1087 at [63]–[65].

28.

For a detailed discussion of the history of regulation in this area see P Hanrahan, Managed

Investments Law & Practice, looseleaf, CCH, ¶2-100–¶2-700; P Hanrahan, ‘ASIC and Managed Investments’ (2011) 29 C&SLJ 287. 29.

Also included in the definition (in para (b)) are time-sharing schemes. A time-sharing scheme is an arrangement that allows people to use or occupy property for periods of time that operates over three or more years. The statutory definition is ‘… a scheme, undertaking or enterprise, whether in Australia or elsewhere: (a) participants in which are, or may become, entitled to use, occupy or possess, for 2 or more periods during the period for which the scheme, undertaking or enterprise is to operate, property to which the scheme, undertaking or enterprise relates; and (b) that is to operate for a period of not less than 3 years’. Time-sharing schemes are regulated in accordance with ASIC Regulatory Guide 160 — Time Sharing Schemes, June 2012. They are not discussed in this book.

30.

The different elements of para (a) of the definition are discussed in detail in P Hanrahan, Managed Investments Law & Practice, looseleaf, CCH, ¶6-100–¶6-250.

31.

In particular, Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) 148 CLR 121; 6 ACLR 45; [1981] HCA 49.

32.

See Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387; upheld on appeal in Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620; [2000] QCA 452 at [17]; Burton v Arcus (2006) 32 WAR 366; 57 ACSR 468; [2006] WASCA 71 at [51]; Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168; [2004] WASC 241 at [80]; Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [23]–[24].

33.

Carragreen Currency Corporation Pty Ltd v Corporate Affairs Commission (NSW) (1987) 5 ACLC 148 per Hodgson J. Note that this appears to depart from the approach taken by the Full Federal Court in interpreting the definition of ‘debenture’ in ABN AMRO, discussed in 3.10 above.

34.

Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168; [2004] WASC 241 at [80].

35.

Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) 148 CLR 121; 6 ACLR 45; [1981] HCA 49, per Mason J at ACLR 51, quoted in Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387 at [17] and Australian Securities and Investments Commission v Emu Brewery Mezzanine Ltd (2004) 52 ACSR 168; [2004] WASC 241 at [81].

36.

Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; [1999] QSC 387 at [17].

37.

ALRC and CASAC, Report No 65, Collective Investments: Other People’s Money, 1993.

38.

ALRC/CASAC, Report No 65, above at [3.5].

39.

Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 27 ACLC 712; [2009] FCA 450 at [6].

40.

Examples include Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339; Re Lawloan Mortgages Pty Ltd (2002) 172 FLR 241; Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388; [2002] NSWSC 834; Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd (2003) 47 ACSR 52; Australian Securities and Investments Commission v Piggott, Wood & Baker [2006] FCA 1774; Australian Securities and Investments Commission v West (2008) 100 SASR 496; 66 ACSR 143; [2008] SASC 111.

41.

See Australian Securities and Investments Commission v Landy DFK Securities Ltd (2002) 20 ACLC 1613; Australian Securities and Investments Commission v Tasman Investment Management Ltd (2006) 193 FLR 297; Australian Securities and Investments Commission v Primelife Corp Ltd (2005) 54 ACSR 536; Mier v FN Management Pty Ltd (2005) 56 ACSR 93; Australian Securities and Investments Commission v Mount Warren Park (Nominees) Pty Ltd (2005) 56 ACSR 43; Emu Brewery Mezzanine Ltd (in liq) v ASIC (2006) 32 WAR 204; Re GDK Financial Solutions Pty Ltd (2006) 202 FLR 343; Lake Coogee Estate Management Pty Ltd v Australian Securities and Investments Commission (2006) 60 ACSR 281; Australian Securities and Investments Commission v Frasers Project Managers Pty Ltd [2008] FCA 541; Australian Securities and Investments Commission v Letten [2010] FCA 140.

42.

See Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778; Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387; Australian Securities and Investments Commission v ABC Fund Managers Ltd (2001) 39 ACSR 443; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240; Australian Securities and Investments Commission v Drury Management Pty Ltd [2003] QSC 285; Australian Securities and Investments Commission v Comcash Australasia Pty Ltd (2004) 59 ACSR 632; Australian Securities and Investments Commission v Arafura Equities Pty Ltd (2005) 56 ACSR 429; Australian Securities and Investments Commission v McDougall (2006) 57 ACSR 175; Australian Securities and Investments Commission v Mercorella (No 2) (2006) 230 ALR 598; Australian Securities and Investments Commission v Risqy Ltd [2008] QSC 107; Australian Securities and Investments Commissions v IIdylic Solutions Ltd; Australian Securities and Investments Commission v PJCB International Ltd (2009) 76 ACSR 129.

43.

See Australian Securities and Investments Commission v McNamara (2002) 42 ACSR 488 (for the recovery of shipwrecks); Australian Securities and Investments Commission v Edwards (2004) 22 ACLC 1469; Australian Securities and Investments Commission v Fuelbanc Australia Ltd (2007) 64 ACSR 17.

44.

Australian Softwood Forests Pty Ltd v Attorney-General for NSW (1981) 148 CLR 141; 6 ACLR 45; [1981] HCA 49 per Mason J.

45.

Cited with approval by Gilmour J (with whom Spender J agreed) in National Australia Bank Ltd v Norman (2009) 180 FCR 243; 74 ACSR 561; [2009] FCAFC 152.

46.

See Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR 692; [2005] NSWSC 15 at [52]–[53]; and Burton v Arcus (2006) 32 WAR 366; 57 ACSR 468; [2006] WASCA 71 at [56]–[57].

47.

Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147 at [99]. Their Honours go on to clarify that ‘We do not mean to imply that land may never be pooled’.

48.

WA Pines Pty Ltd v Hamilton (1980) CLC ¶40-654.

49.

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2012) 301 ALR 1; [2012] FCA 1028 at [1209].

50.

On the distinction between a franchise and a managed investment scheme, see, for example, Australian Securities and Investments Commission v Austral Timber Pty Ltd (1999) 17 ACLC 1697; and Enviro Systems Renewable Resources Pty Ltd v Australian Securities and Investments Commission (2001) 80 SASR 1; 36 ACSR 762; [2001] SASC 11.

51.

ASIC has exercised its exemption powers extensively. Among those managed investment schemes that may be exempt from registration (depending on the terms on which the arrangement is offered, the size of the venture and the identity of the person offering it) are ASIC Regulatory Guide 91 — Horse Racing and Breeding Schemes; ASIC Regulatory Guide 77 — Property Trusts and Property

Syndicates; ASIC Regulatory Guide 87 — Charities; ASIC Regulatory Guide 49 — Employee Share Schemes; ASIC Regulatory Guide 148 — Investor Directed Portfolio Services; ASIC Regulatory Guide 149 — Nominee and Custody Services; and ASIC Regulatory Guide 179 — Managed Discretionary Accounts Services. 52.

There are many examples of ‘stapled securities’ quoted on ASX. A stapled security consists of two or more financial instruments (for example, a share in a company and an interest in a registered managed investment scheme) bound together (usually by contract) in such a way that one instrument cannot be dealt with without the other. The price and distribution reflects the combined performance of the two issuing entities. For example, in the property sector, the staple may consist of a unit in a trust that owns the real property, and a share in the responsible entity (that is, the public company that operates the trust). The use of such a structure can produce taxation advantages for investors.

53.

ASIC Annual Report 2014–15. p 27. This does not include registered schemes described by ASIC as being in ‘wind up or strike off’.

54.

The term ‘managed fund’ is used to describe a scheme that holds a basket of financial assets selected by the operator and held on trust for the investors in the scheme. The main sub-categories of managed fund are cash; cash enhanced; equities; specialist equities; bonds; yield; alternative; and multi-sector. Although a meaningful breakdown of registered schemes by type is difficult, it is likely that about 3000 registered schemes fall into this category.

55.

For information about all ASX-listed schemes, see . Note that not all vehicles classified by ASX as listed managed funds are structured as registered managed investment schemes.

56.

Also known as listed property trusts. There were approximately 60 A-REITs (structured either as stand-alone trusts or as stapled securities) listed on ASX.

57.

This includes direct property trusts and syndicates (that own particular real estate assets) and unlisted schemes that invest in these direct property arrangements. Most are fixed term.

58.

This includes pooled mortgage funds and contributory mortgage schemes..

59.

This group includes a mix of infrastructure assets, such as toll roads and airports.

60.

These divide into forestry schemes and other agribusiness (such as horticulture, aquaculture and viticulture).

61.

The nature of the members’ interest in a scheme structured as a unit trust is discussed in P Hanrahan, Managed Investments Law & Practice, looseleaf, CCH, [65-300]. See also CPT Custodian Pty Ltd v Commr of State Revenue (2005) 224 CLR 98; [2005] HCA 53.

62.

CSLRC Discussion Paper 6 — Prescribed Interests. May 1987, Ch 4.

63.

P Hanrahan, ‘ASIC and Managed Investments’ (2011) 29 C&SLJ 287 at 309–10. See also CAMAC, Managed Investment Schemes — Report, July 2012.

64.

Prior to the enactment of the Financial Services Reform Act 2001 (Cth), the Corporations Law separately regulated futures.

65.

Explanatory Memorandum to the Financial Services Reform Bill, [6.72].

66.

Futures and forward rate agreements involve an agreement to buy or sell an asset at a given price on a future date.

67.

Options contracts give one party the right (but not the obligation) to buy or sell an asset in the future.

68.

Swaps involve an interest rate or currency exchange. In the case of an interest rate swap, one party is obliged to pay a fixed interest rate to the other party in return for a floating interest rate.

69.

Parliamentary Joint Committee on Corporations and Securities, Report on Derivatives, 1995, [1.3]– [1.5].

70.

On appeal, the High Court held that the funding agreement was a credit facility and therefore not a financial product for the purposes of Ch 7 of the Corporations Act: International Litigation Partners Pte Ltd v Chameleon Mining NL (2012) 246 CLR 455; 91 ACSR 473; [2012] HCA 45.

71.

For examples of the possibility of regulatory and definitional overlap in Ch 7 see T Ciro, ‘Functional Regulation and Financial Products: Regulatory Interplay Between Financial Derivatives and Contracts of Insurance’ (2002) 13 JBFLP 5; and J Donnan, ‘Debentures, Derivatives and Managed Investment Schemes — The Characterisation and Regulation of Investment Instruments’ (2002) 13 JBFLP 28.

72.

ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; 99 ACSR 336; [2014] FCAFC 65 at [658].

73.

This is because s 765A(1)(h) expressly excludes ‘a credit facility within the meaning of the regulations (other than a margin lending facility)’. Credit facility is defined for this purpose in Corporations Regulations reg 7.1.06.

74.

In contrast the definition of ‘financial product’ in s 12BAA(7)(k) includes a credit facility as defined in Australian Securities and Investments Commission Regulations 2001 (Cth) reg 2B.

75.

For a general discussion of this type of facility, see P Ali, I Ramsay and B Saunders ‘The Legal Structure and Regulation of Securities Lending’ CIFR Working Paper No 022/2014, May 2014.

76.

See Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia, November 2009, Ch 3; S Steele, ‘Lessons (to be) Learnt from the Opes Prime Insolvency’ (2008) 32 MULR 1127; W Murray, ‘Regulation of Margin Loans — Before and After the New Amendments to the Corporations Act 2001 (Cth)’ (2011) 26 AJCL 299.

77.

See Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Ltd (2008) 246 ALR 361; 66 ACSR 116; [2008] FCA 594.

78.

Financial System Inquiry Final Report, March 1997, pp 235–6.

79.

Above, p 277.

80.

Explanatory Memorandum to the Financial Services Reform Bill 2001, [1.6].

81.

Explanatory Memorandum to the Financial Services Reform Bill, [6.38] says: ‘Where a facility includes a number of components, only one of which is a financial product, the Chapter will only apply to the facility to the extent to which it consists of a financial product. For example, some banking products may involve dual credit and debit facilities. The [Act] will only apply to the debit aspects of the facility and not the credit aspects.’

82.

‘Facility’ is defined as including intangible property, an arrangement or term of an arrangement (including a term that is implied by the law or required by law to be included), or a combination of intangible property and an arrangement or term of an arrangement. Two or more arrangements together can constitute a single arrangement where they come within the terms of s 761B. Section s 761B operates where it is reasonable to assume that parties to two or more arrangements regard them as constituting a single scheme, and if they were a single arrangement, the constituent parts would together comprise a financial product.

83.

Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192 at [352].

84

Australian Securities and Investments Commission v Fuelbanc Australia Ltd (2007) 162 FCR 174; 64 ACSR 17; [2007] FCA 960 at [34].

85.

See The Barclay MIS Group of Companies Pty Ltd v Australian Securities and Investments Commission (2002) 125 FCR 374; [2002] FCA 1606.

86.

International Litigation Partners Pte Ltd v Chameleon Mining NL (2012) 246 CLR 455; 91 ACSR 473; [2012] HCA 45.

87.

For a brief discussion of Ch 7 and non-cash payments see A Tyree, ‘CLERP 6 and Payments’ (2000) 11 JBFLP 112.

88.

Explanatory Memorandum to the Financial Services Reform Bill 2001, [6.84].

89.

CCA s 131A(1) provides that Pt XI Div 2 of the CCA ‘does not apply … to the supply, or possible supply, of services that are financial services, or of financial products’. Division 2 applies the Australian Consumer Law as a law of the Commonwealth: see 8.53 below.

[page 153]

Part 2 Issuers

[page 155]

Chapter 4 REGULATION of SECURITIES OFFERINGS Introduction Pattern of Regulation Parameters of regulation Types of offers Offers that Need Disclosure to Investors Offers that need disclosure Offers excluded from the disclosure requirement Other Requirements for the Issuer Issuer must already be in existence Issuer may not be a proprietary company Debenture issue must comply with Ch 2L Advertising and Publicity Prohibitions Permitted advertisements Other exceptions to the prohibition Other Selling Restrictions Securities hawking Conduct in relation to financial products ASIC Act consumer protection Consequences of Non-Compliance Contravention is a criminal offence Court may make orders

4.1 4.2 4.3 4.8 4.10 4.11 4.17 4.31 4.32 4.33 4.34 4.35 4.36 4.38 4.39 4.43 4.43 4.44 4.45 4.46 4.47 4.51

INTRODUCTION 4.1 In common with that of all other mature market economies, Australian law regulates certain offerings of securities to retail and (in some cases) wholesale investors. The rationale for regulating securities

offers is discussed in Chapter 1 above. The primary focus of regulation is on ensuring that those to whom securities are offered [page 156] have available to them adequate information to enable them to make an informed decision about whether to acquire the securities on offer. Regulation is contained for the most part in Ch 6D of the Corporations Act 2001 (Cth) (Corporations Act), which (along with Pt 7.9 of the Corporations Act, which regulates the offer of financial products other than securities) is the main focus of this part of the book. As Chapter 1 makes clear, mandatory disclosure in connection with new issues of securities to the investing public has been required under Australian law since the middle of the 19th century. Over time, the regulatory framework for fundraising has become progressively more complex. Until the commencement of the Corporations Law scheme in 1991, disclosure in the form of a prospectus that contained the itemised matters set out in the legislation was required where there was a primary ‘offer to the public’ of securities. In 1991, the ‘offer to the public’ test as the lynchpin for disclosure regulation was removed, and replaced with a requirement that the issuer prepare a prospectus for every securities offering other than an ‘excluded offer’. At the same time, the checklist approach to prescribing prospectus contents was replaced with a general obligation to disclose: … all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the corporation and the rights attaching to the securities.

These new requirements were contained in Pts 7.11 and 7.12 of the Corporations Law. This basic pattern of regulation was altered again when Ch 6D was introduced into the (then) Corporations Law by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act). The new law changed the circumstances in which disclosure was required, and the form

that disclosure could take. The lynchpin for regulation became whether or not an offer of securities ‘needs disclosure to investors’ under Pt 6D.2. If an offer is one that needs disclosure to investors under Pt 6D.2, then Ch 6D prohibits a person from offering securities if the body has not been formed or does not exist (Corporations Act s 726), and from offering securities or distributing an application form for securities unless a disclosure document for the offer has been lodged with ASIC and is provided to the offeree: Corporations Act s 727. The legislation now allows for one of five different types of disclosure documents to be used, depending on the circumstances of the offer. They are: prospectuses, short-form prospectuses, two-part simple corporate bond prospectuses, profile statements and offer information statements.1 A full prospectus of the kind required under the former Pt 7.12 of the Corporations Law is no longer required in every case.

PATTERN OF REGULATION 4.2 The prime notion in the regulation of securities offerings is that of an offer of securities that ‘needs disclosure to investors under Pt 6D.2’ of the Corporations Act: [page 157] see, for example, Corporations Act ss 113, 283AA, 726, 727, 734 and 736. If an offer is one that needs disclosure to investors under Ch 6D, then certain important consequences follow: 1.

Certain structural requirements may apply, including that the offeror may not be a proprietary company and, if the securities on offer are debentures, compliance with the requirements of Corporations Act Ch 2L (for the appointment of an approved trustee for debenture holders under a complying deed) may be required.

2.

The offer cannot be made before the body is formed.

3.

The offer must be conducted in accordance with the procedure

outlined in Corporations Act Pt 6D.2. This involves certain steps, including preparation of a disclosure document that contains prescribed information, lodgment of that disclosure document with the Australian Securities and Investments Commission (ASIC) and distribution of the disclosure document with the application form for the securities. 4.

Restrictions on the manner in which the offer is communicated to investors are imposed. These include restrictions on advertising the offer and on making unsolicited offers of securities face-toface or by telephone.

5.

The general market integrity and consumer protection provisions that govern all conduct in relation to securities apply (with some important exclusions) to the conduct of the offer.

If the offer is not one that needs disclosure to investors under Ch 6D, the mandatory disclosure requirements in Pt 6D.2 do not apply. However, some restrictions on advertising and securities hawking, and the general market integrity and consumer protection provisions, will apply to the offer. This chapter explains the parameters of fundraising regulation in Australia, and identifies the types of offers that need disclosure to investors under Ch 6D of the Corporations Act. It then goes on to explain the regulatory restrictions and requirements (other than those contained in Corporations Act Pt 6D.2) that apply to the different types of securities offers. The requirements of Pt 6D.2 for regulated offers are explained in Chapter 5 below. The civil and criminal consequences, for offerors and those associated with them, of misstatements or non-disclosure in relation to regulated and unregulated securities offers are explained in Chapter 8 below.

Parameters of regulation Limits of specialist regulation 4.3 In Chapter 1 above, we discussed the rationale for specialist regulation of securities and financial markets. That specialist regulation

includes, under Corporations Act Ch 6D, mandatory disclosure requirements imposed by law in connection with the offer of certain types of financial products. Chapter 6D operates within various parameters. The regime only applies to offers of ‘securities’ as defined; the offer of other types of financial products is regulated under a different regime, contained in Corporations Act Pt 7.9. It only applies where the offer has the requisite [page 158] connection with Australia. Further, ASIC has power under the Corporations Act to exempt certain offers from the regulatory regime, which it has exercised extensively. Within the class of securities offerings that are potentially subject to regulation, Ch 6D recognises that differing levels of regulatory intervention are justified in differing circumstances. Accordingly, the system of regulation is not intended to provide identical protection to every individual offeree in every kind of securities offering. In some circumstances, general proscriptive laws aimed primarily at protecting the integrity and stability of the market as a whole are considered adequate. In other circumstances, more specific prescriptive requirements aimed primarily at informing investors are imposed. Various considerations have determined the parameters of the specialist regulation applied to securities offers under the Corporations Act, which are reflected in Corporations Act Pt 6D.2 Div 2 (which sets out which offers need disclosure to investors) and Corporations Act Pt 6D.2 Div 3 (which sets out which level of disclosure is required). These include: Distinction between primary and secondary offers: Disclosure is required less frequently in relation to secondary offers of securities, compared with primary offers. Prima facie, all primary offers of securities are subject to the mandatory disclosure requirements by Corporations Act s 706; in contrast, only secondary offers that are made off-market by a person who controls the issuer, or that amount to an indirect issue of the securities or an indirect off-market sale by a controller, are caught by Corporations Act s 707. Nature of the offeree: Some classes of offeree may be supposed to

have adequate investment expertise to make their own inquiries and disclosure need not be mandated. Others may already be supposed to have sufficient information about the particular issuer and securities on offer. Generally speaking, disclosure under Corporations Act Pt 6D.2 is not required for offers to sophisticated or professional investors, to senior managers of the issuer or their close associates, or to existing securities holders under bonus plans, dividend reinvestment plans and debenture roll-overs. ASIC offers limited relief from the disclosure requirements where the offeree is an employee participating in an employee participation scheme.2 Type of security: More limited disclosure requirements apply to offers of simple corporate bonds. Continuous disclosure: If the securities offered are those of a public company listed on a securities exchange and are quoted on its stock market, and if the Listing Rules of that securities exchange have met standards set under the Corporations Act, the requirements for an offering may be relaxed. Hence, the Corporations Act at various points treats listed corporations and listed securities differently from others. Rights issues relating to quoted securities, and the on-sale of quoted securities by those who acquired them under a wholesale offer, receive disclosure relief. Where a prospectus is required in relation to an offer of continuously quoted securities, more limited content requirements apply. This reflects the fact that information about a listed [page 159] entity is provided on an ongoing basis to the markets under the continuous disclosure rules discussed in Chapter 7. Scale of the offer: The costs involved in providing full disclosure to investors may provide a disincentive to fundraising, particularly for start-up entities. A more limited disclosure obligation may be provided for small scale offers or initial public offerings by start-up entities, to encourage investment in these entities. Small scale personal offers raising less than $2 million in a 12-month period

may be exempt from the mandatory disclosure requirements. A more limited disclosure document is permitted for bodies raising their first $10 million by way of a securities offering.3 Alternative regulation: Separate regulation of a securities offer may not be required where it occurs as part of a transaction that is otherwise regulated, for example, a takeover or a scheme of arrangement. Nature of the issuer: Certain types of issuers are exempt from the disclosure requirements, including authorised deposit-taking institutions (ADIs) and life insurance companies that issue debentures, bodies incorporated under state or territory legislation (such as state corporations, incorporated associations and cooperatives) that offer securities in their home state or territory, and exempt public authorities.

Offers of securities 4.4 The fundraising provisions in Corporations Act Ch 6D apply in relation to offers of securities as defined in Corporations Act s 700. The various definitions of securities and security used in the Corporations Act are discussed in detail in Chapter 3 above. Under Corporations Act s 700, the definition includes shares in a body, debentures of a body, legal or equitable rights or interests in shares and debentures, and options over unissued shares and debentures. A warrant4 that is a security is exempted from all of the provisions of Ch 6D by Corporations Regulations 2001 (Cth) (Corporations Regulations) reg 6D.5.01. Chapter 6D does not apply in relation to the offer of member shares in certain mutual financial institutions, including building societies, credit unions and friendly societies: see Corporations Regulations regs 6D.2.01 and 12.8.03. The definition of ‘security’ in Corporations Act s 700 includes options to acquire shares and debentures by way of issue. Section 702 provides guidance on the treatment of offers of options under Ch 6D. Importantly, an offer of an option over securities is not an offer of the underlying securities. The grant of an option without an offer of the option is regarded as an offer of the option. Furthermore, an offer to grant an option is to be equated with an offer to issue the security constituted by the option.

[page 160] Options to acquire already issued securities by way of transfer are not regulated under Ch 6D — instead they are usually treated as derivatives and regulated under Ch 7. Options to dispose of (rather than acquire) securities (that is, put options) are not securities.5 Offers by foreign companies listed on Australian financial markets of CHESS depository interests (CDIs) over their securities to investors in Australia are regulated as if they were offers of the underlying securities, under ASIC Regulatory Guide 253 — Fundraising: Facilitating Offers of CHESS Depository Interests, October 2014. ASIC’s general approach to regulating such offers involves ‘looking through’ the CDI to the underlying foreign securities, so that offers of CDIs are regulated under the Corporations Act in the same way that offers of the underlying foreign securities would be regulated. The fundraising requirements of Corporations Act Ch 6D which apply to securities no longer apply (as they did until the commencement of the Financial Services Reform Act 2001 (Cth) (FSR Act) on 11 March 2002 and subject to transitional arrangements in Pt 10.2 of the Corporations Act) to interests in managed investment schemes. Disclosure in connection with the offer of financial products other than securities (including derivatives and interests in managed investment schemes) is required under Pt 7.9 of the Corporations Act, discussed in Chapter 6 below. In the case of stapled securities the components of which include both interests in a registered scheme and securities of a body, a combined prospectus and product disclosure statement must be prepared.

Territorial application of Ch 6D 4.5 Chapter 6D contains territorial limitations on its application. Offers that are not received in Australia are not subject to the disclosure requirements imposed under the Chapter. The general territorial application of the Corporations Act is governed by Corporations Act s 5. It provides that each provision of the Act applies ‘in this jurisdiction’: that is, all the states, the Australian Capital Territory

and the Northern Territory. Section 5(4) goes on to say that ‘each provision of this Act also applies, according to its tenor, in relation to acts or omissions outside this jurisdiction’. The extra-territorial application of the Corporations Act is based on the Commonwealth’s external affairs power (s 51(xxix) of the Constitution) and its other powers under s 51 of the Constitution: see Corporations Act s 3(3). The geographic coverage of Ch 6D is dealt with in s 700(4). It provides that Ch 6D ‘applies to offers of securities that are received in this jurisdiction, regardless of where any resulting issue, sale or transfer occurs’. Offers made by Australian companies into overseas markets are not caught. As the Explanatory Memorandum to the CLERP Bill points out, this definition has several consequences for electronic commerce: first, Ch 6D applies to offers that are transferred electronically into Australia from overseas; and second, offers made on internet sites that have [page 161] been generated by a server outside the jurisdiction are covered by the Ch 6D provisions if the offer is capable of being received in Australia: see Explanatory Memorandum, [8.64]. The application of Ch 6D to offers and advertisements that are accessible on the internet is limited by relief granted by ASIC under Corporations Act s 741. ASIC Class Order 02/246 relieves issuers of internet offers and advertisements from the operation of Ch 6D where there is no clear connection with Australia. The policy underlying the relief is explained in ASIC Regulatory Guide 141 — Offers of Securities on the Internet, March 2000. As stated in ASIC RG 141.6, the intention is to exclude from regulation: … offers, invitations and advertisements of securities that are accessible in Australia on the internet if: (a) the offer, invitation or advertisement is not targeted at persons in Australia; (b) the offer or invitation contains a meaningful jurisdictional disclaimer; (c) the offer, invitation or advertisement has little or no impact on investors in Australia; and (d) there is no misconduct.

Offers made outside Australia that are received within Australia are exempted from Ch 6D in certain specific circumstances, where compliance

with Australian law would be disproportionately burdensome on the foreign offeror and it is otherwise appropriate to grant relief in the circumstances. This relief is particularly relevant for foreign companies who wish to offer securities to existing security holders or employees who are in Australia at the time of the offer. ASIC Regulatory Guide 72 — Foreign Securities Disclosure Relief, September 2015 sets out the basis on which foreign offerors will be exempted from Ch 6D. As stated in ASIC RG 72.2: … it may be appropriate to grant relief from the requirement to prepare an Australian prospectus where: (a) a foreign offeror has complied with a disclosure regime offering similar levels of investor protection to the Australian prospectus requirements; or (b) very few offers are made to Australians.

ASIC also grants relief from the operation of Ch 6D in relation to rights issues by foreign companies and scrip offers under foreign bids and schemes of arrangement, subject to a range of conditions. The policy rationale is that, ‘after a person acquires an interest in a foreign entity, they accept that foreign law largely governs their relationship with the entity. Given the potential disadvantage to Australian investors if they are excluded from such transactions’, ASIC considers it appropriate to grant relief provided that suitable investor protection measures are in place. Specific relief may be available for foreign entities offering securities to employees located in Australia under an employee participation scheme, under ASIC Regulatory Guide 49 — Employee Incentive Schemes, November 2015.

Application to fundraising by governments 4.6 The application of Corporations Act Ch 6D to the fundraising activities of government entities is complex. The position is different for state and Commonwealth governments and government entities, and for different types of government and semi-government securities. Offers of debentures, stocks and bonds issued by ‘governments’ of any kind are not subject to Ch 6D, because these instruments are not securities within the [page 162]

meaning of Corporations Act s 700(1). However, semi-government instruments may be securities for the purposes of Corporations Act Ch 6D, if they are shares or debentures (or rights or interests in them), and the entity that issued them is a ‘body’. Where the issuer is a state or territory government instrumentality or authority, then even if the instruments on offer are securities as defined, Ch 6D may not apply because of Crown immunity, or the offer may not be one that requires disclosure to investors, because of the express exemption in s 708(21). The effect of Corporations Act s 5A(3) is that Ch 6D can apply to the Commonwealth Government entities, but not those of the states or territories. It provides that Ch 6D binds the Crown in right of the Commonwealth, but does not bind the Crown in right of any state, of the Australian Capital Territory, of the Northern Territory or of Norfolk Island. Here, a reference to the Crown in a particular right includes a reference to an instrumentality or agency (whether a body corporate or not) of the Crown in that right: Corporations Act s 5A(1). The predecessor provisions to Corporations Act s 5A(3) are ss 17(1A) and 18(2) of the former Corporations Act 1989 (Cth), which were introduced into that Act by the CLERP Act. The stated intention of the CLERP Act was to extend the operation of Ch 6D to fundraising by the federal government. The Explanatory Memorandum to the CLERP Bill stated (at [8.71]) that the intention of these provisions was ‘to remove the immunity of the Federal Government and its agencies from the fundraising provisions of the Law’. The underlying policy was to promote competitive neutrality as between government and private enterprises in the capital markets, reflecting the then-current political agenda for privatisation (including the part-sale of Telstra). However, the intention was never to include debt securities issued by the Commonwealth Government or its agencies that are guaranteed by the government: see Explanatory Memorandum, [8.76]. The immunity provided to state and territory governments and their instrumentalities and agencies extends only to their actions as ‘the Crown’. The question of whether an instrumentality or agency is acting as the Crown in right of the relevant state or territory is a complex one — the fact that an entity is owned by government will not be sufficient: see, for example, Re Queensland Power Trading Corporation and Australian

Securities and Investments Commission (2005) 89 ALD 346; [2005] AATA 945 (AAT). In many cases, legislation establishing an entity will specify that it does not, for any purpose, represent the Crown: see, for example, s 5(2) of the Grain Marketing Act 1991 (NSW), discussed in Re NSW Grains Board; Smith v Lawrence (2002) 171 FLR 68; [2002] NSWSC 913. In this case the entity is not entitled to Crown immunity. If this is not specified, then the question turns on whether the entity is carrying out a function of government.6 Even where an authority of a state or territory is not entitled to Crown immunity, offers of its securities may nevertheless be exempt from the disclosure requirements in Pt 6D.2 because of Corporations Act s 708(21): see 4.28 below. [page 163]

ASIC exemptions and modifications 4.7 The mandatory disclosure regime does not apply to a securities offering if ASIC has exercised its power under Corporations Act s 741 to grant an exemption from (or modification of) it. ASIC has power under Corporations Act s 741 to exempt a person from all or specified provisions of Ch 6D: see 2.31 above. The rationale for conferring upon ASIC the ability to exempt certain offers from the law or particular aspects of it is explained in 2.34 above. In the fundraising context, ASIC may grant relief to all persons, specified persons, or a specified class of persons. The exemption can relate to all securities, specified securities or a specified class of securities. Both unconditional and conditional relief is possible. ASIC is required by Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) s 1(2) to exercise its powers to ‘maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy’ and to ‘promote the confident and informed participation of investors and consumers in the financial system’. ASIC’s approach to the exercise of its discretionary powers to grant

relief is explained in ASIC Regulatory Guide 51 — Applications for Relief, December 2009. In particular, in considering new policy applications, ASIC aims to ‘weigh the commercial benefit and any net regulatory benefit or detriment that would flow from granting the sought relief on the conditions proposed’. Its stated policy is generally to ‘grant relief where: (a) we consider that there is a net regulatory benefit; or (b) the regulatory detriment is minimal and is clearly outweighed by the resulting commercial benefit’: see ASIC RG 51.44. Various ASIC Regulatory Guides indicate the circumstances in which ASIC will grant relief from disclosure requirements; these are summarised in Appendix 2 to ASIC Regulatory Guide 254 — Offering Securities under a Disclosure Document, March 2016. They include ASIC Regulatory Guide 49 — Employee Incentive Schemes, November 2015; ASIC Regulatory Guide 67 — Real Estate Companies, November 2015; ASIC Regulatory Guide 72 — Foreign Securities: Disclosure Relief, September 2015; ASIC Regulatory Guide 87 — Charities; ASIC Regulatory Guide 125 — Share Purchase Plans, March 2010; ASIC Regulatory Guide 173 — Disclosure for On-sale of Securities and Other Financial Products, March 2016; ASIC Regulatory Guide 188 — Disclosure in Reconstructions, February 2007; ASIC Regulatory Guide 189 — Disclosure Relief for Rights Issues, March 2016; and ASIC Regulatory Guide 253 — Fundraising: Facilitating Offers of CHESS Depository Interests, October 2014.

Types of offers Primary issues and secondary sales 4.8 Sections 706 and 707 of the Corporations Act impose the disclosure requirement in connection with an offer of securities. Section 706 deals with offers of securities for issue: that is, primary offers. Section 707 deals with offers of securities for sale: that is, secondary offers. Primary offerings are offerings of securities that have not yet been allotted by an issuer of securities who is seeking funds. For example, a new company may be

[page 164] building its initial share capital; an established private company may have converted itself into a public company and be seeking additional share capital; or an established public company may be raising more share capital by an offer to the market generally, by a rights issue confined to its existing shareholders or by a ‘placement’ to a select group of investors. Other examples are where a company makes shares available to its employees as part of an employee–share incentive scheme or where a company conducts a dividend reinvestment scheme. A person who responds to a primary offering is said to be responding to subscribe for the securities in contrast to purchasing them. According to Governments Stock and other Securities Investment Co v Christopher [1956] 1 WLR 237 at 242, ‘subscribe’ means taking or agreeing to take securities for cash with a liability to pay the nominal value of the securities. But it now appears clear that securities can be issued in return for non-cash consideration. It was confirmed in Broken Hill Pty Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609 that subscription could be made in shares in consideration for shares. Secondary offerings are offerings of securities that have already been issued; for example, a holder of shares offers them for sale. A person who responds to a secondary offering is said to respond to purchase them. An important distinction is made in Ch 6D between primary and secondary offerings. A primary offering, referred to in Ch 6D as ‘an offer of securities for issue’, requires disclosure to investors under Pt 6D.2 unless s 708 or s 708AA says otherwise: Corporations Act s 706. A secondary offering, referred to as ‘an offer of securities for sale’, requires disclosure to investors only in the limited circumstances set out in s 707(2), (3) and (5): Corporations Act s 707(1). Even then, disclosure to investors is not required if s 708 or s 708A says otherwise. The scope of the disclosure requirements for secondary sales is discussed in 4.12–4.16 below.

Invitations and offers 4.9 The word ‘offering’ is used in this book to refer in a general way to

any indication by a person that particular securities will be available for acquisition, whether by subscription or purchase, by the person to whom the communication is made. An offering of securities, whether for subscription or purchase, can be made by way of inviting offers to subscribe or to purchase or by way of an offer of the securities for subscription or purchase. In judicial interpretation of earlier legislation referring to offers in relation to securities, it was decided the word ‘offer’ was not used in the technical contractual sense of an offer to be bound once someone accepts.7 It was used in the sense of ‘holding out a thing to a person to take it if he will’.8 [page 165] This approach is reflected in Corporations Act s 700(2), which provides that, for the purposes of Corporations Act Ch 6D, ‘offering securities for issue includes inviting applications for the issue of the securities’ and ‘offering securities for sale includes inviting offers to purchase the securities’. Section 700(3) provides that: … for the purposes of this Chapter, the person who offers securities is the person who has the capacity, or who agrees, to issue or transfer the securities if the offer is accepted.

Thus, offers in the technical sense (that is, something which can be accepted so as to form a contract) and invitations are both covered. An invitation is something pursuant to which an offer may be made; when that offer is accepted, a contract will be formed. Section 700(2) and (3) expand rather than limit the meaning of the term ‘offer of securities’. More broadly, the meaning of the term must be ascertained from its ordinary usage in the context of the legislation and its purpose. In Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267 at [97], Palmer J said: Section 700(2) makes it clear that the distinction between ‘offer’ and ‘invitation to treat’ which is drawn in the classical theory of contract formation is not to be slavishly applied in determining whether an offer requiring disclosure under Ch 6D has been made. Not

every casual or imprecise intimation that securities may be acquired would constitute an offer within the disclosure provisions and yet it could not be the case that the disclosure provisions are not attracted until the moment when the potential investor is confronted with an application form or with some other document containing all of the terms of a contract, so that mere assent is capable of bringing a binding contract into existence. Many investors would have made up their minds about whether to take up securities well before they are confronted either with the application form or with some document containing all of the terms of a contract.

In the Australian Investors Forum case the question of when an offer of securities was made was important, because Corporations Act s 708(10) says that disclosure to investors is not required for certain offers so long as the conditions in s 708(10) are met ‘before, or at the time when, the offer is made’. Section 708(10) is discussed in 4.21 below. A person may make an offer of securities in a number of ways including personally, by an employee or agent,9 or by authorising and approving an offer.10 [page 166]

OFFERS THAT NEED DISCLOSURE TO INVESTORS 4.10 Part 6D.2 Div 2 of the Corporations Act sets out which securities offers require disclosure to investors in the form of a disclosure document that meets the content, lodging and other requirements in Corporations Act Pt 6D.2. Section 706 captures all issue (that is, primary) offers. Section 707 captures sale (that is, secondary) offers that involve the off-market sale of securities of a body by a person who controls the body: Corporations Act s 707(2). It also captures sale offers that amount to the indirect issue of the securities (Corporations Act s 707(3)) or the indirect off-market sale of securities by the body’s controller: Corporations Act s 707(5). Sections 706 and 707 operate subject to ss 708, 708A and 708AA, which state that certain offers do not need disclosure to investors in certain circumstances. These circumstances are analysed at 4.17ff below.

Offers that need disclosure Issue offers 4.11 By operation of Corporations Act s 706, an offer of securities for issue always needs disclosure to investors under Pt 6D.2 of the Corporations Act unless Corporations Act s 708 or s 708AA says otherwise.

Off-market sale by a controller 4.12 The general rule is that most sale offers of securities do not need disclosure to investors under Pt 6D.2. The first exception to that general rule is offers of the kind described in Corporations Act s 707(2). Unless s 708 says otherwise, the effect of s 707(2) is that offer of a body’s securities for sale requires disclosure to investors if the person making the offer controls the body, and either the securities are not quoted, or (if they are quoted) they are not offered for sale in the ordinary course of trading on a relevant financial market. A person controls a body if they have the capacity to determine the outcome of decisions about the body’s financial and operating policies: Corporations Act s 50AA.

Sale amounting to indirect issue 4.13 The second exception to the general rule that sale offers do not need disclosure to investors is Corporations Act s 707(3). Section 707(3) is an anti-avoidance provision. Its primary purpose is to ensure that a body issuing securities does not circumvent the disclosure requirement in s 706 by issuing securities to a person (such as a professional investor) in circumstances that do not require disclosure to investors because of s 708, with the purpose of the person to whom the securities are issued then distributing the securities widely by way of an (otherwise unregulated) secondary offer.11 [page 167]

The on-sale provisions, including in Corporations Act s 707(3), are described in ASIC Regulatory Guide 173 — Disclosure for On-sale of Securities and Other Financial Products, March 2016 as an: … anti-avoidance mechanism that is designed to minimise the opportunity for issuers of securities or other financial products to avoid giving disclosure to retail investors by: (a) first issuing the financial products to an intermediary for whom disclosure is not required; and (b) the intermediary then on-selling the financial products to retail investors.12

To this end s 707(3) provides that, unless s 708 or s 708A says otherwise, an offer of a body’s securities for sale within 12 months after their issue needs disclosure to investors under Pt 6D.2 if the body issued the securities without disclosure to investors under the Part, and either: the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them. The prohibition applies to the first and any subsequent resale of securities during the relevant period.13

Purpose 4.14 Section 707(4) formulates the purpose test for subs (3). Securities are taken to be issued or acquired with the relevant purpose if there are reasonable grounds for concluding that the securities were issued or acquired with that purpose (whether or not there may have been other purposes for the issue or acquisition). Further, under s 707(4)(b) securities are taken to have been issued or acquired with the relevant purpose if: … any of the securities are subsequently sold, or offered for sale, within 12 months after issue, unless it is proved that the circumstances of the issue and the subsequent sale or offer are not such as to give rise to reasonable grounds for concluding that the securities were issued or acquired with that purpose.

An anti-avoidance provision of this type has been present in the securities laws for some time: see former s 1030 of the Corporations Law. However, in its former incarnations the operation of the provision has

turned on the purpose for which the body issued the securities — the purpose of the acquirer acquiring them was not relevant. This changed with the amendment of s 707(3) and (4) as part of the FSR Act. The purpose of the acquirer in acquiring the securities has become relevant for the operation of the provision. Paragraphs (3)(b) and (4)(b) of s 707 are both expressed disjunctively. Accordingly, in order for the statutory presumption in [page 168] s 707(4)(b) to be rebutted it is necessary for there to be proof of reasonable grounds establishing that neither the issuer nor the acquirer had the necessary purpose.14 4.15 The commencement of the amendments resulting from the FSR Act on 11 March 2002 led to concerns that the placements market in Australia would be adversely impacted by the provision. Until that time it was common practice in the Australian securities market for an issuer to issue securities to an institutional or other professional investor under what is generally referred to as a private placement. Such an offer would not require disclosure to investors because of s 708. However, many placees were not natural long-term holders of the securities — their intention in acquiring the securities may have included to hold the securities or on-sell the securities when market conditions determined that it was in the interests of their investors or shareholders to do so. Such an on-sale, if it occurred within 12 months of issue, would indicate that they had the purpose of selling or transferring the securities, unless that purpose could be rebutted. If the placee was found to have that purpose, the on-sale would require disclosure to investors unless the law provided otherwise. In 2004 the Corporations Act was amended to include Corporations Act s 708A, which exempts certain offers caught by s 707(3) from the disclosure requirements. Section 708A is discussed in 4.30 below. ASIC supplements the operation of s 708A by relief granted in accordance with ASIC RG 173. The operation of Corporations Act s 707(3), and its interaction with s

708(17) discussed below, was considered in Re Timor Sea Petroleum NL (2000) 35 ACSR 186; [2000] VSC 337. That case concerned a scheme of arrangement under which shares were to be issued to a trustee without any application moneys being received but upon terms that the shares would be sold by the trustee and the net proceeds of sale would be the subscription moneys for those shares. The operation of s 708(17) in this context is discussed in 4.27 below.

Sale amounting to indirect off-market sale by a controller 4.16 Section 707(5) operates in much the same way as s 707(3). Again, it is an anti-avoidance provision designed to prevent a controller from circumventing the disclosure obligation in s 707(2) by selling securities to a person, such as a professional investor, in circumstances that do not require disclosure because of s 708, and then arranging for the person to whom they are sold to distribute the securities widely by way of secondary offers that do not require disclosure under s 707. Section 707(5) says that, unless s 708 says otherwise, an offer of a body’s securities for sale within 12 months after their sale by a controller needs disclosure to investors under Pt 6D.2 if at the time they were sold by the controller either the securities are not quoted or (if they are quoted) they are not offered for sale in the ordinary course of trading on a relevant financial market; the controller sold the securities without Pt 6D.2 disclosure, and either: [page 169] the controller sold the securities with the purpose of the person to whom they were sold selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or the person to whom the securities were sold acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them. Section 707(6) sets out the purpose test for subs (5). As with s 707(3),

on-sale within 12 months of the date of acquisition raises the prima facie (but rebuttable) presumption that the parties had the requisite purpose to bring the on-sale within s 707(5).

Offers excluded from the disclosure requirement 4.17 The exceptions to the principle that an offer of securities for issue or sale needs disclosure to investors under Pt 6D.2 are contained in the Corporations Act ss 708, 708AA and 708A. Section 708 contains exceptions of general application that are relevant in relation to the various types of primary offers (Corporations Act s 706) and secondary offers (Corporations Act s 707) referred to above. Section 708AA (enacted in 2007) and s 708A (enacted in 2004) are more specific in their operation. Section 708AA applies to offers made in connection with certain rights issues that would otherwise require disclosure under Corporations Act s 706. Section 708A applies to certain sale offers that would otherwise require disclosure under Corporations Act s 707(3) because the sale amounts to an indirect issue of the securities. The various operative paragraphs of ss 708, 708AA and 708A each provide that an offer of securities does not require disclosure to investors under Pt 6D.2 in the circumstances described. The legislative provisions are detailed and specific, and close attention to the statutory language is required. What follows is a summary of the important exceptions to the disclosure requirement contained in those provisions. The defendants bear the onus of proving facts which would bring them within an exemption.15

Small scale personal offerings 4.18 Certain small scale personal offers of securities do not require disclosure to investors under Pt 6D.2, because of Corporations Act s 708(1)–(7). An offer by a body to issue securities, or by the controller of a body to sell securities off-market, does not require disclosure to investors so long as the offers are ‘personal’ to the [page 170]

offeree and none of the offers results in a breach of the ‘20 investor ceiling’ or the ‘$2 million ceiling’ as defined in s 708(3) (for primary offers) and (4) (for off-market sales by the body’s controller). The exception in s 708(1) for small scale personal offers does not apply to an offer for sale to which Corporations Act s 707(3) (sale amounting to indirect issue) or s 707(5) (sale amounting to indirect sale by controller) applies. In the case of a primary offer, an offer results in a breach of the 20 investor ceiling if it results in the number of people to whom securities have been issued exceeding 20 in any 12-month period. It results in a breach of the $2 million ceiling if the amount raised by the body by issuing securities exceeds $2 million in any 12-month period. For secondary offers, an offer results in a breach of the 20 investor ceiling if it results in the number of people to whom the offeror sells securities exceeding 20 in any 12-month period; and results in a breach of the $2 million ceiling if it results in the amount raised by the person by selling the body’s securities exceeding $2 million in any 12-month period. Offers for the issue or sale of securities coming under this exception must be ‘personal’. A personal offer is one that may only be accepted by the person to whom it is made; and is made to a person who is likely to be interested in the offer in light of previous contact between the person making the offer and the offeree, some professional or other connection between the person making the offer and the offeree, or statements or actions by the offeree that indicate an interest in offers of that kind: s 708(2). In counting the 20 persons, certain issues and sales can be disregarded, namely those that result from an offer that did not need a disclosure document because of any other subsection of s 708, was not received in Australia, or was made under a disclosure document: s 708(5). Section 708(7) sets out how the amount of money raised by a body issuing securities is to be calculated. The following must be included: the amount payable for the securities at the time of issue; any amount payable at a future time if a call is made (if the securities are shares issued partly paid); any amount payable on the exercise of an option (if the security is

an option); and any amount payable on the exercise of a right to convert the securities into other securities (if such a right exists): s 708(7). Offers and intended offers covered by Corporations Act s 708(1) may not be advertised, because of Corporations Act s 734(1). The advertising restrictions are discussed in 4.36 below.

Offers involving at least $500,000 4.19 Offers that involve a minimum subscription or purchase amount of $500,000, or that bring the total amount paid by a particular investor for securities in the relevant class over $500,000, are also excluded from the disclosure requirements in Pt 6D.2 by Corporations Act s 708(8)(a) and (b). Those accepting such offers are treated by the legislation as being sufficiently sophisticated, and having sufficient [page 171] incentive and ability to obtain information, not to require the protection of the mandatory disclosure regime. The exception applies where the minimum amount payable on acceptance of the offer by the person to whom it is made is at least $500,000, or where the amount payable on acceptance by the person to whom the offer is made and amounts previously paid by the person for the body’s securities of the same class add up to at least $500,000. ASIC’s view is that the exception is available only where the subscription or purchase amount is paid in money, not money’s worth (such as shares, rights under a mining lease, or other property). Under s 708(9) any money lent by the person offering the securities or an associate of that person is to be disregarded in calculating the amount payable, or paid, for securities for the purpose of this exception. The minimum amount payable for the securities on the acceptance of the offer refers to the amount payable on acceptance of the offer and not sums payable subsequently on the purchase. This means that an instalment arrangement under which there was an initial payment on acceptance of

less than $500,000 and a subsequent ‘balloon payment’ or instalment is not within the exemption.16

Offers to high net worth investors 4.20 Section 708 provides that disclosure is not required under Pt 6D.2 where the offeree is a sophisticated or professional investor that meets certain minimum asset or income thresholds. These exceptions are contained in ss 708(8)(c) (sophisticated investors) and 708(11)(b) (professional investors). The effect of Corporations Act s 708(8)(c) is that an offer of a body’s securities does not need disclosure to investors under Pt 6D.2 if the person to whom the offer is made is a high net worth investor. Specifically, the provision says that disclosure is not required if ‘it appears from a certificate given by a qualified accountant no more than two years17 before the offer is made that the person to whom the offer is made’ has net assets of at least $2.5 million or has a gross income for each of the last two financial years of at least $250,000 a year: see Corporations Act s 708(8) (c) and Corporations Regulations regs 6D.2.03 and 6D.5.02. In calculating the person’s assets or income, the assets or income of any company or trust controlled by the person may be included: Corporations Act s 708(9B) and (9C). A ‘qualified accountant’ for this purpose is a person specified in ASIC Regulatory Guide 154 — Certificate by a Qualified Accountant, October 2001, and ASIC Corporations (Qualified Accountant) Instrument 2016/786. Section 708(8)(d) extends the benefit of the exception to offers made to a company or trust controlled by a person who meets the requirements of s 708(8)(c). [page 172] Section 708(11)(b) says that an offer of securities does not need disclosure to investors under Pt 6D.2 if it is made to a person who has or controls gross assets of at least $10 million, including any assets held by an associate or under a trust that the person manages.18

Offers to experienced investors made through a financial

services licensee 4.21 Section 708(10) excludes from the disclosure requirements certain offers that reach offerees through their licensed financial adviser or broker. This exclusion relies on the licensed intermediary making an assessment that the offeree is sufficiently experienced in investing in securities to be able to understand and assess the offer without the benefit of the mandatory disclosure. Disclosure is not necessary if, on reasonable grounds, the licensee is satisfied that the offeree has previous experience in investing in securities that allows them to assess: various matters including the offer’s merits, the value of the securities, risks of acceptance, the information they require; and the adequacy of the information provided by the offeror. In addition, the exception only applies if the licensee gives the offeree a statement of the licensee’s reasons for being satisfied as to those matters, either before, or at the time when, the offer is made. It is also necessary that the offeree signs a written acknowledgment before, or at the time the offer is made, that the licensee has not given them a disclosure document in relation to the offer. In order for the exception to the disclosure requirement to apply, the offer must be made through a financial services licensee, and cannot be made by the offeror directly: Corporations Act s 708(10)(a). The licensee must be ‘satisfied on reasonable grounds’ of the matters set out in s 708(10)(b) and must provide to the offeree a written statement of its reasons for being satisfied as to those matters. In Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2005) 55 ACSR 544; [2005] NSWSC 1065 at [10]–[11], Barrett J observed: … s 708(10) casts particular responsibility upon a financial services licensee. The requirement that the licensee be ‘satisfied on reasonable grounds’ as to the matters stated in s 708(10)(b) is one that must be approached with diligence and care. The licensee has a statutory duty to make enquiry about all matters relevant to the opinion it must form and then, of course, to consider whether, in the factual circumstances, there exists the reasonable grounds for it to be satisfied as to the matters stated. Woolly thinking about some general concept of ‘sophisticated investor’ is entirely misplaced.

In Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 Brereton J said (at [50]) that Corporations Act s 708(10)(b) imposed: … stringent requirements and obligations upon the relevant financial services licensee if the

exemption is to be available. The licensee’s satisfaction on reasonable grounds of the matter referred to in s 708(10)(b) is a condition of the availability of the exemption, and requires the licensee sufficiently investigate the experience of the investor to form the relevant opinion.

[page 173] In addition, the offeree must sign a written acknowledgment that the licensee has not provided the offeree with a disclosure document. The written statement and the written acknowledgment must be provided ‘before, or at the time when, the offer is made’. In Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267 at [98] and [99], Palmer J concluded: … in determining at what point of time an offer has been made for the purposes of … s 708(10) CA one has to apply a degree of pragmatism and common sense. The information conveyed to a potential investor need not contain all of the terms of a contract of subscription or transfer but the information must be sufficient to identify the essential terms of the proposed investment and must convey that the investor may act on that information if desired.

His Honour went on (at [99]) to say that, while the circumstances in which particular offers of securities are made will vary, the indicia that an ‘offer’ has been made will generally include that the issuer company has been identified, that the general nature of the securities and the price at which they may be acquired has been indicated, and that it has been suggested that the securities are available for acquisition now, or at a later time, by the person to whom the information is conveyed, by the requisite payment.

Offers to professional investors 4.22 Offers of securities made to certain professional investors do not require disclosure under Pt 6D.2 because of Corporations Act s 708(11)(a). ‘Professional investor’ is defined in Corporations Act s 9; it includes: a financial services licensee; a body regulated by the Australian Prudential Regulation Authority (APRA), other than the trustee of a superannuation entity;19

a body registered under the Financial Corporations Act 1974 (Cth); the trustee of a superannuation entity that has net assets of at least $10 million; a listed entity, or a related body corporate of a listed entity; an exempt public authority;20 and an investment company.21 [page 174] It also includes any foreign entity that, if established or incorporated in Australia, would fall within one of these categories.22

Offers to people associated with the body 4.23 Offers of a body’s securities do not require disclosure under Pt 6D.2 if they are made to certain people associated with the body. Section 708(12)(a) exempts an offer made to ‘a senior manager of the body or a related body or their spouse, parent, child, brother or sister’ while s 708(12)(b) exempts an offer made to a body corporate controlled by a person referred to in para (a). ‘Senior manager’ is defined in Corporations Act s 9, but the definition is modified for the purposes of Ch 6D by ASIC Class Order 04/899. The definition substituted by the class order, which applies ‘in relation to a body’, is ‘a person who is concerned in, or takes part in, the management of the body (regardless of the person’s designation and whether or not the person is a director or secretary of the body)’. It is not enough that the person is an employee of the body — they must have involvement in management. Nor is it necessary that the person is an employee of the body.23 The policy of Corporations Act s 708(12) is to distinguish those involved in management who are likely to know enough about the body’s affairs and the securities offered as not to need the full protection of the Corporations Act.24 The definition inserted by the class order reflects the definition of ‘officer’ that appeared in the Corporations Law prior to 2000. It must be interpreted having regard to the context in which it is used. The

definition of ‘officer’ now used in the Corporations Act is narrower, reflecting the approach taken by Ormiston J of the Supreme Court of Victoria in Commission for Corporate Affairs (Vic) v Bracht [1989] VR 821 at 830. An officer is someone who makes, or participates in making, decisions that affect the whole or a substantial part of the business of the company, or who has the capacity to affect significantly the company’s financial standing.25 In contrast, the definition of ‘senior manager’ adopted by the class order appears wider than this.26 [page 175]

Offers under a dividend reinvestment plan or bonus share plan 4.24 Primary offers of securities made under a dividend reinvestment plan or bonus share plan to existing holders of securities do not require disclosure under Pt 6D.2: s 708(13)(a). This exception applies where one or more existing shareholders in the body are offered fully-paid shares in that body under a dividend reinvestment plan or bonus share plan. A corresponding exemption exists for dividend reinvestment plans and bonus share plans operated by foreign companies, under Corporations Regulations reg 6D.2.02. Section 708(13)(b) contains a similar exemption for offers of interests in managed investment schemes; however, this appears to be an anomaly given that Ch 6D does not apply to the offer of such interests: see 4.4 above.

Offers to existing debenture holders 4.25 Primary offers of a disclosing entity’s debentures for issue, if made to one or more existing debenture holders, do not require disclosure under Ch 6D, because of s 708(14). For the exemption to apply, the issuer must be a ‘disclosing entity’ within the meaning of Corporations Act Pt 1.2A: see Chapter 7 below. Although a literal reading of ss 111AI, 283AA and 708(14) suggests that the benefit of the exemption extends to an offeror that was required by Ch 2L to appoint a trustee for debenture holders but did not, the better view is that s 708(14) should be read as if the words

‘and the disclosing entity has complied with s 283AA’ were added at the end of the subsection.27 This exception does not apply to an offer of simple corporate bonds, or an offer of debentures (other than simple corporate bonds) if the offer is made to holders of simple corporate bonds, because of Corporations Act s 708(14A). Offers of simple corporate bonds are discussed in Chapter 5 below.

Offers for no consideration 4.26 Disclosure under Pt 6D.2 is not required for offers in relation to securities, other than options, where no consideration is to be provided for the issue or transfer of the securities: Corporations Act s 708(15). Under s 254A(1)(a) companies have the power to issue ‘bonus shares’. Bonus shares are shares which are issued without consideration being payable to the issuing company. It is important to distinguish bonus shares, which are truly without consideration, from other offers of securities for which there is consideration that might not be immediately obvious. For example, if a company were to offer its shareholders the option of taking a cash dividend or a new share, it could be said that forgoing the dividend represented the provision of consideration. Securities offered as part of an employee share plan may be ‘free’, but the employee may be taken to have provided consideration in the form of their continued employment with the issuer. Section 708(15) expressly states that this exception does not apply to options. Instead, offers of options involving no consideration are covered by s 708(16). [page 176] It provides that disclosure to investors is not required under Pt 6D.2 where no consideration is payable to acquire or exercise the option.

Offers otherwise regulated

4.27 Section 708 also excludes from the disclosure requirement in Pt 6D.2 certain offers of securities that are made in connection with corporate reorganisations or reconstructions that are separately regulated under the Corporations Act. The rationale for this exemption is that persons acquiring the securities are otherwise adequately protected, either by receiving disclosure required in connection with the particular transaction, or by the need for court approval. Offers of securities exempted in this way include offers made under a compromise or arrangement under Corporations Act Pt 5.1 (s 708(17)) or a deed of company arrangement (s 708(17A)) or in connection with a takeover bid made under Corporations Act Ch 6 (s 708(18)). Offers made under a compromise or arrangement carried out in accordance with Corporations Act Pt 5.1 do not need separate disclosure to investors under Ch 6D: s 708(17). The offer must be in conjunction with a compromise or arrangement under Pt 5.1 approved at a meeting held as a result of an order under s 411(1) or s 411(1A). The scope of s 708(17) was considered in Re Timor Sea Petroleum NL (2000) 35 ACSR 186; [2000] VSC 337. In that case, Timor Sea Petroleum NL (Timor Sea) sought approval of a scheme of arrangement. The scheme involved, among other things, the issuing of shares to a trustee who would later sell those shares, giving the proceeds to Timor Sea Petroleum as subscription for the shares. ASIC argued that the scheme might contravene s 707(3) (sale amounting to an indirect issue). Timor Sea relied on s 708(17). ASIC argued in favour of a narrow interpretation of s 708(17) on the basis that otherwise the Ch 6D provisions could be defeated by shareholders agreeing under a scheme to issue shares to numerous persons without a disclosure document. However, Warren J distinguished between the facts in Re Timor Sea Petroleum NL and the examples given by ASIC as reasons for a narrow construction of s 708(17). Her Honour considered that, on the facts, the sale of the shares was ‘an integral part of the arrangement for which approval [was] sought’: at [23]. In contrast, the examples given by ASIC would not constitute a scheme of arrangement and her Honour found it likely that a court faced with these scenarios would ‘either refuse to authorise the convening of a meeting or refuse approval of the scheme’.28 Warren J held that the s 708(17) exception

applied in this case. Her Honour found that s 703(3) did not apply, because disclosure is unnecessary if s 708 ‘says otherwise’. Section 708(17A) excludes from the disclosure requirements in Pt 6D.2 offers of securities that are made to any or all of a company’s creditors under a deed of company arrangement entered into pursuant to Pt 5.3A of the Corporations Act. The exception is subject to certain conditions. The offer must not require the provision of consideration other than the release of the company from a debt or debts. Further, the disclosure provided to creditors under Corporations Act s 439A(3) or s 445F(2) (as the case may be) must be accompanied by a statement that sets out all relevant [page 177] information about the offer that is within the knowledge of the administrator and indicates that the statement is not a prospectus and may contain less information than a prospectus. Disclosure under Pt 6D.2 is not required for an offer of securities that is made as consideration for an offer to acquire securities under a takeover bid under Ch 6 and which is accompanied by a bidder’s statement: s 708(18). Although the offer is not required to produce a disclosure document under Ch 6D, the offeror will nevertheless be required by Corporations Act s 636 to make similar disclosures about the securities in the bidder’s statement.

Exempt offerors 4.28 Certain offerors are exempted from the disclosure requirements in Pt 6D.2 by s 708(19), (20) and (21). Primary and secondary offers of debentures issued by Australian ADIs or by bodies registered under the Life Insurance Act 1995 (Cth) do not need disclosure to investors under Pt 6D.2, because of Corporations Act s 708(19). An Australian ADI is an authorised deposit-taking institution within the meaning of the Banking Act 1959 (Cth), such as a bank, building society or credit union, or a person who carries on state banking within the meaning of s 51(xiii) of the Commonwealth Constitution. For the exception to apply, the instrument

in question must be a debenture. An undertaking by an Australian ADI to repay money deposited with it, or lent to it, in the ordinary course of its banking business is not a debenture (because of para (b) of the definition of debenture in the Corporations Act s 9). The exception is probably narrowly construed, so that it only applies to securities which comprise a debenture only and nothing else (that is, not to hybrid instruments).29 Bodies corporate (other than companies) that are incorporated by or under a law of a state or territory are ‘exempt bodies’ as defined in Corporations Act s 66A. This includes, for example, bodies incorporated under incorporated associations legislation or co-operatives legislation. Offers of an exempt body’s securities in its home state or territory do not need disclosure to investors under Pt 6D.2, because of Corporations Act s 708(20). An offer of securities of an exempt public authority of a state or territory does not require disclosure, because of s 708(21). This is true whether or not the offer occurs in the authority’s home state. ‘Exempt public authority’ is defined in s 9 and includes a body corporate that is incorporated within Australia or an external territory that is either an instrumentality or agency of the Crown in right of a state or a territory, or a ‘public authority’. The application of Ch 6D to instruments issued by governments and governmental entities is discussed in 4.6 above. Debentures, stocks and bonds issued by governments are not subject to Ch 6D, because they are not securities as defined. An [page 178] instrumentality or agency of the Crown in right of a state or territory enjoys Crown immunity from Ch 6D in any event, because of s 5A(3) of the Corporations Act. In deciding whether an entity is a public authority for the purposes of Corporations Act s 708(21) it is ‘necessary to make a close examination of the functions, activities and objects of the particular body’: see Re NSW Grains Board; Smith v Lawrence (2002) 171 FLR 68; [2002] NSWSC 913

at [52]. In the Grains Board case, Barrett J adopted with approval the propositions articulated by Hill J (with whom Wilcox and Drummond JJ agreed) in Commr of Taxation v Bank of Western Australia Ltd (1995) 61 FCR 407;30 these are that: a question whether a particular entity is an authority will be a question of fact and degree dependent upon all the circumstances of the case; a private body, corporate or unincorporated, established for profit will not be an authority; incorporation by legislation is not necessary before a body may be classified as an authority; for a body to be an authority of a state or of the Commonwealth, the body in question must be an agency or instrument of government set up to exercise control or execute a function in the public interest — it must be an instrument of government existing to achieve a government purpose; the body in question must perform a traditional or inalienable function of government and have governmental authority for so doing; it is not necessary for a person or body to be an authority that he, she or it have coercive powers, whether of an administrative or legislative character — conversely the fact that a person or body has statutory duties or powers will not of itself suffice to characterise that person or body as an authority; and the body must exercise control power or command for the public advantage or execute a function in the public interest — the central concept is the ability to exercise power or command.

Rights issues of quoted securities 4.29 Section 708AA says that offers of quoted securities made under a rights issue do not require disclosure to investors under Pt 6D.2 so long as the various conditions set out in s 708AA(2) are met, and ASIC has not made a determination (that the body has contravened certain disclosure and other requirements contained in the Corporations Act) under s 708AA(3). A rights issue is an arrangement under which existing security

holders are given the opportunity to acquire new securities in proportion to their pre-offer holdings on specified terms. [page 179] The disclosure rules relating to rights issues are modified by ASIC in the manner explained in ASIC Regulatory Guide 189 — Disclosure Relief for Rights Issues, March 2016. Section 708AA was introduced into the Corporations Act in 2007, replacing earlier ASIC class order relief for rights issues. That said, the provisions have since been further modified by ASIC instrument. The section (as modified) is helpfully set out in consolidated form in Appendix 2 of ASIC RG 189. ‘Rights issue’ is defined in Corporations Act s 9A (as modified). A rights issue is an offer of a body’s securities for issue in respect of which the following conditions are met: (a) the securities being offered for issue are in a particular class; (b) either: (i)

the offer is made to every person who holds securities in that class to issue them, or their assignee, with the percentage of the securities to be issued that is the same as the percentage of the securities in that class that they hold before the offer; or

(ii) if the conditions in subsection (3) are met — such an offer is made to: (A) every person with a registered address in Australia or New Zealand; and (B) every other person (if any) with a registered address outside Australia and New Zealand to whom the body decides to make offers, who holds securities in that class; (c) the terms of each offer are the same.

The conditions in subsection (3) relate to the inclusion of non-residents in the offer Under Corporations Act s 708AA(2), a body that wishes to rely on s 708AA in respect of a rights issue must give the operator of the prescribed financial market on which the securities are quoted a notice that complies with s 708AA(7) within the 24-hour period before the offer is made. Among other things the notice must state that the body has complied with

the provisions of Corporations Act Ch 2M (accounts and audit) that apply to the body, as well as the continuous disclosure requirements of Corporations Act s 674: see Chapter 7 below. The notice must state the potential effect of the rights issue on control of the body, and the consequences of that effect. Importantly, the notice must also include any information that is ‘excluded information’ as defined. Excluded information is information that is material (in the sense that investors and their professional advisers would reasonably require the information to make an informed assessment in relation to the body and the securities) that has not been disclosed by the body under the continuous disclosure rules. For example, this may comprise information that a body listed on the Australian Securities Exchange (ASX) has not disclosed because the information falls within ASX Listing Rule 3.1A: see 7.9 below. However, excluded information need only be disclosed ‘to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in a disclosure document’: Corporations Act s 708AA(9). [page 180]

Sale offers of quoted securities 4.30 Section 708A contains specific exemptions covering certain offers of securities for sale, made by persons who have acquired securities either from the issuer or from a person who controls the issuer, that might otherwise require disclosure to investors under Corporations Act s 707(3) (sale amounting to indirect issue) or s 707(5) (sale amounting to indirect off-market sale by a controller). Section 707 is discussed at 4.12–4.14 above. The exceptions to the disclosure requirement contained in s 708A are very technical, and close attention to the precise requirements of the section is necessary. ASIC RG 173 provides guidance for listed companies and listed managed investment schemes in relation to the circumstances in which ASIC will give relief from the disclosure requirements for the on-sale of securities and other financial products. In broad terms, Corporations Act s 708A allows for the sale of quoted securities, without disclosure to investors under Pt 6D.2, by a person who

has acquired them (either from the body or from a person who controls the body) in three circumstances. The first is where the securities are quoted on a financial market and the issuer or the controller has provided the market operator with information in what is sometimes referred to as a ‘cleansing notice’.31 The cleansing notice is similar in nature to the notice provided by the body to the market operator under s 708AA(2), discussed in 4.29 above. The second is where a prospectus relating to securities in the relevant class has been lodged with ASIC and is still extant. The third is where the issue of the securities was covered by a prospectus, and the securities had been issued to an underwriter or person nominated by the underwriter. A person who has acquired securities from the issuer or its controller in circumstances covered by s 707(3) or s 707(5) cannot rely on s 708A if the securities were issued by the body, or sold by the controller, for a purpose set out in s 707(3)(b)(i) or s 707(5)(c)(i): for example, for the purpose of on-sale. Nor can it rely on s 708A if a determination made by ASIC under s 708(2) (to the effect that the body had contravened certain disclosure or other requirements) was in force at the time the relevant securities were issued.

OTHER REQUIREMENTS FOR THE ISSUER 4.31 If an offer of securities is one that needs disclosure to investors under Corporations Act Pt 6D.2, certain consequential requirements and restrictions contained in the Corporations Act are triggered: the Corporations Act prohibits the offer of securities before the body is formed; the body may not be a proprietary company (unless the offer relates to shares in the company and is made to existing shareholders or employees); and if the offer relates to debentures, the body must have appointed a trustee for debenture holders under a trust deed in the form required by Corporations Act Ch 2L before the offer is made. [page 181]

Issuer must already be in existence 4.32 Section 726 of the Corporations Act says: A person must not offer securities of a body that has not been formed or does not exist if the offer would need disclosure to investors under Pt 6D.2 if the body did exist. This is so even if it is proposed to form or incorporate the body.

Accordingly, the body must already have been formed before the offer is made. As to when an offer of securities is considered to be made, see Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267 at [100] (Palmer J), discussed at 4.9 above. For the purposes of Ch 6D, the person who offers securities is the person who has the capacity, or who agrees, to issue or transfer the securities if the offer is accepted: see Corporations Act s 700(3).

Issuer may not be a proprietary company 4.33 Chapter 6D regulates the offer of securities ‘of a body’. In the ordinary course, that body may not be a proprietary company. Instead, a company that wishes to undertake a securities offering that requires disclosure to investors under Ch 6D must be formed as, or convert to, a public company. A proprietary company may convert to a public company under Corporations Act Pt 2B.7. This restriction applies because of Corporations Act s 113, and reflects the historical purpose of allowing the incorporation of proprietary companies. The right to register a company as a proprietary company was introduced in Victoria in the late 19th century. In return for accepting limits on its size and ability to undertake public fundraising, proprietary companies were subjected to less onerous governance and disclosure requirements. For example, it is now the case that proprietary companies may have as few as one director (public companies must have three); small proprietary companies are not ordinarily subject to the period disclosure requirements in Corporations Act Ch 2M (accounts and audit); and transactions by proprietary companies (other than those controlled by public companies) with related parties do not require shareholder approval under Corporations Act Ch 2E.

The restriction is contained in Corporations Act s 113(3), which says that, subject to limited exceptions, a proprietary company ‘must not engage in any activity that would require disclosure to investors under Chapter 6D’. The exceptions are the offer of its shares to existing shareholders of the company or to employees of the company or of a subsidiary of the company. Overall, the total number of non-employee shareholders that a proprietary company may have is limited to 50: Corporations Act s 113(1). A contravention of the prohibition in Corporations Act s 113 is a strict liability offence: Corporations Act s 113(4). However, the offer or issue of shares is not invalid merely because of a contravention: Corporations Act s 113(5). If a proprietary company does contravene the prohibition, ASIC may require it to convert to a public company: Corporations Act s 165. [page 182]

Debenture issue must comply with Ch 2L 4.34 If the securities offered are debentures (see 3.8 above), and the offer of debentures is made in Australia and needs disclosure to investors under Ch 6D, then Corporations Act s 283AA applies. Section 283AA provides that, before a body makes such an offer, regardless of where any resulting issue, sale or transfer occurs, the body must enter into a trust deed that complies with s 283AB and appoint a trustee that complies with s 283AC. In these circumstances the body is required to comply with Corporations Act Ch 2L: see Corporations Act s 283AA(3).32 The requirement to enter into an approved deed and appoint an approved trustee for debenture holders is not limited to circumstances where disclosure to investors is required under Corporations Act ss 706– 707. It is also triggered where debentures are offered in circumstances covered by Corporations Act s 708(14) (debenture roll-overs) or s 708A (sale offers of quoted securities), as consideration under a takeover bid made under Corporations Act Ch 6, or as part of a compromise or arrangement under Corporations Act Pt 5.1 approved at a meeting held as a result of an order made under s 411(1) or s 411(1A).

ADVERTISING AND PUBLICITY 4.35 In addition to requiring the provision of information to investors under Corporations Act Pt 6D.2 in connection with certain offers of securities, the Corporations Act places restrictions on advertising or otherwise publicising securities offers. The restrictions are contained for the most part in Corporations Act s 734. These specific restrictions on advertising securities offers operate in addition to the general prohibitions on misleading or deceptive conduct, mis-selling and market manipulation in connection with securities offers, contained in Corporations Act Pt 7.10 and ASIC Act Pt 2 Div 2 and discussed in Chapter 8 below. Until 1991, securities law restricted the publication of advertisements and public notices about forthcoming securities offers to ‘tombstone’ notices, that contained certain limited information about the offer (such as the name of the offering entity and the type and number of securities available) and nothing else. The advertising restrictions were relaxed by the changes to securities law made with the introduction of the Corporations Law in 1991. Following those changes, the effect of the law was that most securities offers could be advertised with a degree of freedom as to the content and form of the advertisement, so long as the advertisement or notice contained certain prescribed information (including a requirement to state that investors should obtain and read the prospectus before making a decision to invest). However, advertisements for unlisted securities made before a disclosure document is lodged with ASIC are still limited to a ‘tombstone’ format. Section 734 is structured in such a way as to prohibit the publication of advertisements, or statements that refer directly or indirectly to a securities offer or that might induce people to apply for securities, subject to certain exceptions. [page 183] Advertisements and statements that refer to offers covered by Corporations Act s 708(1) (that is, small scale personal offers) are prohibited in all cases: see 4.36 below. Advertisements and statements referring to offers that need

a disclosure document are permitted so long as they contain the ‘small print’ required by s 734(5) (for advertisements and statements published before the disclosure document is lodged with ASIC) or s 734(6) (for advertisements and statements published after the disclosure document is lodged with ASIC): see 4.37 below. The thrust of the small print is to direct the attention of readers, listeners and viewers to a disclosure document that has been lodged before they make their investment decision. Section 734(4) makes clear that the dissemination of a disclosure document that has been lodged with ASIC does not contravene the prohibition. Advertisements and statements relating to offers that do not need a disclosure document (other than small scale personal offers covered by the Corporations Act s 734(1)) are not restricted. Certain corporate documents, news reports and other independent publications are permitted under Corporations Act s 734(7), and ‘pathfinder’ disclosure documents are allowed under Corporations Act s 734(9): see 4.41 below. Section 734(8) contains a general exemption for publishers and broadcasters. It states that a person does not contravene s 734(1) or s 734(2) by publishing an advertisement or statement in the ordinary course of a business of publishing a newspaper or magazine, or broadcasting by radio or television, so long as the person did not know and had no reason to suspect that its publication would amount to a contravention of Corporations Act Ch 6D. Contravention of Corporations Act s 734(1) or s 734(2) is a strict liability offence: Corporations Act s 734(2B).

Prohibitions Small scale personal offers 4.36 Small scale personal offers of the kind referred to in Corporations Act s 708(1) may never be advertised. Section 734(1) says that a person must not advertise, or publish a statement that refers directly or indirectly to, an offer or intended offer of securities that would need a disclosure document but for s 708(1), which is discussed in 4.16 above; it is to the

effect that disclosure under Pt 6D.2 is not needed if an offer is ‘personal’ to the offeree and it does not result in a breach of the ‘20 investor ceiling’ or the ‘$2 million ceiling’ (as defined) in a 12-month period.

Offers that need disclosure to investors 4.37 Section 734(2) applies to any offer, or intended offer, of securities that needs a disclosure document under Corporations Act Pt 6D.2. It provides that a person must not ‘advertise the offer or intended offer’ or ‘publish a statement that: (i) directly or indirectly refers to the offer or intended offer; or (ii) is reasonably likely to induce people to apply for the securities’. However, the prohibition does not apply if the advertisement or publication is authorised by s 734(4), s 734(5), s 734(6) or s 734(7), or if it is allowed under s 734(9) or by ASIC instrument. [page 184] When enacted in its earlier form, the breadth of the prohibition in Corporations Act s 734(2) led to concerns that it may interfere with ordinary business or ‘image’ advertising conducted by issuers. Because of s 734(2)(b)(ii), a statement may be caught by the prohibition even though it does not refer directly or indirectly to the offer itself. For example, a company may run an advertising campaign emphasising its value to the economy or its sustainability credentials — matters that may be relevant to the decision of some investors whether to acquire securities (for example, as part of a demutualisation or privatisation). Section 734(3) deals with this issue. It provides that, in deciding whether a statement indirectly refers to an offer or is reasonably likely to induce people to apply for securities, certain matters should be taken into account. Subsection (3) says that regard should be had to three matters: whether the statement forms part of the normal advertising of the body’s products or services and is genuinely directed at maintaining its existing customers or attracting new customers for those products or services; whether it communicates information that ‘materially deals with the affairs of the body’; and whether it is ‘likely to encourage investment decisions being made on the basis of the statement

rather than on the basis of information contained in a disclosure document’.

Permitted advertisements 4.38 Section 734(5) and (6) allow for the publication of advertisements and statements that would otherwise be prohibited by s 734(2), if they are limited to (in the case of advertisements for unlisted securities placed before the disclosure document is lodged with ASIC) or include (in other cases) the ‘fine print’ prescribed by the subsections. The information that must be included is prescribed by s 734(5) (if publication occurs before the disclosure document is lodged with ASIC) or s 734(6) (if publication occurs after the disclosure document is lodged).33 Before a disclosure document for the offer is lodged with ASIC, the form that an advertisement or other publication relating to the offer can take depends on whether the securities are in a class already quoted, or not. If the securities are not in a class already quoted, then only a ‘tombstone’ advertisement is allowed. Any advertisement or statement may contain only the information set out in Corporations Act s 734(5)(b), and nothing more. It must include statements that identify the offeror and the securities, and to the effect that a disclosure document for the offer will be made available and that anyone who wants to acquire the securities will need to complete the application form that will be in or will accompany the disclosure document. The advertisement may also include a statement of how to arrange to receive a copy of the disclosure document. If the securities on offer are in a class already quoted, greater freedom in the content and form of the advertisement is allowed. The advertisement must include the prescribed statement set out in s 734(5)(a), identifying the issuer (and in the case [page 185] of a sale offer, the seller) and providing certain information about the forthcoming disclosure document.

After a disclosure document has been lodged with ASIC in relation to an offer, s 734(6) applies. An advertisement or publication does not contravene s 734(2) so long as it includes the prescribed statement identifying the issuer (and seller, where appropriate) and providing information about the disclosure document. ASIC has published general guidance on advertising in ASIC Regulatory Guide 234 — Advertising Financial Products and Advice Services Including Credit Good Practice Guidance, November 2012, and specific guidelines for debenture advertising in ASIC Regulatory Guide 156 — Advertising of Debentures and Notes to Retail Investors, February 2012.

Other exceptions to the prohibition 4.39 Section 734(4), (7) and (9) contain other exceptions to the prohibition in s 734(2). Subsection (4) allows for the dissemination of disclosure documents that have been lodged with ASIC, while subs (9) allows for the limited dissemination of draft ‘pathfinder’ documents to sophisticated and professional investors. Subsection (7) contains the general exceptions, for corporate reports and notices, news and comment (but not ‘advertorials’), and independent securities reports.

Lodged disclosure documents 4.40 Unless a stop order is in force under Corporations Act s 739 (see 5.57 below), a person may disseminate a disclosure document (that is, a prospectus, profile statement or offer information statement) that has been lodged with ASIC without contravening s 734(2): Corporations Act s 734(4).

Pathfinder disclosure documents 4.41 Before the disclosure document is lodged with ASIC, it may be disseminated in draft form to professional or sophisticated investors, under s 734(9). A draft disclosure document disseminated in this way is sometimes referred to as a ‘pathfinder document’; the purpose of a pathfinder document is to obtain market responses on certain matters connected with the offer, in the light of which the document is completed.

For example, the price may be omitted and the document may be circulated to evoke what addressees consider the appropriate price at which the issue should be offered. In that way the issuer does not have to set a price without the benefit of any market response. That is done in a so-called ‘open price underwritten tender’. The underwriter guarantees to the issuer corporation or vendor a base price to ensure that the corporation or vendor will get funds in any event. A book of demand is compiled from tenders by institutions and others at prices between the base price and the defined upper end of a range of prices. The price at the point where the demand fills the issue is taken as the issue or sale price. The process reduces risks for the underwriter and enables the issuer or vendor to fix the price in the light of demand. Under s 734(9) it is not a contravention of subs (1) or subs (2) for a person to send a draft disclosure document for securities to a person if an offer of the securities to [page 186] that person would not require disclosure due to the sophisticated investors (s 708(8) or s 708(10)) or professional investors (s 708(11)) exceptions.

General exceptions 4.42 Section 734(7) contains the general exceptions to the prohibition in s 734(2) that cover corporate documents, independent news reports and commentary, and independent securities reports. Corporate documents are covered by s 734(7)(a) (reports by the issuer or its officer to the stock exchange), (7)(b) (notice or report of a general meeting of the issuer) and (7)(c) (report published by the issuer that does not refer to the offer and does not include proscribed information). Independent news and commentary are covered by s 734(7)(d) (news reports or genuine comment) and (7)(e) (independent securities reports), so long as no one ‘gives consideration or another benefit for publishing the report’.

OTHER SELLING RESTRICTIONS

Securities hawking 4.43 For many years, securities regulation has prohibited securities ‘hawking’: that is, the practice of selling securities by way of unsolicited personal sales contact. The need for this legislation arose out of the activity of canvassers, many paid by commission, personally hawking securities from house to house and offering them to persons who in many instances lacked business experience. In many cases where the securities proved to be of little value, fraud was often suspected but, although the law provided a remedy for fraudulent misrepresentation, it was usually impracticable to seek that remedy because the victims had to prove fraud or recklessness and lacked the financial means to sue. In recent years the problem of ‘boiler shops’ selling securities by unsolicited telephone canvassing required an extension of the law to this type of conduct.34 The predecessor to s 736(1), s 1078(1) of the Corporations Law, prohibited hawking in the context of a person ‘go[ing] from place to place’. The phrase ‘go from place to place’ was defined in the Corporations Law as including communication with other persons by the use of telephone, facsimile machines and the like: former s 1077(a) of the Corporations Law. The current prohibition is contained in Corporations Act s 736(1), which provides that ‘a person must not offer securities for issue or sale in the course of, or because of, an unsolicited meeting with another person, or telephone call to another person’. ‘Offer’ has its extended s 700 meaning, and includes making invitations and distributing application forms. ASIC has published extensive guidance on its interpretation of the hawking provisions, in ASIC Regulatory Guide 38 — The Hawking Provisions, May 2005. [page 187] Various offers are exempted from the prohibition by Corporations Act s 736(2). They are offers covered by s 708(8) or s 708(10) (sophisticated investors); offers covered by s 708(11) (professional investors); offers of

listed securities made by telephone by a licensed securities dealer; offers made by licensed securities dealers to their existing clients; and offers made under an eligible employee share scheme. The expression, ‘licensed securities dealer’ appears to refer to an Australian financial services licensee: see ASIC RG 38. Contravention of Corporations Act s 736(1) is a strict liability offence: Corporations Act s 736(1B). Also, the prohibition on hawking of securities is accompanied by the giving of power to the person to whom the securities are issued or transferred to return the securities within one month after the issue or transfer. If the securities are returned, the person is entitled to be repaid the amount they paid for the securities: Corporations Act s 738. Prior to the CLERP Act the consequences of contravention were different: a court could order that a contract made in the course of security hawking be declared void. Under former s 1082 of the Corporations Law that could happen after a person had been convicted of the offence. The court could give consequential directions as to repayment of money or the retransfer of securities. Following the changes to the law it is now easier for the targets of securities hawking to obtain redress.

Conduct in relation to financial products 4.44 Part 7.10 of the Corporations Act proscribes market misconduct and other prohibited conduct in relation to financial products and financial services. These provisions apply generally to persons participating in the market for, or otherwise trading in, financial products. ‘Financial products’ include securities: see Corporations Act s 764A(1)(a). Accordingly, they can apply to an issuer or seller of financial products in connection with an offer of securities. Sections 1041A, 1041B, 1041C and 1041D apply to conduct that may affect trading in financial products on a financial market. They prohibit market manipulation, false trading and market rigging, and the dissemination of information about illegal transactions. The operation of these provisions is explained in Chapter 16 below. Sections 1041E, 1041F and 1041G apply more broadly, to conduct in relation to financial products generally. They prohibit false or misleading statements inducing dealing or affecting price, knowing inducement to deal on the basis of

defective information and dishonest conduct in the course of carrying on a financial services business. The operation of these provisions is explained in Chapter 8. Importantly, Corporations Act s 1041H prohibits misleading or deceptive conduct in relation to a financial product or a financial service (other than, among other things, conduct that contravenes Corporations Act s 728 (misleading or deceptive disclosure document). Contravention of Corporations Act s 1041I is not an offence, but will give rise to civil liability under s 1041I.

ASIC Act consumer protection 4.45 Part 2 Div 2 of the ASIC Act contains a number of controls on sales practices connected with the provision of financial services. The definition of ‘financial service’ [page 188] as it is used in ASIC Act Pt 2 Div 2 is discussed in 8.40 below. Importantly, it is wider than that used in Ch 7 of the Corporations Act. A person provides a financial service for the purposes of the ASIC Act if, among other things, they ‘deal in a financial product’: ASIC Act s 12BAB. ‘Financial product’ includes a security: see ASIC Act s 12BAA(7)(a), discussed at 3.51 above. A person deals in a financial product if they apply for or acquire a financial product, issue a financial product, underwrite securities or managed investment interests, vary a financial product or dispose of a financial product: ASIC Act s 12BAB(7). Arranging for a person to engage in conduct referred to in ASIC Act s 12BAB(7) is also dealing, unless the actions concerned amount to the provision of financial product advice: ASIC Act s 12BAB(8). The effect of ASIC Act s 12BAB is that, in connection with an offer of securities, the actions of the issuer (as well as those of intermediaries such as brokers and advisers) can amount to the provision of a financial service for the purposes of ASIC Act Pt 2 Div 2. While a person is taken not to

deal in a financial product if the person deals in the product on their own behalf, this exception does not apply if the person is an issuer of financial products and the dealing is in relation to one or more of those products: ASIC Act s 12BAB(9). There is no equivalent of the Corporations Act s 766C(4) (which carves out the actions of securities issuers other than investment companies from the definition of financial services used in the Corporations Act) in the ASIC Act. The ASIC Act prohibits various types of undesirable conduct in relation to the supply or possible supply for financial services. While these provisions are generally referred to as ‘consumer protection’ provisions, their application is not limited to consumer transactions. Many of the prohibitions may also apply in relation to commercial transactions between sophisticated parties. The application of ASIC Act Pt 2 Div 2 and its relationship with the Competition and Consumer Act 2010 (Cth) and state fair trading legislation is discussed in Chapter 8 below. Subdivision BA of ASIC Act Pt 2 Div 2 deals with unfair terms in standard form consumer contracts. Subdivision C relates to unconscionable conduct in trade or commerce in relation to financial services.35 Subdivision D is headed ‘Consumer protection’, although its ambit extends beyond consumer transactions. It includes ASIC Act s 12DA (misleading or deceptive conduct in trade or commerce in relation to financial services), s 12DB (false or misleading representations in trade or commerce in connection with the supply or possible supply of financial services), s 12DC (false or misleading representations in relation to financial products that involve interests in land) and s 12DF (conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for purpose or the quality of financial services). It also includes ss 12DE, 12DG, 12DH, 12DI, 12DJ, 12DK and 12DM that prohibit certain undesirable selling practices, including offering gifts and prizes without an intention to provide, bait advertising, referral selling to ‘consumers’ as defined, accepting payment for services without intention to supply, harassment or coercion towards consumers, pyramid selling of financial products, and asserting right to payment for

[page 189] unsolicited financial services. Subdivision E contains conditions and warranties in consumer transactions. These provisions are discussed in Chapter 15 below.

CONSEQUENCES OF NON-COMPLIANCE 4.46 Part 6D.3 of the Corporations Act sets out the prohibitions, liabilities and remedies associated with offers of securities. The key prohibitions are summarised in the following table. Table 4.1: Key prohibitions in Corporations Act Pt 6D.3 Prohibition Offering securities of a body that has not been formed or does not exist Offering securities without a current disclosure document Offering securities under a defective disclosure document Publishing a prohibited advertisement or statement Hawking securities

Section CA s 726 CA s 727 CA s 728 CA s 734 CA s 736

The consequences of contravening Corporations Act s 728 are explained in Chapter 8 below. This part outlines the consequences of contravening the other key prohibitions in Pt 6D.3.

Contravention is a criminal offence 4.47 Non-compliance with s 726, s 727, s 734 or s 736 is a criminal offence. The maximum penalty for each offence is set out in Sch 3 to the Corporations Act; for ss 726 and 727 it is 200 penalty units or imprisonment for five years or both, and for ss 734 and 736 it is 25 penalty units or imprisonment for six months or both. Where a body corporate is convicted of the offence, the penalty is a fine not exceeding five times the maximum pecuniary penalty amount: Corporations Act s 1312.

Physical and fault elements under the Criminal Code 4.48 Because the Corporations Act is a Commonwealth statute, the offence provisions are interpreted and applied in accordance with the Commonwealth Criminal Code36 (the Code). The purpose of the Code, set out in Code s 2.1, is: … to codify the general principles of criminal responsibility under the laws of the Commonwealth. It contains all the general principles of criminal responsibility that apply to any offence, irrespective of how the offence is created.

[page 190] Under the Code, criminal offences in Commonwealth law consist of physical elements and fault elements: Code s 3.1(a). The physical element of the various offences under Pt 6D.3 are: offering securities (ss 726 and 736); making an offer of securities (s 727(1) and (2)); accepting an application for, or issuing or transferring, securities (s 727(3) and (4)); and advertising or publishing a statement (s 734(1) and (2)). Sections 726 and 727 of the Corporations Act do not specify a fault element for the offences created by them. Accordingly, the requisite fault element is intention: Code s 5.6(1). This means that a person commits an offence under s 726 or s 727 only if ‘he or she [or it] means to engage in that conduct’: Code s 5.2(1). In contrast, Corporations Act ss 734(1) and (2) and 736(1) are strict liability offences: see ss 734(2B) and 736(1B). This means that there are no fault elements for any of the physical elements of the offence: Code s 6.1(1)(a). The defence of mistake of fact under Code s 9.2 is available: Code s 6.1(1)(b).

Primary and secondary offenders 4.49 In order for a person to be convicted of an offence under Pt 6D.3, that person must either have performed the physical element of the offence

itself (a primary offender), or have ‘aided, abetted, counselled or procured’ the commission of the offence by another person (a secondary offender). Where the physical element of the offence is offering or issuing securities, it is likely that the primary offender will be the issuer (or offeror, in the case of secondary offers).37 Section 700(3) of the Corporations Act provides that, for the purposes of Ch 6D, ‘the person who offers securities is the person who has the capacity, or who agrees, to issue or transfer the securities if the offer is accepted’. That said, it is worth noting that s 727(1) prohibits two types of conduct: making an offer of securities; or distributing an application form for the offer of securities. The proscribed conduct as it relates to the distribution of an application form is not confined to that of the owner or controller of the securities, and can extend to any person distributing the form, even if, for example, they are acting as an agent. There is no requirement in s 727(1) to demonstrate that the person knew the offers needed disclosure.38 4.50 Part 2.4 of the Code sets out when a person (for example, an officer or agent of an issuer) may be liable as a secondary offender. Under Code s 11.2(1), ‘a person who aids, abets, counsels or procures the commission of an offence by another person is taken to have committed that offence and is punishable accordingly’. Section 11.2(2) of the Code goes on to provide that, for the person to be guilty: ‘(a) the person’s [page 191] conduct must have in fact aided, abetted, counselled or procured the commission of the offence by the other person; and (b) the offence must have been committed by the other person’ (although, because of s 11.2(5), it is not necessary that the principal offender has been prosecuted or has been found guilty). For the person to be guilty under Pt 2.4, proof of intention is required. Under s 11.2(3) the person must have intended that his or her conduct would aid, abet, counsel or procure the commission of any offence (including its fault elements) of the type the other person committed; or that his or her conduct would aid, abet, counsel or procure the commission

of an offence and have been reckless about the commission of the offence (including its fault elements) that the company in fact committed. A person can be liable by virtue of Code s 11.2 only if they: (i) have ‘the required knowledge of the nature of the criminal purpose’; and (ii) they have ‘taken steps to assist in, and/or to promote the commission of the criminal purpose’.39 In Giorgianni v R (1985) 156 CLR 437 at 487–8, the High Court held: No-one may be convicted of aiding, abetting, counseling or procuring the commission of an offence unless, knowing all the essential facts which made what was done a crime, he intentionally aided, abetted, counselled or procured the acts of the principal offender. Wilful blindness … is treated as equivalent to knowledge but neither negligence nor recklessness is sufficient.

Court may make orders 4.51 A specific liability regime exists for contraventions of Corporations Act s 728 (offer of securities under a defective disclosure statement) which is discussed in Chapter 8 below. More broadly, Corporations Act Pt 9.4 confers upon the court power to make a variety of orders where there is a contravention of Corporations Act Ch 6D. The court may make an order under Corporations Act s 1324B (to provide information or publish advertisements). Importantly, where there has been a contravention of Ch 6D, the court may ‘make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5))’ if the court considers that the order or orders concerned will compensate a person affected by the contravention or will prevent or reduce the loss or damage that results: s 1325(1). The types of orders that can be made include orders declaring the whole or any part of a contract to be void ab initio, orders varying contracts, orders refusing to enforce contract provisions, orders directing the refund of money or return of property, orders directing the payment of compensation, and orders to supply services. As Barrett J observed in Australian Securities and Investments Commission v Karl Suleman Enterprizes (2003) 45 ACSR 401; 177 FLR 147; [2003] NSWSC 400 at [17],

[page 192] ‘the prohibition imposed by s 727 exists to protect persons from being enticed by contravening behaviour into subscription contracts with respect to securities’. The consequences of an offeror and its officers contravening Corporations Act s 727 can include orders under ss 1101B and 1324B; and disqualification of individual directors under s 206E.40 ___________________________ 1.

The alternatives are summarised in Corporations Act s 705.

2.

ASIC Regulatory Guide 49 — Employee Incentive Schemes, November 2015.

3.

In 2015 the government announced its intention to relax the fundraising rules to facilitate crowdsourced equity funding for unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in funds in any 12-month period. At the time of writing that policy is being reconsidered.

4.

‘Warrant’ is defined in Corporations Regulations reg 1.0.02.

5.

See Re Macquarie Bank Ltd and Australian Securities and Investments Commission (2001) 39 ACSR 508; [2001] AATA 868 at [45].

6.

See RESI Corporation v Sinclair (2002) 54 NSWLR 387; [2002] NSWCA 123; Corporation of the City of Unley v South Australia (1997) 68 SASR 511.

7.

Attorney-General (NSW) v Mutual Home Loans Fund of Australia Ltd [1971] 2 NSWLR 163 at 165, aff’d (1973) 130 CLR 103; 2 ALR 241; Attorney-General (NSW) v Australian Fixed Trusts Ltd [1974] 1 NSWLR 110 at 117.

8.

WA Pines Pty Ltd v Registrar of Companies [1976] WAR 149 at 153; 1 ACLR 431 at 435; Radiata Forestry Development Co Pty Ltd v Evans (1977) 3 ACLR 82.

9.

Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310 at [63].

10.

Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310 at [63]; Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; 247 ALR 659; 66 ACSR 688; [2008] FCAFC 120 at [19] and [98]; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (2015) 105 ACSR 116; [2015] FCA 342 at [222].

11.

Australian Securities and Investments Commission v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631; [2011] FCA 60 at [39].

12.

ASIC RG 173.1.

13.

See Australian Securities and Investments Commission v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631; [2011] FCA 60 at [40]. See also Australian Securities and Investments Commission v Astra Resources plc (2015) 107 ACSR 323; [2015] FCA 759.

14.

Australian Securities and Investments Commission v Axis International Management Pty Ltd (No 5) (2011)

81 ACSR 631; [2011] FCA 60 at [44]. 15.

Chugg v Pacific Dunlop Ltd (1990) 170 CLR 249 at 257–9; 95 ALR 481 at 486–8; Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 58 at [40]; Australian Securities and Investments Commission v Axis International Management Pty Ltd (No 5) (2011) 81 ACSR 631; [2011] FCA 60 at [52]; Australian Securities and Investments Commission v Great Northern Developments Pty Ltd (2010) 79 ACSR 684; [2010] NSWSC 1087 at [44]; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (2015) 105 ACSR 116; [2015] FCA 342 at [208]; Australian Securities and Investments Commission v Astra Resources plc (2015) 107 ACSR 323; [2015] FCA 759 at [225].

16.

Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 at [8.1]; Re Krypton Nominees Pty Ltd [2013] VSC 446 at [312].

17.

Section 708(8)(c) specifies six months, but the section has been modified by Corporations Regulations reg 6D.5.02 to allow for a period of two years.

18.

See MIS Funding No 1 Pty Ltd v Buckley (2013) 96 ACSR 691; [2013] VSC 607.

19.

That is, a superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth).

20.

The meaning of ‘exempt public authority’ is discussed in 4.28 below.

21.

An investment company is a body corporate, or an unincorporated body, that: (i) carries on a business of investment in financial products, interests in land or other investments; and (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of Corporations Act s 82, the terms of which provided for the funds subscribed to be invested for those purposes: see para (h) of the definition in Corporations Act s 9 below.

22.

Because of para (e) of the definition of professional investor, it also includes a person who controls at least $10 million (including any amount held by an associate or under a trust that the person manages). However, this paragraph does not apply in the context of the disclosure requirements in Chapter 6D, because of Corporations Act s 708(11)(a). Instead s 708(11)(b) excludes from the disclosure requirement offers to ‘a person who has or controls at least $10 million (including any amount held by an associate or under a trust that the person manages)’. See 4.20 above. See also MIS Funding No 1 Pty Ltd v Buckley (2013) 96 ACSR 691; [2013] VSC 607 at [29]–[40]; [53]–[57]. The test is applied by reference to the person’s gross assets: at [68].

23.

See Re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171.

24.

See also Cullen v Corporate Affairs Commission (NSW) (1988) 14c ACLR 789 at 793–4; Re Ansett (1991) 9 ACLC 277 at 285; Re C & J Hazell Holdings Pty Ltd (1991) 9 ACLC 802 at 805; Standard Chartered Bank of Australia Ltd v Antico (No 1) (1995) 18 ACSR 1 at 65–71; Australian Securities and Investments Commission v Parkes (2001) 38 ACSR 355 at 374–6.

25.

See Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963; Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; 88 ACSR 126; [2012] HCA 18.

26.

See the comments of the Corporations and Markets Advisory Committee (CAMAC) on the scope of the definition of ‘officer’ in Corporate Duties Below Board Level — Discussion Paper, May 2005, p 12.

27.

Australian Securities and Investments Commission v Great Northern Developments Pty Ltd (2010) 79 ACSR 684; [2010] NSWSC 1087 at [30]–[40].

28.

Applying Australian Securities Commission v Marlborough Gold Mines (1993) 177 CLR 485.

29.

Re Macquarie Bank Ltd and Australian Securities and Investments Commission (2001) 39 ACSR 508; [2001] AATA 868 at [38].

30.

By reference to the decisions of the High Court in Commr of Taxation v Silverton Tramway Co Ltd (1953) 88 CLR 558, Committee on Direction of Fruit Marketing v Australian Postal Commission (1980) 144 CLR 577; Renmark Hotel Inc v Commr of Taxation (1949) 79 CLR 10; Western Australian Turf Club v Commr of Taxation (1978) 139 CLR 288; Re Anti-Cancer Council (Vic); Ex parte State Public Services Federation (1992) 175 CLR 442; and General Steel Industries Inc v Commr for Railways (1964) 112 CLR 125.

31.

See, for example, Explanatory Memorandum to the Corporations Legislation Amendment (Simpler Regulatory System) Bill, [5.20].

32.

For a detailed discussion of Ch 2L, see R Austin and I Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law, 16th ed, LexisNexis Butterworths, Sydney, 2014, Ch 19.

33.

The effect of Ch 7 of the Corporations Act is to require the inclusion of other information in advertisements or statements, where those advertisements or statements may have the character of financial product advice. The additional information that must be included is discussed in Chapter 14 below.

34.

See the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 at [8.64] and Financial Markets and Investment Products: Promoting Competition, Financial Innovation and Investment (the first CLERP 6 paper) at 102.

35.

See also Corporations Act s 991A.

36.

The Criminal Code is a schedule to the Criminal Code Act 1995 (Cth). For a discussion of the application of the Criminal Code to the Corporations Act, see J Longo, ‘Market Misconduct Provisions of the Financial Services Reform Act: Challenges for Market Regulation’, paper presented at the Centre for Corporate Law and Securities Regulation seminar on Market Misconduct and the Financial Services Reform Bill, 25 July 2001, Melbourne, available at .

37.

See Hamilton v Whitehead (1988) 166 CLR 121; 82 ALR 626.

38.

Australian Securities and Investments Commission v Axis International Management Pty Ltd (2011) 81 ACSR 631; [2011] FCA 60 at [220]–[221].

39.

Re Pong Su (Ruling No 21); R v Ta Song Wong (2005) 202 FLR 1 per Kellam J.

40.

For example, in Australian Securities and Investments Commission v Astra Resources Ltd (No 2) (2016) 113 ACSR 162; [2016] FCA 560, the court made orders pursuant to s 1324B of the Act that companies that contravened s 727 notify the relevant investors, by letters and published advertisements, of their contraventions and of the potential rights of those investors in light of those contraventions. It also made declarations pursuant to s 206E of the Act that directors failed to take reasonable steps to prevent the contraventions of s 727(1) of the Act and that each of the directors be disqualified from managing corporations. However the court declined to make orders pursuant to s 1101B of the Act that each of the transactions by which the shareholders purchased their shares was voidable, together with associated orders providing for notification and refunds; Astra Resources was being wound up, and there was little prospect that it would be able to refund the monies invested. The orders would therefore lack practical utility and might also unfairly prejudice third parties. See also Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2015) 106 ACSR 302; [2015] FCA 527.

[page 193]

Chapter 5 CONDUCTING a REGULATED SECURITIES OFFER Introduction Types of disclosure documents Content Requirements for Prospectuses General disclosure General disclosure — continuously quoted securities Specific disclosure Debenture prospectuses Short-form prospectuses Two-part simple corporate bond prospectuses Content Requirements for Other Disclosure Documents Profile statements Offer information statements Clear Concise and Effective Positive Disclosure Obligations under General Law Statements needing qualification: half-truths and supervening falsity Fiduciary relationship Contracts of utmost good faith Due Diligence Purpose of due diligence Structuring due diligence Carrying out due diligence Offer Process Lodgment with ASIC Application forms Subscription moneys must be held on trust Issue or transfer of securities

5.1 5.2 5.9 5.10 5.13 5.16 5.22 5.24 5.25 5.26 5.26 5.27 5.28 5.30 5.31 5.32 5.33 5.34 5.34 5.38 5.39 5.40 5.41 5.46 5.47 5.48

[page 194] Correcting and Updating Disclosure Supplementary and replacement disclosure documents Form of supplementary or replacement document Consequences of lodging a supplementary or replacement document Dealing with applications Stop Orders Grounds for issuing a stop order Interim stop orders

5.52 5.53 5.54 5.55 5.56 5.57 5.58 5.61

INTRODUCTION 5.1 We saw in Chapter 4 that offers of securities for issue, and certain (limited) offers of securities for sale, require disclosure to investors in accordance with Pt 6D.2 of the Corporations Act 2001 (Cth) (Corporations Act) unless that requirement is expressly excluded in a particular case by s 708, s 708AA or s 708A of the Corporations Act. This chapter explores in some further detail the procedural and other requirements that apply where a person makes a securities offer that requires disclosure to investors under Pt 6D.2, and looks at what information must be included in the disclosure document provided to investors. The conduct of a regulated offer of securities requires that certain steps be taken by the issuer (or seller) of the securities. Preliminary to the offer, the offeror must determine the type of disclosure document that is required for the offer under Corporations Act s 709. It must then prepare the disclosure document, ensuring that it meets the applicable content requirements in Corporations Act ss 710–716 and the general law. For the reasons explained below, it is usually appropriate for the offeror to undertake a formal ‘due diligence’ process in preparing the disclosure document. If there is a misstatement in, or omission from, the disclosure document when an offer is made, the offeror contravenes Corporations Act

s 728. The consequences of contravening s 728 are discussed in Chapters 8 and 9 below. The disclosure document must then be lodged with the Australian Securities and Investments Commission (ASIC) in accordance with Corporations Act s 718. Making a regulated offer without having lodged a disclosure document with ASIC is prohibited by s 727(1). ASIC does not review, ‘pre-vet’ or otherwise approve the disclosure document. For offers of non-quoted securities, the offeror must wait for seven days after lodgment before issuing or transferring securities pursuant to the disclosure document: see s 727(3). The next step after lodgment is to make the offer, by providing a copy of the disclosure document to offerees in accordance with Corporations Act s 721. The practical effect of Corporations Act ss 723 and 727(2) is that the application form for the securities must be included in, or accompanied by, the disclosure document. As application moneys are received, they must be held on trust pending issue or sale of the securities: Corporations Act s 722. During the offer period, the offeror has ongoing obligations if it or its associates discover any defects in the disclosure document or become aware of any material developments affecting the adequacy [page 195] of the disclosure document. If this occurs, the offeror must update the disclosure document by way of a supplementary or replacement disclosure document, or withdraw the offer: Corporations Act ss 719, 724 and 728. After applications are received, the offeror may proceed to issue or transfer the securities in response to applications only if certain conditions are met. These include that an appropriate application form has been received, that any minimum subscription condition set out in the disclosure document has been met, that quotation (if foreshadowed in the disclosure document) has occurred, and that the offeror has not become aware of any defects in the disclosure document: Corporations Act ss 723 and 724. If any of these conditions is not met, then the offeror must deal with any

outstanding applications in the manner set out in the Corporations Act s 724. If the offeror receives an application for securities after the expiry date for the disclosure document, the offeror must deal with the application in the manner set out in Corporations Act s 725. ASIC has power under Corporations Act s 739 at any time before the securities are issued or transferred to suspend a securities offer by way of a ‘stop order’. A stop order may be made if ASIC is satisfied that information in a disclosure document lodged with ASIC is not worded and presented in a clear, concise and effective manner (s 715A), an offer of securities under a disclosure document lodged with ASIC would contravene Corporations Act s 728 (defective disclosure), or an advertisement or publication of a kind referred to in Corporations Act s 734(5) or (6) that relates to securities is defective. These various requirements for regulated offers are explained below. The statutory provisions are augmented by ASIC Regulatory Guide 254 — Offering Securities Under a Disclosure Document, March 2016.

Types of disclosure documents 5.2 The pattern of Pt 6D.2 of the Corporations Act is to require that, where an offer of securities needs disclosure to investors under s 706 (primary offers) or s 707 (some secondary offers), the offeror must prepare a disclosure document that complies with the requirements of the Part (Corporations Act s 709), lodge that disclosure document with ASIC (Corporations Act s 718), and provide the disclosure document to potential investors (Corporations Act s 721). Failure to do so is an offence, under Corporations Act s 727. The circumstances in which an offer needs disclosure to investors under s 706 or s 707 are explained in Chapter 4 above. As Chapter 1 points out, disclosure to investors by way of prospectus has long been required under Anglo-Australian law. Finkelstein J describes the function of the prospectus in the following terms in Cadence Asset Management Pty Ltd v Concept Sports Ltd (2005) 55 ACSR 145; [2005] FCA 1280 at [1]: Vast sums of money are invested in shares. Shares, however, have no intrinsic value

themselves. Their value depends upon the prospects of the corporation that has issued the shares. Their price depends upon how much people are willing to pay based on their evaluation of those prospects. When shares are created and offered to the public, those invited to subscribe must have some idea what the shares will be worth. They have no practical opportunity of making any independent inquiry. The prospectus serves this function. It is the means by which

[page 196] the promoters (and others) are required to disclose to the public everything which could influence the mind of the investor. The Joint Stock Companies Act 1844, 7 & 8 Vict c 110, introduced the principle of compulsory disclosure through the medium of a prospectus and this has been a feature of English and Australian company law ever since. The Australian disclosure provisions are currently to be found in s 710 and s 711 of the Corporations Act 2001 (Cth).

Prior to the substantial amendments made to the fundraising laws by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP Act), all regulated offers of securities required a prospectus. In 1999, the law was changed to allow for different types of disclosure documents to be used in different circumstances. There are now, in effect, six different types of disclosure documents provided for in Ch 6D. They are: a full prospectus, a ‘transaction-specific’ prospectus,1 a short-form prospectus, a two-part simple corporate bond prospectus, a profile statement, and an offer information statement. The table in Corporations Act s 705 shows ‘what disclosure document to use if an offer of securities needs disclosure to investors’ under Pt 6D.2.2 Table 5.1: Disclosure document 1

Type Prospectus The standard full disclosure document.

2

Short-form prospectus May be used for any offer. Section 712 allows a prospectus to refer to content (712)

Sections content (710, 711, 713) procedure (717) liability (728 and 729) defences (731, 733)

2A

3

4

material lodged with ASIC instead of setting it out. Investors are entitled to a copy of this material if they ask for it. Two-part simple corporate bonds prospectus Must be used for any offer of simple corporate bonds.

Profile statement Section 721 allows a brief profile statement (rather than the prospectus) to be sent out with offers with ASIC approval. The prospectus must still be prepared and lodged with ASIC. Investors are entitled to a copy of the prospectus if they ask for it. Offer information statement Section 709 allows an offer information statement to be used instead of a prospectus for an offer to issue securities if the amount raised from issues of securities is $10 million or less.

content (713C, 713D, 713E) procedure (717) liability (728 and 729) defences (731 and 733) content (714) procedure (717) liability (728 and 729) defences (732 and 733)

content (715) procedure (717) liability (728 and 729) defences (732 and 733)

[page 197] 5.3 Understanding the different types of disclosure documents and the different information burdens that they impose on the offeror requires us to distinguish between the offeror’s duty to generate information about itself and the offer (that is, the information burden) on the one hand, and its duty to relay that information at first instance to investors (that is, the dissemination burden) on the other. Depending on the type of offer, the Corporations Act imposes different levels of information burden on offerors. The highest is the information burden imposed in connection with an offer of securities (other than continuously quoted securities) that requires a prospectus. In this case the

offeror must generate and make public the information required under ss 710 (general disclosure test) and 711 (specific disclosures). A lower information burden is imposed where an offer of continuously quoted securities requires a prospectus. In this case, the general disclosure test in s 710 can be satisfied by more limited disclosure than is ordinarily required, because of the Corporations Act s 713. This type of prospectus is referred to by ASIC as a ‘transaction-specific prospectus’. The disclosure burden for offers of simple corporate bonds (as defined) under ss 713A–713E is lower again. Sections 709(4) and 715 impose a lower information burden again, where a body is raising its first $10 million and chooses to do so via an offer information statement instead of a prospectus. An offeror making an offer pursuant to a prospectus can choose to reduce its dissemination burden by distributing to investors an abridged document that is either a short-form prospectus (Corporations Act s 712) or a profile statement (Corporations Act s 714), rather than the full prospectus. The information burden imposed on the offeror is not reduced, but the offeror is not required to disseminate certain of that information to investors unless it is specifically requested by the investor. The principal benefit to offerors of using this type of abridged disclosure to investors is in reduced printing costs, and reduced complexity in its offer documents.

Full prospectus and ‘transaction specific’ prospectus 5.4 The prospectus is the standard full-disclosure document that is required in relation to all offers of securities other than those that qualify to use an offer information statement. Section 709(1) provides that if an offer of securities (other than simple corporate bonds) requires disclosure to investors, a prospectus must be prepared for the offer unless s 708(4) applies (in which case an offer information statement may be used instead). The prospectus must comply with the content requirements in Pt 6D.2 Div 4. These differ depending upon whether the securities on offer are continuously quoted securities as defined in Corporations Act s 9. If they are, the content requirements are more limited — this is referred to by ASIC as a ‘transaction specific prospectus’. The content requirements for both types of prospectuses are discussed at 5.9ff below.

Short-form prospectus

5.5 Section 709(1) notes that a prospectus ‘may simply refer to material already lodged with ASIC instead of including it’. This is provided for in Corporations Act s 712. The Explanatory Memorandum to the CLERP Bill indicated that the primary aim of the short-form prospectus was to reduce the complexity of disclosure provided to retail investors. Para 8.6 of the Explanatory Memorandum states: [page 198] Prospectus length and complexity is a particular concern for retail investors, who may not be experienced in reading and comprehending technical information. The Bill will facilitate the presentation of prospectuses to retail investors in a manner best suited to their needs, while still making available a more technical analysis to investors, professional analysts and advisers who wish to seek further information.

One benefit in using a short-form prospectus is that it reduces printing and related costs for the issuer; for example, an issuer that has lodged its financial statements with ASIC is not required to reproduce them in full in the prospectus that is printed and distributed to potential investors. A prospectus that refers to, rather than setting out in full, information that has been lodged with ASIC as a means of satisfying the content requirements in ss 710, 711 and 713 must do so in the manner set out in s 712, explained below.

Two-part simple corporate bond prospectus 5.6 If the offer involves simple corporate bonds, then under Corporations Act s 709(1A)–(1C) a two-part simple corporate bonds prospectus will be required.3 Corporations Act Pt 7.9 was amended in December 2014 to include an abridged disclosure regime for ‘simple corporate bonds’ as defined. The disclosure regime requires the issuing body to issue a two-part simple corporate bonds prospectus (as outlined in s 713B). The two-part simple corporate bonds prospectus consists of a base prospectus (as outlined in s 713C) and an offer-specific prospectus (as outlined in s 713D). The content requirements for each part are set out in the Corporations Regulations 2001 (Cth) (Corporations Regulations) and are discussed in 5.25 below.

The circumstances in which the two-part simple corporate bond prospectus can be used are set out in s 713A, and are limited. It is intended to apply to relatively low risk and less complex bonds,4 and is only available to listed entities and their subsidiaries. To that end, the legislation creates numerous ‘conditions’ that the issuer, the offer, and the bonds themselves, must meet to come within the regime, contained in s 713A(2)–(20).5 The securities must be debentures that are quoted on a prescribed financial market; are denominated in Australian currency; and are for a fixed term not exceeding 15 years. The principal and any accrued interest must be repaid to the holder at the end of the fixed term of the security. The interest rate must be either a fixed rate, or a floating rate that is comprised of a reference rate (over which the issuer has no direct control) and a fixed margin. The bonds can be subject to an increase in the fixed rate or the fixed margin in respect to the interest payable, but cannot be subject to a decrease in the interest payable. Interest payments under the bonds must be paid periodically and cannot be deferred or capitalised by the issuing [page 199] body. The face value for the bonds cannot exceed $1000. The bonds can only be redeemable (other than at the end of the fixed term) in limited circumstances, set out in s 713A(13). The issuer’s debt to the bond holders cannot be subordinated to debts to unsecured creditors, and the bonds must not be convertible. Importantly, the issuing body must have continuously quoted securities, or be a wholly-owned subsidiary of a body corporate that has continuously quoted securities. The trading in those continuously quoted securities must not have been suspended for more than a total of five days during the 12month period preceding the offer (or if the securities have been quoted for less than 12 months, during the period which the securities have been quoted). If at a particular time, there is no prospectus, to determine whether a body has continuously quoted securities, it can be assumed that a prospectus exists and the date of that prospectus is the first day of the offer made under that prospectus. If the issuing body is a wholly-owned

subsidiary of a body corporate, the body corporate must guarantee, or agree to guarantee, the repayment of any money deposited or lent to the borrower under the securities, and must also guarantee, or agree to guarantee, the repayment of interest payable on the securities. The most recent auditor’s report on the most recent financial statements (either the yearly or half-yearly statements) for the issuer (and if the bonds are issued by a wholly-owned subsidiary of a body corporate which has continuously quoted securities, for the parent) cannot include: a statement that the auditor is of the opinion that the report is not in accordance with this Act; or a description of a defect or an irregularity in the financial report; or a description of a deficiency, failure or shortcoming in respect of certain matters; or an ‘emphasis of matter’ paragraph related to the going concern.6 ASIC has power to exclude a body from the regime under s 713A(21)– (23).

Profile statement 5.7 Under s 709(2) a profile statement for an offer may be prepared in addition to (but not instead of) a prospectus. This is only allowed if the making of offers of that kind by the dissemination of a profile statement (instead of a full or short-form prospectus or offer information statement) has been approved by ASIC. To date, profile statements have not been used in Australia. They are unpopular with issuers as they impose additional information burdens that are thought to outweigh any reduction in the dissemination burden. Use of a profile statement requires ASIC approval. [page 200]

Offer information statement 5.8 An offer information statement may be used instead of a prospectus if the amount raised from issues of securities made by way of an offer information statement is $10 million or less: Corporations Act s 709(4).

The amount raised includes amounts previously raised by the body, a related body corporate, or an entity controlled by a person who controls the body or an associate of that person. In calculating the amount raised, the following must be included: the amount payable for the securities at the time of issue; any amount payable at a future time if a call is made (for partly-paid securities); any amount payable on the exercise of options (if the securities are options); and any amount payable on the exercise of a right to convert the securities into other securities (if such a right exists): Corporations Act s 709(5). Offer information statements were introduced by CLERP Act as one of a series of measures designed to address concerns over access to capital for small and medium enterprises (SMEs). The Explanatory Memorandum to the CLERP Bill states that ‘access to capital has been a concern for SMEs, as they may find that the cost of preparing and lodging a prospectus can be excessive having regard to the amount of capital which is sought to be raised’: see Explanatory Memorandum, [8.44]. The content requirements (and, hence, the information burden imposed on issuers) for offer information statements are more limited than for prospectuses: see 5.27 below.

CONTENT REQUIREMENTS FOR PROSPECTUSES 5.9 The disclosure requirements that apply in relation to each type of disclosure document are contained in Corporations Act Pt 6D.2 Div 4. In the case of a prospectus (other than a two-part simple corporate bonds prospectus), the requirements are contained in s 710, which contains the general disclosure test, and s 711, which prescribes specific information that must be included in the prospectus. The operation of s 710 is modified in relation to offers involving continuously quoted securities by s 713. The information included in a prospectus must be worded and presented in a clear, concise and effective manner: Corporations Act s 715A. ASIC has issued extensive guidance on disclosure, in particular in ASIC RG 254.

General disclosure 5.10 The general disclosure requirement for prospectuses (other than two-part simple corporate bonds prospectuses) is contained in Corporations Act s 710. Section 710(1) provides that, subject to the limiting factors in s 710(1)(a) and (b), a prospectus must contain ‘all the information that investors and their professional advisers would reasonably require to make an informed assessment’ of the various matters set out in the table in s 710. The table is reproduced below. (The table continues to refer to offers of interests in a managed investment scheme, but this is an anomaly as Pt 6D.2 no longer applies to such offers which now attract the disclosure requirements in Corporations Act Pt 7.9: see 4.4 above.) [page 201] Table 5.2: Disclosures (operative) 1

Offer Offer to issue (or transfer) shares, debentures or interests in a managed investment scheme

2

Offer to grant (or transfer) a legal or equitable interest in securities or grant (or transfer) an option over securities

Matters The rights and liabilities attaching to the securities offered the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue (or issued) the shares, debentures or interests the rights and liabilities attaching to: – the interest or option; or –

the underlying securities

for an option — the capacity of the person making the offer to issue or deliver the underlying securities if the person making the offer is: – the body that issued or is to issue the underlying securities; or

–

a person who controls that body; the assets and liabilities, financial position and performance, profits and losses and prospects of that body

if s 707(3) or (5) applies to the offer — the assets and liabilities, financial position and performance, profits and losses and prospects of the body whose securities are offered Note: Section 713 makes special provision for prospectuses for continuously quoted securities.

5.11 The general disclosure obligation is subject to two important limitations, contained in s 710(1)(a) and (b). The first is that the prospectus must contain the information ‘only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus’. The second is that the prospectus must contain the information ‘only if a person whose knowledge is relevant (see s 710(3), explained in 5.12): (i) actually knows the information; or (ii) in the circumstances ought reasonably to have obtained the information by making enquiries’. The requirement that a prospectus contain all information that investors and their professional advisers ‘expect to find’ in such a document is intended to limit, rather than expand, the disclosure test: see Explanatory Memorandum to the CLERP Bill, [8.5]. For example, investors would not expect to find trade secrets disclosed in a prospectus. 5.12 Section 710(2) provides further guidance on what information should be included in the prospectus. In deciding what to include, the offeror should have regard to the nature of the securities and of the body; the matters that likely investors may reasonably be expected to know; and the fact that certain matters may reasonably be expected to be known to their professional advisers. The general disclosure test requires disclosure of anything relevant that is known to, or ought to be known to, a person named in s 710(3): see s 710(1)(b). Section 710(3) includes for this purpose:

the person offering the securities; if the person offering the securities is a body — a director of the body; [page 202] for a primary offer, any proposed director of the body whose securities will be issued under the offer; a person named in the prospectus as an underwriter of the issue or sale; a person named in the prospectus as a financial services licensee involved in the issue or sale; a person (such as an expert) named in the prospectus with their consent as having made a statement that is included in the prospectus or on which a statement made in the prospectus is based (the person’s consent to be named is required under Corporations Act s 716); and a person (such as an investment bank or a lawyer) named in the prospectus with their consent as having performed a particular professional or advisory function (that person’s consent to be named is required under Corporations Act s 716). If there is a defect in the prospectus, these people are potentially liable to investors under Corporations Act s 729: see 9.7 below. Accordingly, it is customary for them to be included in the offeror’s due diligence process: see 5.34 below.

General disclosure — continuously quoted securities 5.13 Rights issues of, and some (otherwise regulated) sale offers in relation to, quoted securities do not need disclosure to investors under Pt 6D.2 because of ss 708AA and 708A: see 4.29 and 4.30 above. Other offers of quoted securities may, however, require disclosure to investors through a prospectus. Where this is so, the level of disclosure required by Corporations Act s 710 may be lower than for other types of offers

because of s 713. ASIC refers to these types of prospectuses as ‘transactionspecific prospectuses’. The legislation does this by saying that a prospectus for continuously quoted securities, or options to acquire continuously quoted securities, satisfies s 710 if it complies with s 713(2), (3) and (4). ASIC has issued extensive guidance and relief in relation to this form of disclosure in ASIC RG 254, Section C. Section 713 reflects the policy distinction made in fundraising law between quoted and non-quoted securities: see 4.3 above. The issuer of quoted securities is subject to ongoing periodic disclosure obligations under Corporations Act Ch 2M and to the continuous disclosure obligations in Corporations Act s 674 and stock exchange listing rules. For this reason, up-to-date information about the assets and liabilities, financial position and performance, profits and losses and prospects of the issuer (other than confidential information carved out from the continuous disclosure obligation) is assumed to be in the public domain, and to be reflected in the price at which already issued securities in that class are being traded on the exchange. Section 713 works so that the offeror is not required to reproduce that information in the prospectus in order to satisfy the general disclosure obligation in s 710. Instead the emphasis is on disclosing the effect that the offer or sale of securities will have on the issuer, and making public any material information about the issuer the disclosure of which has not been required under the continuous disclosure laws but which is required under the prospectus laws: see s 713(5), discussed below. [page 203] Subject to s 713(6), the reduced disclosure obligation in s 713 applies to offers of continuously quoted securities of a body, and to options to acquire continuously quoted securities of a body. ‘Continuously quoted securities’ is defined in Corporations Act s 9; it means securities that are in a class of securities that were ‘quoted ED securities’ at all times in the three months before the date of the prospectus and that are issued by a body that satisfies certain criteria in the lead-up to the offer. The issuer does not satisfy the criteria if, ‘during the shorter of the period during which the

class of securities were quoted, and the period of 12 months before the date of the prospectus’, it (or its director or auditor) was the subject of an order made by ASIC under s 111AS, s 111AT, s 111AV, s 340, s 341 or s 741(1). Securities are not treated as being in different classes merely because of a temporary difference in the dividend, or distribution rights, attaching to the securities or because different amounts have been paid up on the securities. An offeror cannot take advantage of the reduced disclosure obligations in s 713 if ASIC has made a determination in respect of it under s 713(6). ASIC may make such a determination if it is satisfied that, in the previous 12 months, certain key disclosure requirements set out in the section were contravened in relation to the issuer. 5.14 As noted, s 713(1) deems a prospectus to satisfy s 710 if it complies with s 713(2), (3) and (4). Section 713(2) substitutes a more limited general content requirement for the one that would otherwise apply by virtue of s 710(1), while s 713(3) and (4) prescribe additional statements that must be included in the prospectus to take advantage of this reduced disclosure obligation. Under the general disclosure obligation in s 713(2), the prospectus must contain ‘all the information investors and their professional advisers would reasonably require to make an informed assessment of’ the effect of the offer on the body, the rights and liabilities attaching to the securities offered and, if the securities are options, the rights and liabilities attaching to the options themselves and the underlying securities. The prospectus must contain this information ‘only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus’. Under subs (3) the prospectus must draw attention to the body’s regular reporting and disclosure obligations as a ‘disclosing entity’: as defined in Corporations Act Pt 1.2A. The prospectus must also state that potential investors may inspect or obtain a copy of the documents lodged with ASIC. Subsection (4) requires the prospectus either to inform people of their right to obtain certain specified documents, or to include (or be accompanied by) those documents.

5.15 Certain information which is excluded from the continuous disclosure requirements must be set out in the prospectus, by operation of s 713(5). For issuers relying on the modified content test in s 713, the key focus of their due diligence inquiries in preparing the prospectus will be to discover whether any information that is required by s 713(2) has not been disclosed to the market because the issuer has relied on one of the exemptions from the requirement to disclose contained in [page 204] Australian Securities Exchange Listing Rule (ASX LR) 3.1A. Specifically, s 713(5) states that the prospectus must include information that: has been excluded from a continuous disclosure notice in accordance with the listing rules of the prescribed financial market whose operator was given the notice; and is information that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of the assets and liabilities, financial position and performance, profits and losses and prospects of the body, and the rights and liabilities attaching to the securities being offered. In preparing a prospectus in accordance with s 713, the issuer must ascertain whether any information has been withheld from the market on the basis of these carve-outs in ASX LR 3.1A, that must be included in the prospectus because of s 713(5). The prospectus must contain this information only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus. A listed entity’s continuous disclosure obligations are discussed in Chapter 7 below. The general rule under ASX LR 3.1 is that once a listed entity becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of its securities, it must immediately tell the Australian Securities Exchange (ASX) that information. However, the entity is not required to tell the ASX the information if the following three conditions are satisfied: 1.

a reasonable person would not expect the information to be

disclosed; and 2.

the information is confidential; and

3.

if any one or more of the following applies: a)

it would be a breach of the law to disclose the information;

b)

the information concerns an incomplete proposal or negotiation;

c)

the information comprises matters of supposition or is insufficiently definite to warrant disclosure;

d)

the information is generated for the internal management purposes of the entity; and

e)

the information is a trade secret.

Specific disclosure 5.16 In addition to the general requirements of the ‘reasonable investor’ test in s 710, the Corporations Act contains specific disclosure requirements in s 711 that apply to all prospectuses other than two-part simple corporate bonds prospectuses. Under Corporations Act s 711, the terms and conditions of the offer must be disclosed. The prospectus must contain information about the nature and extent of the interests (if any) of certain people (associated with the offer) in the issuer and the offer, and the fees and benefits paid or provided to persons associated with the offer. If the prospectus states or implies that the securities will be quoted, certain statements must be included: s 711(5). The prospectus must be dated and set out [page 205] the expiry date: ss 716(1) and 711(6). Statements relating to its lodgment with ASIC must also be included: s 711(7). These specific disclosure obligations are explained below.

Terms and conditions of the offer 5.17 Under s 711(1), the prospectus must set out the terms and conditions of the offer. This will include details of the number of securities offered and the price, details of any underwriting, arrangements for allocation of securities among applicants, and the proposed arrangements for allotment and issue (or transfer) of the securities.

Disclosure of interests and fees 5.18 Under s 711(2), the prospectus must set out the nature and extent of the interests (if any) that each person referred to in s 711(4) holds, or held at any time during the two years leading up to the date of the prospectus, in: the formation or promotion of the body; property acquired or proposed to be acquired by the body in connection with its formation or promotion, or the offer of the securities; or the offer of the securities. Section 711(3) provides that the prospectus must disclose ‘the amount that anyone has paid or agreed to pay, or the nature or value of any benefit anyone has given or agreed to give’ to a director or proposed director to induce them to become, or qualify as, a director of the body. Similarly, disclosure is required for fees or benefits for services provided by a person referred to in s 711(4) in connection with the formation or promotion of the body or the offer of the securities. It is not sufficient for this purpose merely to state in the prospectus that a person has been paid or will be paid ‘normal, usual or standard fees’ — details of the actual fee or benefit (or the basis for calculating it) must be included. The people referred to in s 711(4) are: any directors or proposed directors; any person named in the prospectus as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of the prospectus; a promoter of the body;

an underwriter to the issue or sale (but not a sub-underwriter); or a financial services licensee named in the prospectus as a financial services licensee involved in the issue or sale.

Quotation of securities 5.19 Additional disclosure is required if the prospectus states or implies that the securities offered will be capable of being traded on an Australian or foreign financial market: s 711(5). If the securities are already admitted to quotation on the relevant market, the prospectus should include a statement to that effect. If not, the prospectus must state either that an application for admission of the securities to quotation on that financial market has been made, or will be made within seven days [page 206] after the date of the prospectus. If the application is not made, or is not accepted within three months of the date of the prospectus, s 723(3) applies and the issue cannot proceed. Extension of time is possible: see 5.50 below.

Expiry date 5.20 The prospectus must be dated as at the date it is lodged with ASIC: see s 716(1). Under s 711(6), the prospectus must contain an expiry date which is no later than 13 months after the date of the prospectus, and state that no securities will be issued on the basis of the prospectus after the expiry date. If the prospectus is replaced, the replacement prospectus must expire on the same date as the original. Applications received after the expiry date must be dealt with in accordance with s 725.

Lodgment 5.21 The prospectus must also include a statement to the effect that the prospectus has been lodged with ASIC and that ASIC takes no responsibility for the content of the prospectus: s 711(7).

Debenture prospectuses 5.22 Special restrictions apply under Ch 2L of the Corporations Act to the terminology that can be used, in disclosure documents and elsewhere, to describe debentures. Section 283BH sets out how debentures may be described. Table 5.3: How debentures may be described Item 1

Description Mortgage debenture

2

Debenture

3

Unsecured note or unsecured deposit note

When description may be used only if the circumstances set out in subs (2) are satisfied only if the circumstances set out in subs (2) or (3) are satisfied in any other case

The circumstances in s 283BH(2) are: the repayment of all money that has been, or may be, deposited or lent under the debentures is secured by a first mortgage given to the trustee over land vested in the borrower or in any of the guarantors; and the mortgage has been registered, or is a registrable mortgage that has been lodged for registration, in accordance with the law relating to the registration of mortgages of land in the place where the land is situated; and the total amount of that money and of all other liabilities (if any) secured by the mortgage of that land ranking equally with the liability to repay that money does not exceed 60% of the value of the borrower’s or guarantor’s interest in that land as shown in the valuation included in the disclosure document for the debentures. [page 207]

The circumstances in s 283BH(3) are: the repayment of all money that has been, or may be, deposited or lent under the debentures has been secured by a charge in favour of the trustee over the whole or any part of the tangible property of the borrower or of any of the guarantors; and the tangible property that constitutes the security for the charge is sufficient and is reasonably likely to be sufficient to meet the liability for the repayment of all such money and all other liabilities that have been or may be incurred and rank in priority to, or equally with, that liability. 5.23 ASIC has in place special policy in relation to debenture prospectuses, under ASIC Regulatory Guide 69 — Debentures and Notes: Improving Disclosure for Retail Investors, February 2012. ASIC has developed eight benchmarks against which retail investors can assess the suitability of unlisted debentures (referred to as ‘unlisted notes’) for them, and requires issuers to address the benchmarks in the prospectus on an ‘if not, why not’ basis.

Short-form prospectuses 5.24 A short-form prospectus may be used for any offer. The requirements for a short-form prospectus are discussed in ASIC RG 254.34–RG 254.43. Under Corporations Act s 712, information which has been lodged with ASIC can simply be referred to in the prospectus, rather than being repeated. The reference to that information must identify the document, or relevant part of it, and state that people can obtain a copy of the document (or relevant part). The reference in the prospectus must contain enough information about the document to enable offerees to decide whether or not to obtain it. If the document is mainly of interest to professional analysts, advisers, or investors with equivalent needs for specialist information, the prospectus must describe the contents of the document (or part) and state that it is primarily of interest to those people. Section 712(3) deems the lodged document (or part) to form part of the prospectus, for the purpose of determining whether the prospectus satisfies the content requirements. It is possible for a person to use a short-form

prospectus by lodging a document with ASIC even if the Corporations Act does not require the document to be lodged: Corporations Act s 712(4). A document (or part) deemed to form part of the prospectus must be given, without charge, to any person who asks for it during the application period of the prospectus: s 712(5).

Two-part simple corporate bonds prospectuses 5.25 The content requirements in Corporations Act ss 710–713 do not apply to a two-part simple corporate bonds prospectus. Instead the content of the prospectus is prescribed by Corporations Act ss 713C and 713D and Corporations Regulations regs 6D.2.04 and 6D.2.05. These requirements are discussed in ASIC RG 254.118–RG 254.125. A two-part simple corporate bonds prospectus consists of: (a) a base prospectus with a life of three years, which must include general information about the issuer [page 208] that is unlikely to change over the three-year life of the document (and that may be released in advance of an actual offer of simple corporate bonds); and (b) an offer-specific prospectus for each offer, which must include details of the offer and may update information contained in the base prospectus. Under the Regulations, the base prospectus must contain a table of contents and sections dealing with the following matters: Section 1: What you need to know; Section 2: About the bonds; Section 3: About the issuer; Section 4: Risks; Section 5: Other information you should consider; and Section 6: Glossary. The offer-specific prospectus must contain a table of contents and

sections dealing with the following matters: Section 1: What you need to know; Section 2: Key dates and offer details; and Section 3: Offer-specific information you should consider. The required disclosures include certain key financial ratios, which must be calculated in accordance with Corporations Regulations reg 6D.2.06.

CONTENT REQUIREMENTS FOR OTHER DISCLOSURE DOCUMENTS Profile statements 5.26 The Corporations Act allows for an offer to be made by disseminating a profile statement (rather than a full prospectus) if ASIC has approved the making of offers of that kind by profile statement: s 709(2). However, a prospectus must still be prepared and lodged with ASIC. Where a profile statement is used, a copy of the prospectus must be provided, free of charge, to any person who asks for it: s 721. The contents of a profile statement are prescribed in s 714. The profile statement must identify the body. It must state the nature of the securities and of the risks involved in investing in them. Specific disclosure of the risks involved in investing in securities is not expressly required in a prospectus, so in this respect s 714 imposes an additional disclosure obligation.7 The profile statement must refer to a person’s right to obtain the prospectus free of charge and state that a copy of the statement has been lodged with ASIC (and that ASIC takes no responsibility for it). Other information may be required by the Corporations [page 209] Regulations or as a condition of ASIC approval under s 709(3). The requirements regarding the expiry date of the profile statement are the

same as for a prospectus: s 714(2). Like all disclosure documents, a profile statement must present the information in a way that is clear, concise and effective: s 715A. It must be dated as at the date on which it was lodged with ASIC: s 716(1). Profile statements are discussed in ASIC RG 254.15–RG 254.17, which indicates that as at March 2016 there were no ASIC approved uses for profile statements.

Offer information statements 5.27 Section 709(4) of the Corporations Act states that an offer to issue securities may be made using an offer information statement instead of a prospectus, if the amount raised from issuing securities is $10 million or less. On how to calculate the amount raised, see s 709(5). The contents of an offer information statement are prescribed by s 715. The offer information statement must set out information regarding the body and the nature of the securities offered. Both must be identified. The offer information statement must describe the business and the use to which the funds raised by issuing securities will be put. Risks associated with the securities must be disclosed, as well as any amounts payable in respect of the securities. The express requirement to disclose risks is not found in the prospectus disclosure requirements.8 The offer information statement must also disclose that a copy of the statement has been lodged with ASIC (and that ASIC takes no responsibility for it). It must be made clear to potential investors that the statement is not a prospectus and that the disclosure is not as full as that which would be found in a prospectus. The statement must recommend that potential investors seek legal advice about the offer. Further disclosure may be required by the Corporations Regulations. A copy of a financial report must be included in the statement: s 715(1) (i). The balance date of the report must not be more than six months prior to offers first being made under the statement. The report must comply with the accounting standards and be audited: s 715(2). ASIC has granted relief in relation to the form and content of the financial reports to be included in an offer information statement, under ASIC RG 254, Section

D. The requirements regarding the expiry of the statement are the same as those discussed above in relation to prospectuses and profile statements: s 715(3). Information in an offer information statement must be worded and presented in a clear, concise and effective manner: s 715A. The document must be dated as at the date on which it was lodged with ASIC: s 716(1).

CLEAR CONCISE AND EFFECTIVE 5.28 The information in a disclosure document (including a prospectus) must be worded and presented in a ‘clear, concise and effective manner’: s 715A(1). [page 210] Contravention of this requirement is not an offence, but may result in ASIC making a stop order in relation to the prospectus: see 5.57 below. The requirement in s 715A(1) was introduced in 2004, to mirror a similar requirement in relation to Product Disclosure Statements: see Corporations Act s 1013C(3). 5.29 In ASIC Regulatory Guide 228 — Prospectuses: Effective Disclosure for Retail Investors, March 2016, ASIC says (at RG 228.22– 228.24): The requirement for ‘clear, concise and effective’ disclosure should be read as a compound phrase so that each word qualifies the other. This means that it is inappropriate to focus on one word in the phrase at the expense of others … For example, complex information should not be omitted to make your prospectus more clear and concise because then your prospectus may not be effective. We consider that your prospectus will generally be ‘clear, concise and effective’ if it: (a) highlights key information (e.g. through an investment overview as explained in Section C); (b) uses plain language (see Table 3); (c) is as short as possible (see RG 228.30–RG 228.40); (d) explains complex information, including any technical terms (see Table 3); and (e) is logically ordered and easy to navigate (see Table 4).

POSITIVE DISCLOSURE OBLIGATIONS UNDER GENERAL LAW 5.30 Supplementing the statutory disclosure requirements are those positive disclosure requirements that arise at general law. These general law requirements also potentially apply to an information memorandum or other document produced in relation to an offer of securities in cases where disclosure to investors under Pt 6D.2 of the Corporations Act is not required. The general law developed by courts of common law provided a remedy of damages against a person who, by a wrong of commission, induced investment in securities by a misrepresentation which the victim could prove to be fraudulent. But as a general rule at common law, in the absence of some positive statutory obligation to disclose, silence is not misrepresentation. In a contract of purchase the principle at common law has been caveat emptor: let the buyer beware. However, the courts have developed general law doctrine to the point where in some situations silence or non-disclosure would be a ground for legal relief. A person may be required to disclose information additional to that required by the statute where non-disclosure results in a half-truth, or in situations of supervening falsity, or where the person is (by virtue of special facts) in a fiduciary relationship with the person to whom securities are offered. However, it seems unlikely that Australian courts would go beyond this, for example, by treating a contract for the issue or sale of securities as a contract of utmost good faith. [page 211]

Statements needing qualification: half-truths and supervening falsity 5.31 One of those situations where, under unenacted law, silence can be a misrepresentation is where a positive representation is only a half-truth. An example is a statement that a company has paid dividends regularly but

the truth is that the latest dividend was paid from reserves of profits from previous years. Another category is where the maker of a statement that is correct when it is made learns of a change that makes it incorrect and fails to correct the statement to the person to whom it was made where the circumstances give rise to an obligation to correct.9 These situations are discussed in 8.51ff below.

Fiduciary relationship 5.32 A further situation in which disclosure is required under unenacted law — in equity rather than common law — is where a fiduciary relationship exists between the contracting parties. If X has placed himself or herself in relation to Y so that Y necessarily reposes confidence in X and as a result X has influence over Y, X and Y may be in a fiduciary relationship. If X abuses the confidence or exerts the influence to gain an advantage at Y’s expense, X will not be allowed to retain the advantage.10 If X were to sell securities to Y while having a relevant influence arising from the relationship, without telling Y the information about the securities that X possesses, the transaction could be set aside or Y could be entitled to monetary compensation by way of equitable damages. Two examples of fiduciary relationships are trustee and beneficiary, and agent and principal. If a broker were employed to purchase shares on behalf of a client and the broker sold to the client shares that it owned, the broker would be under a duty not to withhold from the client any material facts about the shares of which it was aware and which it could not reasonably assume to be within the client’s knowledge already. The ‘fiduciary duty to disclose’ is perhaps more accurately described as a defence against a claim by the client that the fiduciary placed itself in a position of conflict, or profited from the relationship, without the fully informed consent of the client.11 In some circumstances, proprietors of a company can owe a fiduciary duty to an interested purchaser of the company. Their duty will be important where the investor who is misled cannot recover from the company. The case can attract the jurisdiction of a court of equity to

award equitable monetary compensation12 for the breach of fiduciary duty.13 The award is restitutionary in character. [page 212] Directors who invite subscription without providing adequate disclosure can be held liable to indemnify the investor against loss where the relationship is fiduciary in character.14 It may be that company directors will only be held to be in a fiduciary relationship to investors who are, in effect, being invited to invest as proprietors in a quasi-partnership company. In situations where the relationship is simply a commercial one, in which the parties are at arm’s length and on an equal footing, it is unlikely that a fiduciary duty could be said to arise.15

Contracts of utmost good faith 5.33 Another situation where silence is improper at common law is where the parties are making one of the class of contracts known as contracts uberrimae fidei: that is to say, contracts of the utmost good faith. The two classes of contracts of utmost good faith are contracts of insurance and family arrangements such as a contract between members of a family to divide property. Contracts of insurance occupy that special position because courts were impressed by the fact that a person seeking insurance possessed full knowledge of all the material facts and the insurer was at a disadvantage. Given that reason for treating contracts of insurance as giving rise to a duty on the part of the insured to disclose known facts, one might have expected courts to extend the category of contracts of utmost good faith to sales of securities, so that the seller would have a duty of disclosure. In the second half of the 19th century it looked as if the courts were slowly moving in that direction.16 However, the inadequacy of the unenacted law for dealing with company frauds led to the enactment of legislation imposing a positive duty of disclosure on persons selling securities to the public, and it is unlikely that a contract for the issue or sale of securities would now be treated as a contract of utmost good faith.17

DUE DILIGENCE Purpose of due diligence 5.34 In preparing a prospectus the issuer will generally undertake a formal process of collecting, reviewing and verifying the information to be included in the prospectus that is referred to commercially as ‘due diligence’. The function of due diligence is three-fold: to determine the contents of the prospectus; to avoid misleading and deceptive statements in, and omissions from, the prospectus; and to establish defences to civil and criminal liability. [page 213] In July 2016 ASIC released its Report 484: Due Diligence Practices in Initial Public Offerings, which provides an analysis of the due diligence process in initial public offerings. Due diligence in Australia is predominantly led by the issuer, rather than by another ‘gatekeeper’ such as an underwriter as is the case in other jurisdictions.

Determining prospectus content 5.35 The first function of due diligence is to discover and verify all the information that must be included in the prospectus, and ensure that it is included. The general disclosure test for prospectuses in Corporations Act s 710 requires that relevant information be included if it is known to one of the people responsible for or involved in the preparation or issue of the prospectus and referred to in s 710(3) or if, in the circumstances, that person ought reasonably to have obtained the information by making enquiries. A properly structured due diligence process involves making the enquiries necessary to discover this information.18

Avoiding defects

5.36 We will see in Chapter 8 below that an issuer, its directors and various advisers have potential civil and criminal liability for any defects in the prospectus. The second function of due diligence is to ensure, as far as possible, that there are no such defects. Section 728(1) of the Corporations Act provides that a person must not offer securities under a prospectus if the prospectus contains a misleading or deceptive statement or omits material required by the Corporations Act (including s 710) to be included in the prospectus, or if a new circumstance arises after lodgment of the prospectus and information about that new circumstance would have been required to be included if it had arisen before lodgment of the prospectus. The due diligence process is the means by which those persons specifically referred to in s 729(1) of the Corporations Act, along with those involved in the preparation and issue of the prospectus, seek to ensure that there are no misleading or deceptive statements in the prospectus and that the prospectus does not omit material required by the Corporations Act to be included in the prospectus. A person who offers securities in breach of s 728(1) of the Corporations Act in circumstances where the misleading or deceptive statement, omission or new circumstance is materially adverse from the point of view of an investor commits a criminal offence: s 728(3). However, in relation to new circumstances arising after lodgment of the prospectus, an offence is not committed if the person proves that they were not aware of the matter. Further, an investor who suffers loss or damage because an offer of securities under a prospectus contravenes Corporations Act s 728(1) is entitled, under s 729(1), to recover the amount of the loss or damage from those involved in the preparation of the prospectus (even if the person from whom the amount of the loss or damage is recoverable did not commit, and was not involved in, the contravention). [page 214] Section 1041H of the Corporations Act prohibits a person (which would include an issuer and its directors, employees, advisers and consultants)

from engaging in conduct that is misleading or deceptive, or that is likely to mislead or deceive, in connection with any dealing in securities. Section 1041H no longer applies to misleading or deceptive statements in or omissions from a prospectus. However, it continues to apply to any statement relating to an offer of securities which is not contained in a prospectus; for example, roadshows and advertisements for securities. The equivalent prohibitions on misleading and deceptive conduct contained in s 12DA of the Australian Securities and Investments Act 2001 (Cth) (ASIC Act) and in s 18 of the Australian Consumer Law (ACL) applied by state fair trading legislation apply to dealings in securities other than conduct that contravenes s 728 or s 670A or would but for the availability of a defence under those sections. Section 728(2) of the Corporations Act provides that a person is taken to make a misleading statement about a future matter (including the doing of, or refusing to do, an act) if the person does not have reasonable grounds for making that statement. For this reason, particular attention should be paid to any predictions, forecasts or statements of intent contained in the prospectus.

Establishing defences 5.37 The third function of the due diligence process is to provide those persons specifically referred to in s 729(1) of the Corporations Act, along with those involved in the preparation and issue of the prospectus, to the maximum extent possible, with defences to civil and criminal liability for breach of certain provisions of the Corporations Act. The reasonable inquiries and related defences to liability are discussed in 8.25 below.

Structuring due diligence 5.38 Having regard to the three functions of due diligence described above, it is important that a due diligence process is structured and documented appropriately. In Australia, the practice has developed of delegating the due diligence process to a committee established for that purpose by the board of the

offeror.19 The due diligence committee generally consists of representatives of those whose knowledge is relevant to the content of the prospectus (s 710(3)) or who may be liable in respect of it: s 729. So, a typical due diligence committee for an initial public offering may include: one or more of the issuer’s directors; some members of the issuer’s senior management; representatives of the issuer’s lawyers and accountants; representatives of corporate advisers; and representatives of the underwriters. [page 215] If the issuer and its directors are to be able to take advantage of the work done by a due diligence committee,20 it is important that the committee is properly established and instructed by the board. If the due diligence process is to achieve its objectives, it is necessary to ensure that a proper system is established and carried into effect, and that the system is adequately supervised. The board’s key responsibilities include deciding on the composition of the committee, determining the terms of reference of the committee (including the due diligence process), and setting procedures for reporting by the committee.

Carrying out due diligence 5.39 Once the due diligence committee has been established, it will generally adopt a planning memorandum that sets out the process to be undertaken by the committee. Often the planning memorandum will assign to individual members of the committee responsibility for collecting and verifying information to be included in different parts of the prospectus. Materiality thresholds will be set and agreed. The committee will meet several times while the prospectus is being prepared and (depending on the length of the offer period) at least once after the prospectus has been issued and before securities are allotted pursuant to it. The minutes of the meetings will record the steps taken to obtain and

verify information for inclusion in the prospectus. This may include questioning people who have provided information to the committee about that information, or undertaking independent inquiries to ascertain the completeness or accuracy of information. The minutes will also record the basis on which decisions were taken to include or omit information from the prospectus (for example, because information is considered by the committee not to be material). Minutes of meetings held during the offer period will confirm that no information has come to light that would require the preparation of a supplementary or replacement prospectus. The scope and extent of the due diligence process in each case will depend on considerations specific to each individual offer. Small or relatively straightforward offers may require only limited due diligence. More complex offers or businesses may require more extensive due diligence, particularly where information relevant to the issuer that must be included in the prospectus is widely dispersed throughout the issuer.21 Generally, at the end of the due diligence process the committee will obtain from those responsible for the preparation of different parts of the prospectus a sign-off to the effect that the relevant part complies with law. Committee members will often also provide written confirmation to each other, the issuer and the board that they are satisfied with the adequacy of the due diligence process, having regard to the functions described above. [page 216] Conduct at a due diligence committee meeting may be ‘in trade or commerce’ for the purposes of s 12DA of the ASIC Act and s 18 of the ACL: see New Cap Reinsurance Ltd v Daya (2008) 66 ACSR 95; [2008] NSWSC 64 at [52] and [53].

OFFER PROCESS 5.40 The requirements for conducting a regulated securities offer are set out in Corporations Act s 717. Section 717 contains the following table, which ‘summarises what a person who wants to offer securities must do to

make an offer of securities that needs disclosure to investors under [Pt 6D.2] and gives signposts to relevant sections’. Table 5.4: Offering securities (disclosure documents and procedure) 1

2

3

Action required

Sections Comments and related sections Prepare disclosure document, 710 Section 728 prohibits offering making sure that it: 711 securities under a disclosure document sets out all the information 712 713 that is materially deficient required; 714 Section 729 deals with the does not contain any 715 liability for breaches of this misleading or deceptive 716 prohibition statements; and Sections 731, 732 and 733 set is dated, out defences and that the directors consent to the disclosure document Lodge the disclosure 718 Section 727(3) prohibits document with ASIC processing applications for non-quoted securities for seven days after the disclosure document is lodged Offer the securities, making 721 Sections 727 and 728 make it sure that the offer and any an offence to: application form is either offer securities without a included in or accompanies: disclosure document; or the disclosure document; or offer securities if the a profile statement if ASIC disclosure document is has approved the use of a materially deficient. profile statement for offers Section 729(3) deals with of that kind liability on the prospectus if a profile statement is used The securities hawking provisions (s 736) restrict the way in

4

If it is found that the disclosure document lodged was deficient or a significant new matter arises, either: lodge a supplementary or replacement document under s 719; or return money to applicants under s 724

719 724

5

Hold application money received on trust until the securities are issued or transferred or the money returned

722

which the securities can be offered Section 728 prohibits making offers after becoming aware of a material deficiency in the disclosure document or a significant new matter Section 730 requires people liable on the disclosure document to inform the person making the offer about material deficiencies and new matters Investors may have a right to have their money returned if certain events occur: see ss 724, 737 and 738

[page 217] 6

Issue or transfer the securities, 723 making sure that: the investor used an application form distributed with the disclosure document; and the disclosure document is current and not materially deficient; and any minimum subscription condition has been satisfied

Section 721 says which disclosure document must be distributed with the application form Section 729 identifies the people who may be liable if: – securities are issued in response to an improper application form; or –

the disclosure document is not current or is materially deficient

Sections 731, 732 and 733 provide defences for the contraventions Section 737 provides remedies for an investor

Lodgment with ASIC 5.41 Once the disclosure document has been prepared, the first step of the offer is to lodge the disclosure document with ASIC before the offer commences. Lodgment is discussed in ASIC RG 254, Section F.

ASIC’s role 5.42 Disclosure documents used for offers of securities must be lodged with ASIC under Corporations Act s 718. Unless a disclosure document has been lodged with ASIC, the offer of securities and the distribution of application forms are prohibited: s 727(1). 5.43 Note that ASIC does not register the disclosure document. Generally, there is no pre-vetting of documents, but ASIC conducts select compliance reviews of disclosure documents that are lodged with it. ASIC’s role is explained in ASIC RG 254, Section L. Its review may occur during or after the exposure period. If ASIC discovers defects in the disclosure document, it may extend the exposure period (see below) to 14 days and attempt to resolve the issue, or if the exposure period has finished, issue an interim or final stop order: see 5.57 below.

Exposure period 5.44 Applications for non-quoted securities under an offer that needs a disclosure document must not be processed until seven days after the disclosure document is lodged: Corporations Act s 727(3). The Explanatory Memorandum to the CLERP Bill 1998 explains the lodgment requirement in the following terms (at 8.68): A person offering securities will be able to distribute the disclosure document immediately

after it has been lodged with ASIC. However, a person offering non-quoted securities will not be allowed to accept an application for the issue or transfer of securities until 7 days after lodgment of the disclosure document with ASIC. ASIC may extend this 7 day period to a maximum of 14 days. The 7 to 14 day period gives ASIC and the market an opportunity to consider the disclosure document before the commencement of subscriptions for the securities on offer. Where the disclosure document was defective, the market could draw it to the

[page 218] attention of ASIC or aggrieved parties could, if appropriate, seek injunctions preventing the fundraising.

ASIC RG 254, Section G sets out the offeror’s obligations during the seven-day exposure period. The disclosure document must be made generally available throughout this period; this can be done in most cases by the offeror posting the disclosure document on a website and providing paper copies when requested.

Consents required for lodgment 5.45 In order to lodge a disclosure document with ASIC, the consent of various people is required. The consents that need to be obtained vary depending on the type of offer being made. The persons whose consent is required are set out in the following table in s 720; ASIC provides specific guidance in ASIC Regulatory Guide 55 — Statements in Disclosure Documents and PDSs: Consent to Quote, March 2016. Table 5.5: Consents required for lodgment (operative) 1

Type of offer People whose consent is required Issue offers Offer of securities for every director of the body issue every person named in the document as a proposed director of the body if securities interests in a managed investment scheme made available by a body — every director of that body if securities interests in a managed investment

scheme made available by an individual — that individual 2



3



4

Sale offers (sale by controller) Offer of securities for if seller an individual — that individual sale that needs a if seller a body — every director of the body disclosure document because of s 707(2) Sale offers (sale amounting to indirect issue) Offer of securities for every director of the body whose securities are sale that needs a offered for sale disclosure document if seller an individual — that individual because of s 707(3) if seller a body — every director of the body Sale offers (sale amounting to indirect sale by controller) Offer of securities for if seller an individual — that individual sale that needs a if seller a body — every director of the body disclosure document if individual controls the body whose securities because of s 707(5) are offered for sale — that individual if body controls the body whose securities are offered for sale — every director of the controlling body

Like all other documents lodged with ASIC, disclosure documents must be signed by a director or secretary of the offeror: s 351(1). In the case of a foreign company, [page 219]

the document may be signed by its local agent or a director or secretary of the local agent (if the agent is a company). The disclosure document must include a statement that it has been lodged with ASIC and that ASIC takes no responsibility for its contents: see ss 711(7) (prospectuses), 714(1)(e) (profile statements) and 715(1)(f) (offer information statements).

Application forms 5.46 Section 727(2) prohibits a person from making a regulated offer of securities, or distributing an application form in connection with a regulated offer, unless the offer and the form are included in or accompanied by the required disclosure document. The law requires the application form to be attached to or included in the disclosure document as a way of ensuring that the investor receives the disclosure document. Further, s 723(1) says that if an offer of securities needs a disclosure document, the securities may only be issued or transferred in response to an application form. The securities may only be issued or transferred if the person issuing or transferring them has reasonable grounds to believe that the form was included in, or accompanied by, the disclosure document (or, if s 721(2) allows a profile statement to be used — the prospectus or the profile statement) when the form was distributed by the person issuing or transferring the securities; or that the form was copied, or directly derived, by the person making the application from such a form. ASIC has granted relief to allow the use of electronic application forms in certain circumstances: see ASIC Regulatory Guide 107 — Fundraising: Facilitating Electronic Offers of Securities, March 2014.

Subscription moneys must be held on trust 5.47 By operation of Corporations Act s 722, all application and other moneys received from people applying for securities under a disclosure document must be held on trust for the applicants until the securities are issued or transferred (as the case may be), or the money is returned to the

applicant. In Re Elsmore Resources Ltd [2016] NSWSC 856, Black J points out (at [16]) that: … the creation of a separate account in accordance with [section 722] and a declaration of trust would generally be sufficient to establish a statutory trust over the relevant funds: Re Lehman Brothers International (Europe) (in admin) [2012] UKSC 6; [2012] 3 All ER 1 at [2]–[3]; Re MF Global Australia Ltd (in liq) [2012] NSWSC 994 at [28]–[29]. General principles of trust law will be applicable to such a trust: Re Lehman Brothers International (Europe) (in admin) [2010] EWCA Civ 917 at [65]; Re MF Global Australia Ltd above at [102]. The Federal Court of Australia treated ss 722 and 723 of the Corporations Act as giving rise to a statutory trust in G8 Communications Ltd [2016] FCA 297 at [51]–[55], where Barker J observed that relevant monies were held on trust up to the point at which shares were issued.

Circumstances in which moneys must be returned to the applicant include under ss 723(3) and 724(2): see 5.56 below. Where application moneys must be returned, that must be done as soon as practicable: s 722(2).22 [page 220]

Issue or transfer of securities 5.48 In the ordinary course, once applications are received, the offeror can proceed to issue or transfer the securities, subject to the restrictions in s 723. If the disclosure document states that the offer will follow particular procedures (for example, in relation to the allocation of securities if the offer is oversubscribed), these must be followed. The offeror cannot proceed to issue or transfer securities unless it has received an application form which it reasonably believes was included in or accompanied by a disclosure document: see s 723(1) discussed at 5.46 above. It cannot accept an application after the expiry date set out in the disclosure document without taking certain corrective action: see s 725. If the disclosure document sets out a minimum subscription condition, or states or implies that the securities will be listed for quotation on an exchange, the offeror ordinarily cannot issue or transfer the securities without those conditions being met: see ASIC RG 254, Section I.

Minimum subscription conditions

5.49 Although there is no requirement to do so, some disclosure documents state that the issue of securities will proceed only if a specified minimum amount is raised by the offer. Section 723(2) is to the effect that, if a disclosure document for an offer of securities states that the securities will not be issued or transferred unless applications for a minimum number of the securities are received, or a minimum amount is raised by the offer, those securities must not be issued or transferred until that condition is satisfied. For the purpose of working out whether the condition has been satisfied, a person who has agreed to take securities as underwriter is taken to have applied for those securities. Where the minimum subscription is not reached within four months after the date of the disclosure document, the offeror has certain options open to it under Corporations Act s 724. First, it may decide not to go ahead with the offer, and repay any application money already received. Second, the offeror can provide additional disclosure (in the form of a supplementary or replacement disclosure document varying the terms of the offer) and give the applicant one month to withdraw their application and be repaid. Third, the offeror can issue or transfer the securities to the applicant, provide the applicant with this additional disclosure, and give the investor one month to withdraw their application and be repaid.

Quotation conditions 5.50 If a disclosure document for an offer of securities states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere), certain requirements apply under Corporations Act s 723(3). They are that: an application for the admission of the securities to quotation must be made within seven days after the date of the disclosure document; and the securities must be admitted to quotation within three months after the date of the disclosure document. Section 723(3)(c) and (d) provide that, if these two requirements are not met, an issue or transfer of securities in response to an application made under the

[page 221] disclosure document is void, and the person offering the securities must return the money received by the person from the applicants as soon as possible. It may be that the word ‘void’ here should be read as ‘voidable at the election of the applicant for the securities, and that [subsequent onsale] of the securities by that party would constitute an election to affirm the transaction’.23 The requirement to return applicants’ money would appear not to apply where securities are yet to be issued, because s 724(1) (b) contemplates that the offeror can take the steps set out in s 724(2). The offeror may decide not to go ahead with the offer, and repay the money. Alternatively, the offeror can provide additional disclosure (in the form of a supplementary or replacement disclosure document varying the terms of the offer) and give the applicant one month to withdraw their application and be repaid. As a third option, the offeror can issue or transfer the securities to the applicant, provide the applicant with this additional disclosure, and give the investor one month to withdraw their application and be repaid. Courts have been willing to exercise their powers to validate issues of securities that would otherwise be void by operation of s 723(3) in a number of cases.24 In Re Wave Capital Ltd (2003) 47 ACSR 418; [2003] FCA 969 at [29], French J said that s 1322: … may be taken to reflect a broad legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of noncompliance with its requirements where such non-compliance is the product of honest error or inadvertence and where the court can avoid its effects without prejudice to third parties or to the public interest in compliance with the law. That broad policy does not authorise the court lightly to set aside the requirements of the Act where they have not been observed. Each application for the exercise of the court’s relieving power will require consideration of all the circumstances of the case to ensure that the indulgence sought is appropriate and does not undermine the requirements of the Act. Like the discretion to validate invalid share issues under s 254E, the power conferred by s 1322 must be exercised having regard to the requirements of the purposes of the Corporations Act and any other relevant statutes whose application may be in issue. It must also be exercised having regard to the interests of all parties affected and the public interest in ensuring compliance with the statute law and company constitutions. Evidence of a blatant disregard of the provisions of the Act or the constitution of the company may lead to refusal of relief. The provision is, however, remedial in character and should be given a liberal construction. [Citations omitted.]

For example, in Re Solco Ltd [2015] FCA 635; (2015) 106 ACSR 591, the court granted relief under s 1322(4) to cure a failure to observe time limits for admission to quotation on the ASX in respect of shares issued following the publication of a prospectus. In that case, the court was persuaded, on the evidence, that the making of the orders sought would not cause, or be likely to cause any substantial injustice to any person, but rather would fulfil the expectations and commercial interests of all persons concerned. [page 222]

Expired disclosure documents 5.51 Prospectuses and offer information statements must specify an expiry date which is no later than 13 months after the date of the document. They must state that no securities will be issued on the basis of the document after the expiry date. If the document is replaced, the replacement must expire on the same date as the original: see ss 711(6) and 715(3). If an application for securities is received after the expiry date of a disclosure document, the person who offered the securities must act in accordance with s 725(3). Under that section the person can: 1.

return the applicant’s money;

2.

provide the applicant with a new disclosure document and give them one month to withdraw their application and be repaid; or

3.

issue or transfer the securities to the applicant, giving them a new disclosure document and one month to withdraw their application and be repaid.

A failure to follow one of these courses of action amounts to an offence of strict liability: s 725(1A).

CORRECTING AND UPDATING

DISCLOSURE 5.52 It is possible that, during the offer period, a defect in the disclosure document may arise or be discovered. In particular, the disclosure document may be, or become, defective in that: a statement in the disclosure document is misleading; or there is an omission from the disclosure document of material required by s 710, s 711, s 712, s 713, s 714 or s 715; or a new circumstance has arisen that, had it arisen before the disclosure document was lodged, would have been required by s 710, s 711, s 712, s 713, s 714 or s 715. Where this situation arises, various statutory provisions are triggered: A person named in s 729 who becomes aware of the situation must disclose it to the offeror: s 730. The offer cannot proceed unless and until the defect is dealt with: s 728(1). A person who offers securities while there is a defect in the disclosure document which is ‘materially adverse from the point of view of an investor’ commits an offence: s 728(3). If the offeror is aware that there is such a defect and the defect is materially adverse from the point of view of an investor, the offeror must deal with any applications for securities it receives in accordance with s 724. It cannot, without more, proceed to issue or transfer the securities. The offeror has the option of curing the defect by the lodgment of a supplementary or replacement disclosure document, under Corporations [page 223] Act s 719. ASIC’s policy on updating disclosure is set out in ASIC Regulatory Guide 254 — Offering securities under a disclosure document, Section H.

Supplementary and replacement disclosure documents 5.53 Where, during the time that applications for securities can be made on the basis of a disclosure document that has been lodged, there is a significant change affecting something in the disclosure document or a significant new matter arises, the offeror may lodge a supplementary disclosure document or a replacement disclosure document: Corporations Act s 719. The requirements for a supplementary or replacement disclosure document correcting a deficiency or providing information about a new occurrence appear in s 719. A deficiency could be a material statement that is misleading or a material omission. An example is where it becomes apparent that a profit forecast made in the prospectus will not be achieved. The significant new matter referred to in s 719 is one about which information would have been required in the disclosure document. If a person is aware of a deficiency, it is an offence to continue making offers unless the deficiency of the disclosure document has been corrected: s 728. Note that supplementary and replacement prospectuses can also be issued in circumstances not covered by s 719.

Form of supplementary or replacement document 5.54 Under s 719(2) and (3), at the beginning of the document there must be a statement that it is a supplementary or replacement document, respectively. The disclosure document that it supplements or replaces must be identified. In the case of a supplementary document, any previous supplementary documents lodged with ASIC must be identified and the document must state that it is to be read in conjunction with the disclosure document(s) that it supplements. A supplementary or replacement document must be dated. The relevant date is the date on which the document was lodged with ASIC.

Consequences of lodging a supplementary or replacement document

5.55 After the lodgment of a supplementary disclosure document, the disclosure document is taken to be the disclosure document together with the supplementary document for the purpose of applying Ch 6D to events occurring after the lodgment of the supplementary document: s 719(4). A replacement document is taken to be the disclosure document for the purpose of applying Ch 6D to events occurring after the replacement document is lodged: s 719(5). If a supplementary disclosure document is used, then it must be capable of being read with the original disclosure document so as to provide ‘clear concise and effective’ disclosure for the purposes of s 715A.25 [page 224]

Dealing with applications 5.56 In the ordinary course, defects in disclosure that are discovered during the offer period are dealt with by the offeror issuing a supplementary or replacement disclosure document under s 719. Where a completed application form is submitted by an investor who has not received the benefit of that supplementary disclosure (for example, because they applied before, or relied on a disclosure document distributed before, the defect arose or was discovered) the Corporations Act allows the offeror to deal with their application in one of three ways: 1.

The offeror can repay the money.

2.

The offeror can provide additional disclosure and give the applicant one month to withdraw their application and be repaid.

3.

The offeror can issue or transfer the securities to the applicant, provide the applicant with additional disclosure, and give the investor one month to withdraw their application and be repaid. This is provided for in s 724(2). The additional disclosure must be a supplementary or replacement disclosure document that corrects the deficiency: s 724(3).

The obligation to deal with outstanding applications in the manner

prescribed by s 724(2) arises, in connection with defective disclosure, if the offeror is aware of the defect and the defect is ‘materially adverse’ from the point of view of the investor. In Roadships Logistics Ltd v Tree (2007) 64 ACSR 671; [2007] NSWSC 1084 at [8], a director of the offeror ceased to hold office before securities were issued pursuant to a prospectus. The investor argued that this triggered the application of s 724(3) in relation to its application for securities, which had been lodged but not yet acted upon by the issuer (it was acted upon on that day). Barrett J took the view that: … the ‘investor’ referred to in the expression ‘is materially adverse from the point of view of an investor’ is, if you like, a hypothetical reasonable investor, not a particular idiosyncratic investor. In other words, the test is an objective test: see, in a comparable context, the reference to ‘[t]he shareholder whom I should hypothesise for the purpose of materiality’.26

The question of whether s 724(3) was triggered by the change in office holder ‘depended upon objective assessment in two areas’. The first concerned ‘the significance, from the point of view of disclosure under prospectus content requirements, of a statement about who holds in the company the positions [the person] held in this particular case’. The second concerned ‘the capacity of the newly emerged information about the occupancy of such a position to affect the decision of the ordinary wouldbe investor whether or not to make the investment, this being the test of materiality which has long been applied in this area of the law’.27 In his Honour’s view, for s 724(1) to be activated, it would have to be found that any such capacity was adverse, in the sense of turning the would-be investor [page 225] away rather than making him or her more willing to invest. This requires a close consideration of the relevant facts.

STOP ORDERS 5.57 Section 739 of the Corporations Act gives ASIC the power to issue ‘stop orders’ in relation to offers of securities that need disclosure to

investors under Pt 6D.2. The stop order may be triggered by a defect in a disclosure document or in an advertisement relating to a regulated offer. Ordinarily, a stop order can be issued only after ASIC has held a hearing giving interested persons an opportunity to be heard, but ASIC can issue interim stop orders without a hearing in certain circumstances. To be effective, a stop order or interim stop order must be in writing and must be served on the person to whom it applies: s 739(5). ASIC keeps a register of stop orders on its website, as part of the OFFERlist facility. ASIC’s decision to issue a stop order is reviewable on its merits by the Administrative Appeals Tribunal, in the manner explained in 2.22–2.25 above. ASIC may make a stop order at any time until it is no longer possible for the person who is offering the securities to issue or transfer the securities. This is so even if the offer has closed. In Thompson v Australian Securities and Investments Commission (2002) 117 FCR 159; 41 ACSR 456; [2002] FCA 512, an offer of securities had been fully subscribed and the issuer had announced to the market that no further applications would be processed. After the announcement but before the securities were issued, ASIC issued a stop order. Branson J concluded (at [39]): In considering the proper interpretation of s 739, it is appropriate to start from the premise that the section is a provision designed for the protection of potential investors. It seems to me that its inclusion in the Act reflects an appreciation by the legislature that s 724 may provide ineffective protection to an applicant for securities where the relevant disclosure document contains a material misstatement or omission. It would therefore seem logical for the ambit of s 739 to be at least co-extensive with that of s 724. Further, in my view, the terms of s 739(1) indicate that the power given by s 739 to ASIC in respect of an offer of securities under a disclosure statement lodged with it is not intended to come to an end until it becomes impossible for any stop order made by ASIC to operate according to its terms. That is, until it is no longer possible for any relevant offers, issues, sales or transfers of the relevant securities to be made.

Grounds for issuing a stop order Stop orders in relation to defective disclosure documents 5.58 Under s 739(1)(a) and (b) of the Corporations Act, ASIC is empowered to make a stop order if it is satisfied either that ‘information in a disclosure document lodged with ASIC is not worded and presented in a

clear, concise and effective manner (see section 715A)’, or ‘an offer of securities under a disclosure document lodged with ASIC would contravene section 728’. The effect of the stop order is that no offers, issues, sales or transfers of the securities be made while the order is in force. [page 226]

Stop orders in relation to defective advertisements 5.59 Section 739(1)(c) of the Corporations Act empowers ASIC to make a stop order if ‘an advertisement or publication of a kind referred to in s 734(5) or (6) that relates to securities is defective’. Section 739(6) provides that such an advertisement or statement is defective if: there is a misleading or deceptive statement in the advertisement or publication; there is an omission from the advertisement or publication of material required by the relevant subsection to be included in the advertisement or publication; or if the advertisement or publication relates to an offer of securities in a class that is not already quoted, and is published before a disclosure document in relation to the offer is lodged — the advertisement or publication includes material that is not referred to in s 734(5)(b). A person is taken to make a misleading statement about a future matter (including the doing of, or refusing to do, an act) if they do not have reasonable grounds for making the statement: s 730(7). (This does not limit the circumstances in which a statement may be misleading for this purpose.) A stop order made in these circumstances may prohibit specified conduct in respect of the securities to which the advertisement or publication relates (such as the issue or transfer of those securities): s 739(1A)(b). It may also include a statement that specified conduct engaged in contrary to the order

will be regarded as not complying with the requirements of a specified provision of Ch 6D: s 739(1B).

Obligation to hold a hearing 5.60 Before making an order under s 739(1A), ASIC must hold a hearing and give a reasonable opportunity to any interested people to make oral or written submissions to ASIC on whether an order should be made. This is provided for in s 739(2). ASIC hearings are discussed in 2.62–2.66 above.

Interim stop orders 5.61 Under s 739(3) of the Corporations Act, if ASIC considers that any delay in making an order under s 739(1A) pending the holding of a hearing would be prejudicial to the public interest, ASIC may make an interim order prohibiting offers, issues, sales or transfers of the securities that lasts for up to 21 days. Interim orders can also be made during a hearing, under s 739(4). An interim order made during a hearing lasts until ASIC makes a final order after the conclusion of the hearing, or the interim order is revoked, whichever happens first. ASIC may only make an interim stop order if it is satisfied of the matters set out in s 739(1): that is, that the disclosure document or advertisement is defective. In Thompson v Australian Securities and Investments Commission (2002) 117 FCR 159; 41 ACSR 456; [2002] FCA 512, Branson J rejected a submission [page 227] by ASIC that s 739(3) empowered it to make orders in circumstances in which it would not be authorised to make an order under s 739(1): that is, in circumstances in which ‘it holds a suspicion falling short of satisfaction’ as to the relevant matters. Her Honour considered that ‘if the legislature intended that ASIC should be able to exercise, even on an interim basis, the significant power of intervention in fundraising given to it by s 739 in

circumstances less restrictive than those provided for by s 739(1), it would have said so explicitly’. ___________________________ 1.

This is the expression used by ASIC to describe a prospectus for an offer of continuously quoted securities, that is prepared in accordance with Corporations Act s 713. See ASIC RG 254, Section C.

2.

The table in s 705 does not separately describe transaction specific prospectuses, unlike ASIC RG 254.

3.

There is a transition period during which a full prospectus can still be used, ending in December 2016.

4.

Explanatory Memorandum to the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, [1.40].

5.

In addition to satisfying the conditions in s 713A(2)–(20), the bonds, the offer, the issuer, and if the issuer body is a wholly-owned subsidiary of a body corporate which has continuously quoted securities, that body corporate, must comply with any other conditions or requirements as set out in the regulations: s 713A(24)–(27).

6.

An auditor is required to include an ‘emphasis of matter’ paragraph if they conclude that a material uncertainty exists that leads to significant doubt about the ability of the company to continue as a going concern and that uncertainty has been adequately disclosed in the financial reports. The purpose of the inclusion of an ‘emphasis of matter’ paragraph is to draw the readers’ attention to the relevant disclosures relating to the particular matters.

7.

Woodcroft-Brown v Timbercorp Securities Ltd (2011) 253 FLR 240; [2011] VSC 427 at [125].

8.

Woodcroft-Brown v Timbercorp Securities Ltd (2011) 253 FLR 240; [2011] VSC 427 at [125].

9.

See, for example, Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 68 ACSR 595; [2008] NSWCA 206 at [736], [766].

10.

Tate v Williamson (1866) 2 Ch App 55 at 61.

11.

See, for example, Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24 [105]– [108].

12.

See generally I E Davidson, ‘The Equitable Remedy of Compensation’ (1982) 13 MULR 349; W Gummow, ‘Compensation for Breach of Fiduciary Duty’ in Youdan (ed), Equity, Fiduciaries and Trusts, Carswell, Toronto, 1989; L Aitken, ‘Developments in Equitable Compensation: Opportunity or Danger’ (1993) 67 ALJ 596; P McDermott, Equitable Damages, Butterworths, Sydney, 1994.

13.

Nocton v Lord Ashburton [1914] AC 932; cf Commonwealth Bank of Australia v Smith (1991) 102 ALR 453.

14.

Hill v Rose [1990] VR 129. P Finn, ‘Good Faith and Non-disclosure’ in P Finn (ed), Essays on Torts, Law Book Co, Sydney, 1989, p 150 at pp 166–70.

15.

Eighty-Second Vocation Pty Ltd v Parere Investments Pty Ltd [2005] FCA 844.

16.

Central Rly Co of Venezuela (Directors etc) v Kisch (1867) LR 2 HL 99 at 120.

17.

J H Farrar, ‘Good Faith and Dealing with Dissent in Prospectuses’ (1999) 1 U Notre Dame Austl L Rev 27.

18.

Woodcroft-Brown v Timbercorp Securities Ltd (2011) 253 FLR 240; [2011] VSC 427 at [154].

19.

See, for example, Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 68 ACSR 595; [2008] NSWCA 206.

20.

For a discussion of the principles relating to delegation and reliance by company directors generally, see J H Farrar and P F Hanrahan, Corporate Governance, LexisNexis Butterworths, Sydney, 2016, Ch 9.

21.

See generally S Minns and G Golding, ‘Prospectus Due Diligence — A Focussed Approach’ (1993) 11 C&SLJ 542; D Croker, Prospectus Liability under the Corporations Act, CCLSR, Melbourne, 1998, pp 59–63.

22.

The basis on which funds must be returned is discussed below.

23.

Re Golden Gate Petroleum Ltd (2004) 50 ACSR 659; [2004] FCA 1119.

24.

See, for example, Re Golden Iron Resources (2010) 79 ACSR 159; [2010] FCA 693 at [19]–[21].

25.

See, for example, Re Wright Patten Shakespeare Capital Ltd and Australian Securities and Investments Commission (2007) 99 ALD 335; [2007] AATA 2101.

26.

Referring to Bryson J in ICAL Ltd v County Natwest Securities Australia Ltd (1988) 13 ACLR 129.

27.

See, for example, Cackett v Keswick [1902] 2 Ch 456.

[page 229]

Chapter 6 OFFERING MANAGED INVESTMENTS, DERIVATIVES and OTHER FINANCIAL PRODUCTS Introduction Structure of Pt 7.9 Scope of Pt 7.9 Application to arrangements with different ‘components’ Requirement to Provide a PDS When a PDS is required Retail and wholesale clients Jurisdictional connection Exemptions from the PDS requirement Product Disclosure Statements PDS must be prepared by the issuer or seller Manner of providing the PDS Contents Requirements for the PDS Evolution of the PDS content requirements Determining PDS contents Main disclosure requirements for a full PDS Limits on the disclosure obligation Modified PDS content requirement for quoted financial products Modified PDS content requirement for simple managed investment schemes Modified PDS content requirement for margin loans Conducting the Offer Lodgment with ASIC Application forms

6.1 6.2 6.5 6.11 6.12 6.12 6.17 6.26 6.27 6.33 6.33 6.34 6.39 6.39 6.42 6.45 6.52 6.55 6.56 6.57 6.58 6.58 6.59

[page 230] Dealing with application money Quotation conditions Minimum subscription condition Transaction confirmation Cooling off Correcting and updating disclosure Additional information Stop Orders Controls on the Sale Process Restrictions on advertising financial products Hawking financial products Impact of the AFS licensing laws

6.60 6.61 6.62 6.63 6.64 6.65 6.66 6.67 6.68 6.68 6.72 6.73

INTRODUCTION 6.1 Not all instruments acquired through or traded on Australian financial markets are ‘securities’ for the purposes of Ch 6D of the Corporations Act 2001 (Cth) (Corporations Act). The offer and issue of these other instruments (including interests in managed investment schemes, and derivatives) are subject to a separate regulatory regime, contained in Ch 7 of the Corporations Act. This includes, in Corporations Act Pt 7.9, a mandatory disclosure requirement that arises where financial products are offered to ‘retail clients’. This chapter discusses the requirements of Pt 7.9, focusing particularly on the rules of general application and on the specific rules that apply in connection with the offer of interests in listed and unlisted managed investment schemes, derivatives and similar financial products, and margin lending facilities. The disclosure requirements that apply to offers of general insurance and life insurance products, superannuation products, retirement savings accounts (RSAs), and deposits with Australian authorised deposit-taking institutions (ADIs) are not discussed here.1

STRUCTURE OF PT 7.9 6.2 Like the regime for securities offerings contained in Ch 6D of the Corporations Act and described in Chapters 4 and 5 above, the regulatory regime in Pt 7.9 aims to protect members of the public who acquire financial products other than securities, by requiring the disclosure of certain material information in connection with the issue or sale of financial products, and ensuring as far as possible that the [page 231] information is provided in written form before the decision to acquire the product is made. Part 7.9 also: encourages the presentation of that information in a way that enables those acquiring financial products to compare functionally similar products; provides for ongoing disclosure to holders of products; restricts advertising and certain sales activities, including hawking; and allows for ‘cooling off’ in connection with the acquisition of certain financial products. Although there are parallels in Pt 7.9 with the securities disclosure regime in Ch 6D of the Corporations Act, the required disclosure is different. This may reflect a greater emphasis in Pt 7.9 on the use of disclosure to facilitate individual product selection, rather than to provide corporate information to enable the market to set an informed price. In many respects, acquirers of financial products to which the disclosure regime in Pt 7.9 applies are ‘consumers’, rather than investors in the true sense.2 With the exception of interests in listed managed investment schemes and some derivatives, most of the financial products covered by Pt 7.9 are not traded in organised markets. In the Revised Explanatory Memorandum to the Financial Services Reform Bill 2001, the intentions and policy considerations guiding the disclosure regime in Pt 7.9 are explained: at [14.71]–[14.98]. Unlike Ch

6D, Pt 7.9 takes a ‘directed disclosure approach to point of sale disclosure’. The Explanatory Memorandum says (at [14.71]) that this approach: … seeks to balance the need for the purchaser to have sufficient information to make an informed decision and compare products against the concern that they may be provided with more information than they can comprehend. In so doing, it takes a middle ground between the full due diligence approach in the fundraising provisions of the Corporations Law and the Key Features Statement approach taken in relation to superannuation. That is, the provisions take a directed disclosure approach supplemented by other information known to the issuer or seller that might materially influence a retail client’s decision to acquire the product.

The product disclosure regime in Pt 7.9 applies to offers of all types of financial products other than securities and government bonds: Corporations Act s 1010A. The definition of financial product is discussed in Chapter 2 above. It includes any ‘facility through which, or through the acquisition of which, a person … makes a financial investment’ within the meaning of s 763B. It also extends to a facility through which, or through the acquisition of which, a person manages financial risk (see s 763C) or makes non-cash payments (s 763D). A person ‘manages financial risk’ if they ‘manage the financial consequences to them of particular circumstances happening’ or ‘avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates)’. The notes to s 763C [page 232] give as an example of managing financial risk ‘hedging a liability by acquiring a futures contract or entering into a currency swap’. The breadth of the definition of financial product contained in Corporations Act Ch 7 means that the disclosure regime in Pt 7.9 applies across a range of financial arrangements that have little or no functional equivalence. In addition to interests in managed investment schemes and derivatives, the definition includes general insurance, risk life insurance, superannuation products, bank deposits, margin loans, debit cards, stored value cards and travellers’ cheques. The disclosure requirements in Pt 7.9 are complex, and highly specific in their application. They vary significantly depending on the type of financial

product on offer. The principal statutory requirements have been extensively modified, both by regulations and by ASIC legislative instruments; the effect of these modifications is, on occasions, to make substantive amendments to the principal law. In any particular offer, close attention to the actual wording of the requirements and careful research of relevant ASIC policy is required. 6.3 To achieve the regulatory aims explained above, Pt 7.9 contains the following requirements that are applicable, in certain circumstances, to the issue and sale of financial products other than securities and government bonds.3 Table 6.1: Pt 7.9 Requirements for offers of financial products The requirement relating to … Product Disclosure Statements Additional disclosure Ongoing disclosure Periodic reporting Dealing with application moneys Transaction confirmation Dispute resolution

requires a person (generally the issuer) to … under …

prepare and provide disclosure in the form of a Pt 7.9 Div 2 (s Product Disclosure Statement in connection 1011A and with issue or sale of a financial product following) provide additional disclosure on request to a s 1017A person interested in acquiring a financial product provide ongoing disclosure of material changes s 1017B or significant events while a person holds a financial product provide periodic reporting to holders of ss 1017C, certain financial products3 1017D and 1017DA hold moneys in a trust account pending issue s 1017E of a financial product provide confirmation of transactions (such as acquisitions and disposals) in respect of financial products establish dispute resolution procedures

s 1017F

s 1017G

Advertising Cooling off

observe certain restrictions on advertising financial products allow a customer 14 days to return a financial product and obtain a refund

ss 1018A and 1018B ss 1019A and 1019B [page 233]

6.4 Part 7.9 also contains the statutory restrictions on short selling of securities, interests in registered schemes, and government bonds (ss 1020B, 1020C and 1020D); the requirements that apply where an unsolicited offer to purchase financial products (including securities) is made otherwise than on a licensed market (ss 1019C–1019K); and the prohibition on offering interests in managed investment schemes that ought to be registered under Ch 5C but are not (s 1020A). Prohibitions on hawking financial products other than securities are contained in ss 992A and 992AA, which appear in Pt 7.8 of the Act. Section 1020F of the Corporations Act gives ASIC power to modify or grant exemptions from all or specified provisions of Pt 7.9. Exemptions and modifications may also be made by regulation under s 1020G of the Act — this power has been exercised extensively. ASIC’s exemption and modification power is explained at 2.31ff above.

Scope of Pt 7.9 6.5 The requirements of Pt 7.9 potentially apply to conduct in relation to all financial products as defined. However, this is subject to two important limitations, contained in ss 1010A and 1010B. The first limitation is that, except for s 1017F (transaction confirmation) and Div 5A (unsolicited offers) and Div 6 (the prohibition on short selling), Pt 7.9 does not apply to securities (as defined in s 761A) or to government bonds: s 1010A. The definitions of ‘securities’ and of ‘debentures, stocks or bonds issued or proposed to be issued by a government’ are explored at some length in 3.5ff above. The dividing line between Ch 6D (which

regulates offers of securities) and Pt 7.9 (which regulates offers of other financial products) of the Corporations Act is explained at 6.6–6.9 below. The second limitation is that, because of s 1010B, Pt 7.9 only applies to financial products issued in the course of a business of issuing financial products: see 6.10 below.

Financial products other than securities 6.6 The Corporations Act contains two separate disclosure regimes that apply in connection with the offer of financial products: the ‘disclosure document’ regime in Ch 6D and the ‘Product Disclosure Statement’ regime in Pt 7.9. The regimes are quite different: different conduct triggers the obligation to disclose, different exemptions from the disclosure requirements exist, the form and content of the required disclosure is different, and the process in accordance with which offers must be made is different.4 Because different disclosure obligations apply under the two regimes, understanding whether Ch 6D or Pt 7.9 applies to a particular instrument or arrangement is important. This can be difficult for some products, such as options, [page 234] hybrid products, and stapled securities. It may be in some cases (particularly stapled securities) that both regimes apply, and must be accommodated in a single offer. The problems in differentiating classes of financial instruments is exemplified by Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 16 ACSR 148 (the LEPO case), discussed at 1.48 above. The issue before the court in the LEPO case was whether particular financial instruments were ‘securities’ or ‘futures contracts’ for the purposes of the (former) Corporations Law; its significance lay in the fact that different regulatory regimes applied under that law to the two classes of instruments. In response to the LEPO case, the Companies and Securities Advisory Committee (CASAC) recommended to government in 1997 that

a ‘core regulatory approach’ be adopted for all financial markets and the instruments traded on those markets, including securities and derivatives. CASAC argued that such an approach: … could clarify and simplify the law, thereby reducing uncertainties and compliance costs; avoid regulatory overlaps or gaps; facilitate the development of new products by eliminating unnecessary differences in the way products are regulated; reduce regulatory arbitrage: that is, artificially designing products to take advantage of different regulatory regimes; and increase the compatibility of Australian and overseas financial markets regulatory regimes’.5

Although government adopted the spirit of this recommendation in the approach to the regulation of financial intermediaries and the provision of financial advice taken in the Financial Services Reform Act 2001 (Cth) (FSR Act), by which the Corporations Act Ch 7 was enacted, it did not do so in relation to disclosure in connection with the offer of financial products. Instead it maintained two conceptually separate disclosure regimes. Therefore, the problems identified in the CASAC Report remain in relation to product disclosure, because as the discussion in Chapter 3 makes clear, it can sometimes be difficult to determine where in the schema of financial products a particular arrangement sits.6 Options and warrants 6.7 Some options and warrants are securities, and therefore are subject to the disclosure regime in Ch 6D of the Corporations Act. Others are derivatives and are therefore potentially subject to the disclosure regime in Pt 7.9. Options to acquire shares or debentures by way of issue are within the definition of a security7 and therefore are covered by Ch 6D. Depending on their type, options over issued shares can be either securities or derivatives. To fall within para (c) of the definition of a security in s 761A of the Corporations Act, the instrument must confer a legal or equitable interest in issued [page 235] shares or debentures. Covered warrants may fall within this category. The

proper characterisation depends on the terms of the product. Although some warrants are securities, they are expressly excluded from the operation of Ch 6D by Corporations Regulations reg 6D.5.01, discussed in 4.4 above. Offers of warrants (as defined in reg 1.0.02) are covered by the disclosure requirements in Corporations Act Pt 7.9 rather than the requirements in Ch 6D. Special rules apply in relation to the offer of warrants, under Corporations Regulations Pt 7.9 Div 2A. Hybrid securities 6.8 Hybrid securities, including subordinated notes, capital notes and convertible preference shares, have been described by ASIC as combining: … both ‘equity-like’ and ‘debt-like’ characteristics. While their legal form remains a debenture or a share (most often a preference share), this mix of characteristics places them on a spectrum between ‘pure’ equity and bonds.8

These products are covered by Ch 6D, rather than Ch 7. As the Full Federal Court noted in ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; 99 ACSR 336 [2014] FCAFC 65 at [658] (Jacobson, Gilmour and Gordon JJ): The effect of s 761D(3)(c) when read with s 764A(1)(a) and (c) is that a financial product which is a derivative is not treated as a derivative for the purposes of Ch 7 if it also amounts to a debenture … The regulatory regime, including its disclosure requirements, in Ch 6D therefore applies to hybrid securities which have the characteristics of both a debenture and a derivative.

Stapled securities 6.9 Where an offer relates to a stapled entity, and the components of the staple include (say) both shares in a company and interests in a registered managed investment scheme, it may be necessary for the disclosure provided to investors to satisfy both Ch 6D and Ch 7.9

Issued in the course of a business 6.10 An important limitation on the scope of Pt 7.9 is contained in s 1010B(1). It provides that, apart from Div 5A (unsolicited offers), nothing in Pt 7.9 applies in relation to ‘a financial product that is not or was not issued, or that will not be issued, in the course of a business of issuing financial products’. For this purpose, the issue of an interest in a registered

scheme10 is taken to occur in the course of a business of issuing financial products: Corporations Act s 1010B(2). [page 236] Note that the test is whether the product was issued in the course of a business of issuing financial products, not whether it was issued in the course of a financial services business (probably a wider concept). Section 19 provides that a reference to a business of a particular kind includes a reference to a business of that kind that is part of, or is carried on in conjunction with, any other business. For there to be a ‘business’ of issuing financial products, it seems likely that there must be elements of system, repetition and continuity; a one-off issue of financial products is unlikely to be caught.11

Application to arrangements with different ‘components’ 6.11 Financial products can consist of a number of separate components or parts, in some cases provided by different providers. In some situations, different components will be aggregated to form a financial product — this is contemplated by s 761B of the Corporations Act. In others, a financial product may be a component of a broader facility that also includes other components — this is contemplated by ss 762B and 763E. Section 761B of the Corporations Act provides that if it is reasonable to assume that the parties to a series of separate arrangements regard them as constituting a single scheme, and together those separate arrangements would constitute a financial product, they should be viewed as such. Conversely, a financial product can be part of a broader facility. Section 762B provides for this when it says that if a financial product is a component of a facility that also has other components, the requirements of Ch 7 (including, for example, the PDS requirements) only apply in relation to the facility to the extent that it consists of the component that is the financial product. So, for example, a person offering a facility that

comprised a loan to acquire derivatives would be required to comply with Ch 7 in relation to the offer of the derivatives, but not the offer of the loan. However, where the component in the nature of a financial product is only incidental to the broader facility, the operation of Ch 7 may be excluded by s 763E, which states that the component is not to be considered a financial product in these circumstances (provided that the financial product is not one specifically included in the definition by s 764A).12 [page 237] The scope of the ‘incidental’ exclusion in s 763E was considered by the New South Wales Court of Appeal in International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 82 ACSR 517; [2011] NSWCA 50.13 Having decided that a litigation funding agreement was a facility for managing financial risk within the scope of s 763C, the court was asked whether the risk management ‘component’ of the arrangement was sufficiently incidental to trigger the operation of s 763E. The court divided on this point. Giles and Young JJA held (at [91], [209]) that the financial product aspect of the funding agreement is not an incidental component of the facility; it is a main purpose of the agreement that is not separable. Hodgson JA (dissenting) considered that the management of existing and future risks was incidental to the financial risks of the litigation; those risks were dependent on the litigation proceeding: at [125]. In his Honour’s view, s 763E(1)(b) and (2)(b) directs attention to whether it is ‘reasonable to assume’ that the main purpose of the funding agreement was not managing financial risk. The assumption in question need not be objectively true, so long as it is reasonable. In terms of the statute, it is ‘reasonable to assume’ that the main purpose of the funding agreement was not managing financial risk: at [126]. The relationship between ss 762B and 763E also arose in argument in International Litigation Partners, above: at [165]–[183]. Both sections apply in circumstances where a financial product is a component of a facility that has other components. Section 763E applies where the financial product component is ‘incidental’ to the facility, suggesting that s

762B is to apply when it is not. Where the financial product component is incidental, none of the facility is regulated as a financial product. Where the financial product component is not incidental, only the financial product component of the facility is regulated as a financial product. Section 1012K gives ASIC the power to make certain anti-avoidance determinations, aggregating the transactions of closely related bodies or treating transactions by a body as transactions of its controller. The effect of these determinations is that, in effect, the statutory obligations contained in Pt 7.9 become obligations of all of the bodies the subject of the determination.

REQUIREMENT TO PROVIDE A PDS When a PDS is required 6.12 Part 7.9 Div 2 requires, in broad terms, that a PDS be provided to a person before they acquire a financial product, where the person is acquiring the product as a retail client. The PDS contains information about the financial product, including the identity of the issuer, any significant benefits or risks attaching to the product, and the costs of acquiring and holding the product. At least in the context of managed [page 238] investments, the PDS ‘is designed to facilitate informed investment decisions and investments effected with proper protection’.14 Subject to the overriding exceptions in ss 1012D–1012G and 1014E,15 the circumstances in which a retail client must be given a PDS before acquiring a financial product are described in the legislation as a recommendation situation, an issue situation and a sale situation. They are: recommendation situation: where, in the course of providing personal financial advice to the client, a regulated person has recommended that the client acquire the financial product, and the

acquisition is either by way of issue to the client, or by way of transfer to the client under a regulated secondary sale to which the PDS requirements apply: s 1012A; issue situation: where a regulated person offers to issue, or arrange the issue of, or issues a financial product to the client: s 1012B; or sale situation: where a regulated person offers to sell, or sells a financial product to the client in circumstances amounting to an offmarket sale by a controller of the issuer, a sale amounting to an indirect issue of the financial product, or a sale amounting to an indirect off-market sale by the controller of the issuer: s 1012C. In the context of Pt 7.9, ‘offer’ and ‘sale’ have the extended meanings in Corporations Act s 1010C. If a regulated person offers an option over a financial product (other than a security), s 1011C applies. It states that, for the purposes of the PDS requirements, an offer of an option over a financial product is not to be taken to be an offer of the underlying financial product. It also provides that the grant of an option without an offer of the option is taken to be an offer of the option, and an offer to grant an option is taken to be an offer to issue the financial product constituted by the option. Section 1011C corresponds to s 702, which deals with offers of options over securities: see 4.4 above. The PDS requirement is triggered only where the recommendation, issue or sale is to a retail client, and has the requisite nexus with the jurisdiction. It does not apply where s 1012D (as modified by Corporations Regulations regs 7.9.07D, 7.9.07E, 7.9.07F, 7.9.07FA and 7.9.07FB), s 1012DA, s 1012E, s 1012F, s 1012G or s 1014E provide otherwise.

Regulated persons 6.13 The obligation to provide a PDS is triggered only where the conduct is engaged in by a ‘regulated person’ as defined in s 1011B. This includes the issuer of the financial product, or the seller of the financial product (in a sale amounting to an off-market sale by a controller of the issuer, a sale amounting to an indirect issue of the financial product, or a sale amounting to an indirect off-market sale by the controller of the issuer). It also includes certain financial intermediaries who may be involved in the transaction, including any Australian financial services (AFS)

[page 239] licensee, any authorised representative of an AFS licensee, any person who is exempt from the requirement to be licensed by s 911A(2)(j) or exemptions granted by the regulations or by ASIC, and any person who is required to hold an AFS licence but who does not. The obligation to provide a PDS can arise in a recommendation situation, an issue situation or a sale situation: see below. In a recommendation situation, the obligation to provide a PDS falls on the regulated person who is providing the advice. In an issue situation, the obligation can fall on a regulated person offering to issue the financial product, offering to arrange the issue of the financial product, or issuing the financial product. In a sale situation, the obligation arises where a regulated person offers to sell the financial product, or where a client makes an offer to a regulated person to acquire the financial product that the regulated person proposes to accept. The person who provides the PDS to the client may not be the person required to prepare it: see s 1013A, discussed at 6.33 below. In many situations the obligation to provide a PDS could fall on more than one person. In particular, a broker or adviser recommending a particular product, and the issuer of that product, could be under separate obligations as part of the one acquisition by the client. This is dealt with by s 1012D(1), which is intended to resolve these overlapping obligations.

Recommendation situation 6.14 Section 1012A of the Corporations Act imposes on a regulated person an obligation to supply a PDS when the person provides personal advice to a retail client that includes a recommendation that the client acquire a particular financial product. ‘Personal advice’ is discussed in Chapter 14 below. Section 1012A is primarily directed at ensuring that, when a financial adviser recommends particular products to its clients, those clients receive the PDSs for the products as part of the advice process. The PDS will be prepared and supplied to the adviser by the issuer (or seller) of the products, to be handed over by the adviser.

Issue situation 6.15 Section 1012B imposes an obligation on a regulated person to provide a PDS in connection with a primary offer or issue of a financial product to a retail client. The obligation arises where the person: offers to issue the financial product to the client: s 1012B(3)(a)(i); offers to arrange for the issue of the financial product to the client: s 1012B(3)(a)(ii); issues the financial product to the client: s 1012B(3)(a)(iii); or accepts an offer from the client to acquire the financial product by way of issue: s 1012B(4). If the regulated person reasonably believes that the client has already received an up-to-date PDS for the product (for example, from their adviser under s 1012A), the regulated person is not required to provide it again: s 1012D(1). [page 240] The circumstances in which a person is treated as having issued a financial product are explained in s 761E. A product is issued to a person when it is first issued, granted or otherwise made available to the person: s 761E(2). The issuer of the product is the person who is responsible to the holder of the product from time to time ‘for the obligations owed, under the terms of the facility that is the product’: s 761E(4). In the case of an interest in a registered scheme, this will be the scheme’s responsible entity: see s 601FB(1). Special provisions specify who is the ‘issuer’ of a derivative: see Corporations Act ss 761E(5) (over-the-counter derivatives), 761E(6) (market traded derivatives) and Corporations Regulations reg 7.1.04D (derivatives traded on certain exempt markets) and reg 7.9.07A (warrants), discussed at 6.33 below.

Sale situation

6.16 As is the case in relation to most secondary sales of securities under Ch 6D (see 4.8 above), most secondary sales of financial products do not require disclosure to investors in the form of a PDS. There are three exceptions to this general principle: 1.

where the seller controls the issuer of the financial product, and the sale is not made on a licensed market (either because the product is not quoted or because the offer is made off-market): s 1012C(5);

2.

where financial products issued without a PDS are offered for sale within 12 months of issue, and they were either issued or acquired for the purpose of the subscriber ‘selling or transferring the product, or granting, issuing or transferring interests in, or options or warrants, over the product’: s 1012C(5). The purpose of the person issuing or acquiring the financial product is ascertained in accordance with s 1012C(6); and

3.

where financial products sold by a controller off-market without a PDS are offered for resale within 12 months, and the financial products were sole or acquired with the purpose of the acquirer ‘selling or transferring the product, or granting, issuing or transferring interests in, or options or warrants, over the product’: s 1012C(8). The purpose of the person issuing or acquiring the financial product is ascertained in accordance with s 1012C(9).

The secondary sale provisions have been significantly modified in their operation in relation to specific transactions by ASIC policy, including to protect the viability of the placements market: see ASIC Regulatory Guide 173 — Disclosure for On-sale of Securities and Other Financial Products, March 2016.

Retail and wholesale clients 6.17 The obligation to provide a PDS is triggered only if the person to whom the recommendation or offer is made is a retail client. The question of whether a person is a retail client in respect of a particular financial product depends first on the nature of the product. A person may be

treated as a retail client when they acquire one type of one financial product (say, a general insurance product) but not another (say, a managed investment product). [page 241] Sections 761G and 761GA of the Corporations Act contain the statutory definition of ‘retail client’, supported by regs 7.1.11–7.1.28 of the Corporations Regulations. These sections are modified (that is, amended) in their application to Corporations Act Pts 7.6–7.9 by Corporations Regulations regs 7.6.02AB, 7.6.02AC, 7.6.02AD, 7.6.02AE and 7.6.02AF, which were introduced as part of the ‘FSR Refinement Project’ in December 2005. The amendments made by Corporations Regulations regs 7.6.02AB–7.6.02AF are made pursuant to the following sections of the Corporations Act that allow for exemptions and modifications to be made to the Act by the regulations: ss 926B (for Pt 7.6), 951C (for Pt 7.7), 992C (for Pt 7.8) and 1020G (for Pt 7.9). The definition is summarised in Table 6.2. Table 6.2: Who is a retail client? For this financial product … Certain defined classes of general insurance products (motor vehicle, home building, home contents, sickness and accident, consumer credit, travel, and personal and domestic property) Superannuation and RSA products

a client is retail …

see …

if the person is an s 761G(5), (11) and (12) and individual or the Corporations Regulations regs product is for use in a 7.1.11–7.1.17 small business (that is, a business employing less than 20 people or, in the case of a manufacturing business, 100 people) in all cases

s 761G(6)

All other financial products

unless: the price of the product exceeds the prescribed amount the product is provided for use in connection with a business that is not a small business the client is certified by a qualified accountant as high net worth the client is a professional investor, or the client is certified by an AFS licensee as a sophisticated investor

Pt 7.1 Div 2 ss 761G(7) and 761GA and Corporations Regulations regs 7.1.11–7.1.28 The price threshold is, generally, $500,000. Superannuation sourced money is excluded A client can be certified as a high net worth investor if they have assets of $2.5 million and income of $250,000 Professional investor is defined in CA s 9 A client can be certified as sophisticated if they are dealing with a licensee who is satisfied they have adequate experience to assess the offer

6.18 A person who is not a retail client is a wholesale client: s 761G(4). As Table 6.2 indicates, if a financial product is not, or a financial service provided to a person does not relate to, a general insurance product, a superannuation product or an RSA product, the product or service is provided to the person as a retail client unless one or more of s 761G(4A) or s 761G(7)(a)–(d) or s 761GA applies. [page 242] 6.19 It is important to note that the onus for establishing that a person was not a retail client in relation to a particular financial product or financial service falls on the provider of the product or service rather than the client. Therefore, if an issuer chooses to limit its activities to dealings

with wholesale clients it would need to have in place a procedure for ensuring that the clients met the relevant criteria (for example, by having them sign a declaration confirming the relevant matters, or provide copies of their accounts).

Transaction over $500,000 6.20 A product or service is not provided to a person as a retail client if the price for the provision of the financial product, or the value of the financial product to which the financial service relates, equals or exceeds $500,000: see s 761G(7)(a) and Corporations Regulations regs 7.1.18 (price of investment-based financial products), 7.1.19 (value of investmentbased financial products), 7.1.22 (value of derivatives) and 7.1.22A (value of foreign exchange contracts). The price or value of a number of financial products acquired in the same transaction can be aggregated for this purpose: Corporations Regulations reg 7.1.17B. In most cases, ‘superannuation-sourced money’ as defined cannot be counted in assessing price or value under s 761G(7)(a) if the financial service being provided to the person is either financial product advice or, if the person is a retail client, the issue or sale of a financial product to the person in circumstances requiring the giving of a PDS: Corporations Regulations reg 7.1.26. Superannuation-sourced money is money that the financial services provider knows or ought reasonably to know is being paid to a person as a superannuation lump sum by the trustee of a regulated superannuation fund, or has been paid as an eligible termination payment or superannuation lump sum within the previous six months: Corporations Regulations reg 1.0.20.

Large business 6.21 If the financial product, or the financial service, is provided for use in connection with a business that is not a small business (a small business being a business employing less than 100 people if the business is or includes the manufacture of goods, or less than 20 people if it is not), the person is not a retail client: see s 761G(7)(b) and (12).

High net worth investor

6.22 This category applies where a financial product, or financial service, is not provided for use in connection with a business. A person is not a retail client if they provide a copy of a certificate given within the preceding two years by a qualified accountant (as defined), that states that the person has net assets of at least $2.5 million, or has a gross income for each of the last two financial years of at least $250,000: s 761G(7)(c) and Corporations Regulations regs 7.1.28 and 7.6.02AF. The person’s net assets and income may include those of a company or trust controlled by them: ss 761G(7A) and 761G(7B) inserted by Corporations Regulations reg 7.6.02AC. A company or trust controlled by such a person is also a wholesale client: s 761G(7)(ca) inserted by Corporations Regulations reg 7.6.02AB. [page 243]

Experienced investor dealing with an AFS licensee 6.23 An experienced investor dealing with an AFS licensee is treated as wholesale if the conditions in s 761GA are met. The person providing the product or service must be an AFS licensee; the product must not be a general insurance product, a superannuation product or a retirement savings account product; and the product or service must not be provided for use in connection with a business. In these circumstances, a person may be treated as wholesale if the licensee is satisfied on reasonable grounds that the client has previous experience in using financial services and investing in financial products that allows the client to assess the merits of the product or service, the value of the product or service, the risks associated with holding the product, the client’s own information needs, and the adequacy of the information given by the licensee and the product issuer. The licensee must give the client a written statement of its reasons for being satisfied as to these matters ‘before, or at the time when, the product or advice is provided’, and the client must sign a written acknowledgment. This imposes a significant burden on the licensee to satisfy itself of the relevant matters.16

Professional investor

6.24 A person who is a professional investor is not a retail client for the purposes of Ch 7, because of s 761G(7)(d). ‘Professional investor’ is defined in the Corporations Act s 9 (modified by Corporations Regulations reg 7.6.02AE). It includes a financial services licensee; a body regulated by the Australian Prudential Regulation Authority (APRA) (other than the trustee of a superannuation entity);17 the trustee of a superannuation entity that has net assets of at least $10 million; a person who has or controls gross assets of at least $10 million (including any assets held by an associate or under a trust the person manages); a body registered under the Financial Corporations Act 1974 (Cth); a listed entity, or a related body corporate of a listed entity; an exempt public authority,18 and an investment company.19 It also includes any foreign entity that, if established or incorporated in Australia, would fall within one of these categories.

Related body corporate of a wholesale investor 6.25 If a financial product or a financial service is or would be provided to, or acquired by, a body corporate as a wholesale client, related bodies corporate of the [page 244] client are taken to be wholesale clients in respect of the provision or acquisition of that financial product or financial service: s 761G(4A) inserted by Corporations Regulations reg 7.6.02AD.

Jurisdictional connection 6.26 The obligation to provide a PDS does not apply unless the offers or recommendations referred to in ss 1012A, 1012B and 1012C have the requisite jurisdictional nexus with Australia. The jurisdictional scope of Pt 7.9 is set out in s 1011A. For the Part to apply, the offer or recommendation must ordinarily be received in Australia: s 1011A(1). Section 1011A(2) says that the obligation in s 1012B on the product issuer to provide a PDS in connection with an issue of a financial product to a

person ‘in circumstances in which there are reasonable grounds to believe that the person has not been given a PDS for the product’ also applies where the product is issued in Australia. However, note that Corporations Regulations reg 7.9.07FB expressly provides that a PDS is not required ‘if the client is not in this jurisdiction’.

Exemptions from the PDS requirement 6.27 The obligation to provide a PDS cannot arise unless the financial product was or will be issued ‘in the course of a business of issuing financial products’: see s 1010B, discussed at 6.10 above. Further, a regulated person is not required to provide a PDS in a recommendation situation described in s 1012A, an issue situation described in s 1012B or sale situation described in s 1012C unless the person with whom they are dealing is a retail client: see 6.17 above. This means that a recommendation, issue or sale to a wholesale client does not require a PDS. Even where the product is or was issued in the course of a business of issuing financial products, and the person to whom it is offered is a retail client, the regulated person may be relieved of the obligation to provide a PDS by s 1012D (as modified by Corporations Regulations regs 7.9.07D, 7.9.07E, 7.9.07F, 7.9.07FA and 7.9.07FB), s 1012DAA, s 1012DA, s 1012E, s 1012F, s 1012G or s 1014E. The relevant exemptions from the disclosure requirement are discussed below.20 6.28 The key exemptions for our purposes are contained in ss 1012D, 1012DAA, 1012DA and 1012E. Section 1012D contains particular exemptions that apply in specific situations, such as where financial products are being issued to existing holders or for no consideration, or where the offeree is related to the offeror. Section 1012DAA covers rights issues for quoted securities, s 1012DA covers certain secondary sales of quoted securities, and s 1012E contains an exemption for small-scale personal offers of interests in registered managed investment schemes. [page 245]

General exemptions 6.29 The key exemptions in s 1012D are as follows: Client has already received a PDS: Because the obligation to provide a PDS can arise in connection with a recommendation situation, issue situation or sale situation, it may be that a client has already been provided with a PDS by their adviser or broker in connection with a recommendation, and does not require another copy when they apply for or buy the product. Section 1012D(1) deals with this situation by saying that a PDS need not be provided if the client has already received one from another source, or the regulated person believes on reasonable grounds that this has occurred. All relevant information is already known to offerees: Section 1012D(2B) provides that a regulated person does not have to provide a PDS if ‘because of s 1013F, no information would be required to be included in’ the PDS. Section 1013F is discussed at 6.54 below. Client is not in the jurisdiction: A PDS is not required if the client is not in the jurisdiction: s 1012(8A) inserted by Corporations Regulations reg 7.9.07FB. Offer is declined: A PDS is not required in an issue situation or a sale situation if the offer of the financial product is declined: s 1012D(9J) and (9K) inserted by Corporations Regulations reg 7.9.07E. Existing holders: A PDS need not be provided where a client already holds a financial product of the same kind, and the regulated person believes on reasonable grounds that the client has received, or has and knows they have access to, the information required to be disclosed through a PDS and information provided in accordance with the continuous disclosure and reporting requirements: s 1017B, s 1017C or s 1017D or Ch 6CA. This is provided for in s 1012D(3). A financial product is of the same kind if it falls within s 1012D(10).21 In a recommendation or issue situation involving distribution reinvestment or switching by a client who already holds a financial product of the same kind, a PDS is not required because of s 1017D(3). No consideration: Under s 1012D(5), a PDS is not required for a

recommendation, issue or sale situation involving the issue or sale of interests in a registered scheme (other than options) for no consideration. Also, where options are issued or sold for no consideration, and no consideration is payable to exercise the option, a PDS is not required, under s 1012D(6). Takeovers: Where interests in registered schemes, or options to acquire shares or debentures by way of transfer, are offered as part of the consideration in a [page 246] takeover bid, and the offer is accompanied by a bidder’s statement prepared in accordance with Ch 6 of the Act, a PDS is not required: s 1012D(7). Exempt bodies: Recommendations, issues and sales of interests in unregistered managed investment schemes operated by exempt bodies generally do not require a PDS, because of s 1017D(8). ‘Exempt body’ is defined in s 66A, which provides that a body corporate is an exempt body of a state or territory if, and only if, it is not a company, and is incorporated by or under a law of the state or territory.22 For example, an offer to participate in an unregistered scheme operated by an incorporated association for the benefit of its members will not attract the PDS requirements because of this exemption. Client associated with a registered scheme: A recommendation, issue or sale situation in relation to interests in a registered scheme does not require a PDS where the client is a ‘senior manager’ of the scheme’s responsible entity or a related body corporate, is a close relative of such an officer, or is a body corporate controlled by any such person: s 1012D(9A) and (9B). The meaning of ‘senior manager’ is modified for this purposed by ASIC Class Order 04/899.

Rights issue of quoted financial products 6.30 Like s 708AA (which applies to rights issues of quoted securities), s

1012DAA provides an exemption from the mandatory disclosure requirements in relation to certain offers made in connection with a rights issue of financial products that are quoted on a prescribed financial market, such as the Australian Securities Exchange (ASX). Section 708AA is discussed at 4.29 above. The exemption is only available if the various conditions set out in s 1012DAA(2) are met, and ASIC has not made a determination (that the body has contravened certain disclosure and other requirements contained in the Corporations Act) under s 1012DAA(3). A body cannot rely on the exemption in Corporations Act s 1012DAA unless it has complied with the periodic and continuous disclosure requirements contained in the Corporations Act and the applicable listing rules. Nor can it do so if the securities have been suspended for quotation for more than five days in the 12 months leading up to the date of the offer. Section 1012DAA(2)(f) provides for the issuer of the product to give the market operator a notice that complies with s 1012DAA(7) within the 24hour period before the offer is made. Among other things, the notice must state that the body has complied with the provisions of Corporations Act Ch 2M (accounts and audit) that apply to the body, as well as the continuous disclosure requirements of Corporations Act s 674: see Chapter 7 below. The notice must state the potential effect of the rights issue on control of the body, and the consequences of that effect. Importantly, as with a notice given under s 708AA, the notice provided in accordance with s 1012DAA(7) must include any information that is ‘excluded [page 247] information’ as defined. The definition of ‘excluded information’ in s 1012DAA is different from that in s 708AA, reflecting the fact that a different general disclosure test applies for PDSs from that which applies to disclosure documents given under Pt 6D.2: see 6.51 below. Excluded information is information that a person would reasonably require for the purpose of making a decision, as a retail investor, whether to acquire the

relevant product that has not been disclosed by the body under the continuous disclosure rules. For example, this may comprise information that a body listed on the ASX has not disclosed because the information falls within ASX Listing Rule (LR) 3.1A: see 7.9 below. That said, excluded information need only be disclosed ‘to the extent to which it is reasonable for a person considering, as a retail client, whether to acquire the relevant product to expect to find the information in a PDS’: s 1012DAA(9).

Sale offers of quoted financial products 6.31 Section 1012DA contains specific exemptions covering certain offers of quoted financial products for sale, made by persons who have acquired securities either from the issuer or from a person who controls the issuer, that might otherwise require disclosure to investors under Corporations Act s 1012B(6) (sale amounting to indirect issue) or s 1012B(8) (sale amounting to indirect off-market sale by a controller). The exemption is similar to that provided for in relation to the on-sale of listed securities under Pt 6D.2, by Corporations Act s 708A. In broad terms, Corporations Act s 1012DA allows for the sale of quoted securities, without a PDS, by a person who has acquired them (either from the body or from a person who controls the body) in three circumstances. The first is where the financial products are quoted on a financial market and the issuer or the controller has provided the market operator with information in what is sometimes referred to as a ‘cleansing notice’, containing material information not disclosed under the continuous disclosure regime. The second is where a PDS relating to financial products in the relevant class has been lodged with ASIC and is still extant. The third is where the issue of the financial products was covered by a PDS, and the financial products had been issued to an underwriter or person nominated by the underwriter. ASIC offers certain relief in connection with on-sale of interests in listed managed investment schemes, on the terms of ASIC RG 173. A person who has acquired securities from the issuer or its controller in circumstances covered by s 1012D(6) or s 1012D(8) cannot rely on s 1012DA if the financial products were issued by the issuer, or sold by the

controller, for a purpose set out in s 1012DA(6)(c)(i) or s 1012DA(8)(d)(i); for example, for the purpose of on-sale. Nor can it rely on s 1012DA if a determination made by ASIC under s 1012DA(2) (to the effect that the issuer had contravened certain disclosure or other requirements) was in force at the time the relevant securities were issued.

Small scale personal offers of interests in managed investment schemes 6.32 Section 1012E contains a ‘less than 20/less than $2 million’ exemption in relation to registered managed investment schemes that corresponds to the ‘small-scale personal offers’ exemption for securities offers under s 708(1). Section 708(1) is [page 248] discussed in 4.18 above. The exemption provided by s 1012E is extended to the offer of interests in unregistered managed investment schemes by Corporations Regulations reg 7.9.16A. Broadly, the section provides that a PDS is not required for an offer of interests in a scheme where the offer is made personally to the offeree, and: in the case of an offer to issue interests, the total number of subscribers does not exceed 20 and the total amount subscribed does not exceed $2 million in a 12-month period; and in the case of a sale offer, the total number of purchasers does not exceed 20 and the total aggregate purchase price does not exceed $2 million in a 12-month period. Section 1012E includes provisions for its interpretation, including setting out the basis on which the various amounts and numbers are to be calculated. The person seeking to rely on the exemption must establish that the required conditions exist.23 These are: that all of the financial products are issued by the same person; that each offer is a ‘personal offer’ as defined in s 1012E(5); that none of the offers results in a breach of the ‘20

purchasers’ ceiling; and that none of the offers results in a breach of the $2 million ceiling. Certain offers are disregarded in deciding whether the ceilings are reached. Offers that did not require a PDS (for example, because they were made to professional investors) and those that were made under a PDS are disregarded, because of s 1012E(8). Under s 1012E(9), issues and sales that resulted from an offer made by a managed investment scheme that was ‘a body’ that was not then a registered scheme are disregarded if the body became a registered schcme within 12 months after that offer was made and the offer would not have required a PDS (otherwise than because of s 1012E) if the managed investment scheme had been a registered scheme at the time the offer was made.

PRODUCT DISCLOSURE STATEMENTS PDS must be prepared by the issuer or seller 6.33 The obligation to provide a PDS falls on any relevant regulated person (as defined in s 1011B) who engages in the relevant conduct. This may be an adviser, an intermediary such as a broker or dealer, the issuer of the product or, in the case of regulated secondary sales, the seller. However, the obligation to prepare (as distinct from provide) a PDS is fixed by s 1013A. In the case of primary offers, issues, and recommendations that result in issues, the PDS must be prepared by the issuer of the financial product. A PDS relating to a secondary sale must be prepared by the person making the offer to sell the financial product. The person who is required to prepare the PDS is referred to as the ‘responsible person’: s 1013A(3). The distinction between [page 249] the ‘regulated person’ and the ‘responsible person’ is important, particularly in determining who is liable and on what basis if a PDS is required but not provided.24

Except where the product is jointly issued, the PDS may be prepared by, or on behalf of, only one responsible person: s 1013A(3A) inserted by Corporations Regulations reg 7.9.07J. Under Corporations Act s 761E(5), over-the-counter derivatives are taken to be issued by both parties to the derivative; and exchange-traded derivatives are taken to be issued either by the intermediary (for example, a broker) where one is involved, or the market operator. Corporations Regulations reg 7.1.04D deals with derivatives traded on certain exempt markets, and reg 7.9.07A treats warrant issuers as the issuer of the financial product.

Manner of providing the PDS Timing 6.34 As a general rule, the PDS must be provided to the client before the financial product is acquired. This is consistent with the underlying policy of the disclosure regime: that the information in the PDS should inform the retail client’s decision whether to acquire the product. Section 1012A says that, where a PDS is required in a recommendation situation, it must be given at or before the time when the regulated person provides the advice. Section 1012B says that, in an issue situation, the PDS must be given at or before the time when the regulated person makes the offer, or issues the financial product, to the person. In a sale situation, the PDS must be given at or before the time when the regulated person makes the offer: s 1012C. Special arrangements apply for providing PDSs at a later time in relation to some financial products (such as superannuation) not discussed in this book. A PDS can be provided later for a financial product for which an application form is not required under s 1016A, to which the cooling-off period applies: s 1012G inserted by Corporations Regulations reg 7.9.15H.

Form of the PDS 6.35 The PDS may consist of two or more separate documents given to a person at the same time. Where a PDS comprises separate documents, the

statutory requirements in s 1013L must be met. All parts must be dated, with the date of the PDS being the most recent. The legislation and ASIC policy allows for the delivery of PDSs in electronic form in certain circumstances: see ASIC Regulatory Guide 221 — Facilitating Digital Financial Services Disclosure, March 2016. The electronic delivery of PDSs is governed by s 1015C, regs 7.9.02A and 7.9.02B and ASIC Corporations (Facilitating Electronic Delivery of Financial Services Disclosure) Instrument 2015/647 and Corporations (Removing Barriers to Electronic Disclosure) Instrument 2015/649. ASIC’s view is that most disclosures required under Corporations Act Pts 7.6–7.9 [page 250] (including PDSs) can be delivered digitally. In most cases it will be clear from the context that a client has provided or nominated their electronic address for the purpose of receiving disclosure under the Corporations Act, and no higher standard of consent is required to send to an electronic address compared to non-electronic methods. Section 1015C sets out how a PDS or Supplementary PDS (see below) is to be given to the client. As modified, the legislation requires that a PDS be: given personally to the person; or sent to the person at an address (including an email address) or a fax number nominated by the person; or otherwise made available to the person as agreed; or published electronically and notified in accordance with the ASIC instrument. If it is sent to an address, the envelope or container must be addressed to the person or the accompanying message must be addressed to the person. If the document is provided in electronic form, it must be presented in a way that as far as practicable allows the person to keep a copy and access it in the future; and clearly identifies the information that is part of the document.25

Incorporation by reference 6.36 Regulation 7.9.15DA allows for incorporation by reference of information into a full PDS. A responsible person is not required to include a statement or information mentioned in Pt 7.9 in a full PDS if the statement or information is in writing and is publicly available in a document other than the PDS, and the responsible person includes the certain statements in the PDS and makes the incorporated information available on request. The statement or information is taken to be included in the PDS for all purposes: Corporations Regulations reg 7.9.15DA.

Short-form PDSs 6.37 Regulation 7.9.61AA and Sch 10BA of the Corporations Regulations are intended to allow for the use of a short-form PDS (as defined) by a regulated person. Schedule 10BA inserts a new Pt 7.9 Div 3A into the Corporations Act. The use of a short-form PDS reduces the dissemination burden (but not the information burden) on the regulated person, by allowing the regulated person to provide an abridged disclosure document to the client, and requiring the regulated person to provide the full PDS only if it is requested. Therefore, the policy underlying the use of short-form PDSs is similar to that for short-form prospectuses: see 5.5 above. Section 1017H(1) of the Act (inserted by Pt 3 Sch 10BA to the Corporations Regulations) provides that ‘if a regulated person is required or obliged by this Act to give a [PDS] to another person, the regulated person may instead provide a Short-Form PDS for the product’. Section 1017H(2) goes on to provide that ‘if the [page 251] responsible person is requested by the other person to provide the [full PDS] the regulated person must provide’ the PDS. The short-form PDS provided for in Pt 7.9 Div 3A is not the same as the ‘shorter PDS’ regimes for some managed investment products and for

margin loans introduced by Corporations Amendment (No 5) Regulations 2010, discussed at 6.56 and 6.57 below.

Authorisation 6.38 There is no express requirement for a PDS to be signed by the issuer or seller (as the case may be) or any or all of its directors. However, for a PDS that must be lodged with ASIC, that requires the consent of all of the directors of the responsible person.26 A lodged PDS must also meet the requirements for lodgment contained in Pt 9.12 of the Act and the corresponding regulations.

CONTENTS REQUIREMENTS FOR THE PDS Evolution of the PDS content requirements 6.39 When Corporations Act Pt 7.9 was enacted in 2001, it was intended that adopting a ‘directed disclosure’ approach to prescribing PDS content would result in disclosure that was tailored for and appropriate to the particular type of financial product being offered, and assisted retail clients in making good choices in acquiring financial products. The revised explanatory memorandum to the Financial Services Reform Bill 2001, referred to in 6.2 above, contains an extensive explanation of the intentions and policy considerations guiding the new regime for disclosure in relation to financial products; it goes on to say that: The other key feature of the [directed disclosure] approach taken is that it has been drafted in such a way that it is capable of applying flexibly across the full range of financial products that are subject to the regime. It is envisaged that a Product Disclosure Statement for a banking product will be very different from a Product Disclosure Statement for a managed investment product in terms of the detail provided. However, there will, through the directed disclosure approach, be sufficient similarity between the documents to enable a consumer to compare them if they so wish.27

6.40 However, soon after the transition period for the FSR Act finished in 2004, it became apparent that the PDSs being produced in accordance with Pt 7.9, even for quite straightforward financial products, were not the clear and informative documents that the legislature had hoped for. Beginning in 2005 various attempts were made to address this problem;

generally by providing more prescriptive and targeted content requirements for particular financial products. This has been done largely through the making of regulations and by way of ASIC legislative instruments, [page 252] but PDS content requirements are also influenced by (non-binding) statements of ASIC regulatory policy on matters such as ‘good practice’ in disclosure for retail clients, either generally or in relation to particular products. The end result is that the content requirements for the PDS are both highly specific for particular products, and extremely difficult to locate and follow. It should not pass without comment that legislation and regulatory rules intended to produce the clear, concise and effective communication of information utterly fail to demonstrate it. 6.41 After numerous attempts to fix the poor quality disclosure being produced by responsible persons in accordance with Pt 7.9, we have now arrived at what is essentially a bifurcated disclosure regime, with some managed investment products and margin loans covered by ‘shorter PDS’ regimes introduced in 2010 (not to be confused with the ‘short-form PDS’ regime described at 6.37 above) and all other financial products28 subject to the full PDS regime as (extensively) modified by the Corporations Regulations and ASIC policy. In the discussion that follows, we begin by looking at the content requirements for relevant financial products29 that attract the full PDS disclosure obligation in Pt 7.9. We then consider the specific content requirements for shorter PDSs for simple managed investment schemes30 (at 6.56) and margin lending facilities: at 6.57.

Determining PDS contents 6.42 Various sections of the Corporations Act prescribe the form and contents of the PDS. Further detailed content requirements are contained in the Corporations Regulations. In each case, the extent of the required disclosure is limited by reference to factors such as the state of the

responsible person’s knowledge, the likely information needs of retail clients, the nature of the financial product offered and the circumstances of the offer, by ss 1013C, 1013FA and 1013F: see below. The PDS content requirements are subject to an overriding legislative requirement that ‘the information included in the Product Disclosure Statement must be worded and presented in a clear, concise and effective manner’: s 1013C(3). The meaning of ‘clear, concise and effective’ is discussed at 5.28 above. Unlike prospectuses, which have a fixed life of up to 13 months, PDSs are ‘evergreen’ and do not expire. However, s 1012J as modified by ASIC Class Order 03/0237 requires that the information in a PDS be up-to-date as at the time it is given to the client. A PDS that becomes out-of-date can be withdrawn and replaced, [page 253] or updated by way of a supplementary PDS under Pt 7.9 Div 2 Subdiv D: see 6.65. Otherwise, material alterations require the PDS to be re-dated.31 The main form and content requirements for a full PDS (for a product that is not a continuously quoted security: see s 1013FA) are summarised in Table 6.3. In addition to the prescribed contents, a full PDS may include other information or refer to other information that is set out in another document: s 1013C(1)(b). Table 6.3: Form and content requirements — full PDSs Title and abbreviation Specific disclosure requirements

Requirements Section Document must be titled a ‘Product Disclosure s 1013B Statement’. The abbreviation PDS can be used elsewhere. PDS must disclose information about (where s 1013D of the applicable) the issuer, any significant risks or benefits associated with holding the product, costs, fees, expenses and charges,

commissions, significant characteristics and features of the product, dispute resolution, tax implications, cooling off, environmental, social and ethical considerations in investment, and certain other specific information for particular products.

Act and Pt 7.9 Divs 2, 2A, 2B, 4 and 4A of the Regulations

General disclosure obligations

PDS must include any other information ‘that s 1013E might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product’. Date PDS must be dated. The date is the date of s 1013G preparation or, where it is required to be lodged with ASIC, of lodgment. Listed PDS must contain prescribed disclosures about s 1013H products whether the product can be traded on a market or whether application has or will be made to the operator of the market. Registered PDS must contain prescribed information s 1013I schemes that about the scheme’s continuous disclosure are ED obligations and the availability of copies of securities disclosed information. PDSs lodged PDS must state that the document has been s 1013J with ASIC lodged and that ASIC takes no responsibility under s 1015B for its contents. Experts Where a PDS contains a statement by a person s 1013K statements or a statement said to be based on a statement made by a person, the person must consent and the PDS must disclose that consent. 6.43 ASIC has issued detailed policy guidance on the full PDS requirements: see generally ASIC Regulatory Guide 168 — Disclosure: Product Disclosure Statements (and Other Disclosure Obligations),

October 2011. The guidance includes the ASIC ‘Good Disclosure Principles for PDSs’ in RG 168, Section C — that disclosure should: (a) be timely; (b) be relevant and complete; (c) promote product understanding; [page 254] (d) promote product comparison; (e) highlight important information; and (f) have regard to consumers’ needs. 6.44 Specific ‘if not, why not’ disclosure policies are applied by ASIC in relation to particular types of financial products — these require issuers to disclose whether their financial product meets certain benchmarks (that is, legal or business characteristics) and if not, why not, and what the effect of divergence from the benchmark means for investors. Importantly, these policies include: ASIC Regulatory Guide 45 — Mortgage Schemes: Improving Disclosure for Retail Investors, May 2012; ASIC Regulatory Guide 46 — Unlisted Property Schemes: Improving Disclosure for Retail Investors, March 2012; ASIC Regulatory Guide 227 — Over-the-Counter Contracts for Difference: Improving Disclosure for Retail Investors, August 2011; ASIC Regulatory Guide 231 — Infrastructure Entities: Improving Disclosure for Retail Investors, January 2012; ASIC Regulatory Guide 232 — Agribusiness Managed Investment Schemes: Improving Disclosure for Retail Investors, January 2012; and ASIC Regulatory Guide 240 — Hedge Funds: Improving Disclosure, October 2014 PDSs for these products are usually prepared in accordance with these guides.

Main disclosure requirements for a full PDS Specific disclosure 6.45 A long list of specific disclosure requirements for PDSs is contained in Corporations Act s 1013D. The document must be called a ‘Product Disclosure Statement’ (s 1013B) and it must be dated (s 1012G). It must include the name and contact details of the issuer (and, if the PDS relates to a sale, the seller): s 1013D(1)(a). Subject to the limitations in ss 1013D,

1013C(2), 1013F and 1013FA (see 6.52 below) the PDS must include such of the prescribed information as a person would reasonably require for the purposes of making a decision, as a retail client, whether to acquire the financial product. In deciding what a ‘retail client’ would reasonably require, it is has been said that: The ‘retail client’ concept is central to the operation of s 1013D in particular. That person will typically be reasonably intelligent; at a minimum, the decision-maker should not assume the retail investor is obtuse, unusually stupid, or prone to behave like a ‘moron in a hurry’ … While not expert in matters of finance, the retail client will exercise ordinary common sense and be reasonably diligent and reflective when deciding whether to make an investment. He or she may be less interested in technical details than regulators sometimes assume. The retail client can read what is plainly explained without drawing unlikely or off-beat conclusions. He or she has a reasonable tolerance for risk, especially where the investment opportunity in question involves financing property development. I do not suggest the individual will be incautious, but he or she is unlikely to approach a document with the lawyer’s forensic eye for nuance and heightened sensitivity to risks, both real and imagined.32

[page 255] The prescribed information is: information about any significant benefits to which a holder of the product will or may become entitled, the circumstances in which and times at which those benefits will or may be provided, and the way in which those benefits will or may be provided (s 1013D(1)(b)) or disclosed as a dollar amount unless the regulations provide otherwise (s 1013D(1)(m)); information about any significant risks associated with holding the product (s 1013D(1)(c)); information about: the cost of the product; any amounts that will or may be payable by a holder of the product in respect of the product after its acquisition, and the times at which those amounts will or may be payable; and if the amounts paid in respect of the financial product and the amounts paid in respect of other financial products are paid into a common fund — any amounts that will or may be deducted from the fund by way of fees, expenses or charges (s 1013D(1)(d)) or disclosed as a dollar amount unless the regulations

provide otherwise (s 1013D(1)(m)). The presentation, structure and format of the fees and costs disclosure must comply with Corporations Regulations reg 7.9.16N and ASIC has issued relevant guidance in ASIC Regulatory Guide 97 — Disclosing Fees and Costs in PDSs and Periodic Statements, November 2015; if the product will or may generate a return to a holder of the product — information about any commission, or other similar payments, that will or may impact on the amount of such a return (s 1013D(1)(e)), disclosed as a dollar amount unless the regulations provide otherwise (s 1013D(1)(m)); information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product (s 1013D(1)(f)); information about the dispute resolution system that covers complaints by holders of the product and about how that system may be accessed (s 1013D(1)(g)); general information about any significant taxation implications of financial products of that kind (s 1013D(1)(h)); information about any cooling-off regime that applies in respect of acquisitions of the product (whether the regime is provided for by a law or otherwise) (s 1013D(1)(i)): see 6.64 below; if the product issuer (in the case of an issue statement) or the seller (in the case of a sale statement) makes other information relating to the product available to holders or prospective holders of the product, or to people more generally — a statement of how that information may be accessed (s 1013D(1)(j)); if the product has an investment component (including managed investment products —the extent to which labour standards or environmental, social [page 256] or ethical considerations are taken into account in the selection, retention or realisation of the investment (s 1013D(1)(l) and (2A)); and

any other statements or information required by the regulations (s 1013D(1)(k)). Under s 1013D(1)(m) as modified by Corporations Regulations reg 7.9.15A, information that is required to be included in the PDS because of s 1013D(1)(b) (benefits), (d) (costs) and (e) (commissions), must be stated as amounts in dollars. This is so unless ASIC has determined otherwise in accordance with Corporations Regulations reg 7.9.15B or reg 7.9.15C. ASIC’s detailed policy on dollar disclosure is set out in ASIC Regulatory Guide 182 — Dollar Disclosure, June 2008. The particular requirements of s 1013D(1)(b), (c), (d) and (f) are modified for market traded derivatives by Corporations Regulations reg 7.9.07B. Significant risks 6.46 Section 1013D(1)(c) requires the disclosure of such ‘information about any significant risks associated with holding the product’ as a person would reasonably require for the purposes of making a decision, as a retail client, whether to acquire the financial product. The fact that the issuer must disclose any significant risks associated with holding the financial product is one of the things that differentiates the disclosure required in a PDS from the disclosure required in connection with an offer of securities regulated under Corporations Act Ch 6D. ‘Significant risk’ was considered at length by Judd J at first instance in Woodcroft-Brown v Timbercorp Securities Ltd (in liq) 2011) 85 ACSR 551; [2011] VSC 427, and by the Court of Appeal in Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2013) 96 ACSR 307; [2013] VSCA 284 (Warren CJ, Buchanan JA and Macaulay AJA). Noting that the risk must be significant to the investor in making a decision, the Court of Appeal concluded (at [130]) that: Significant risk involves both probability and consequence. ‘Significant’ means important or notable and ‘risk’ means exposure to chance of hazard or loss. It would constitute an incorrect approach to look only at consequence when the very definition of risk involves the notion of chance, meaning probability.

It is appropriate to take into account ‘the elements of probability, consequence and the perspective of the investor’: at [131]. Ultimately,

whether a particular circumstance is judged to be a ‘significant risk’ will involve a consideration of a range of issues. The concept is (at [132]): … intended to be a flexible requirement tailored to the type of product involved and its particular circumstances. Among the constellation of issues in weighing ‘significant risk’, there is the probability of the occurrence, the degree of impact upon investors, the nature of the particular product and the profile of the investors together with other matters. The constellation or group of issues is not closed and will vary depending upon particular circumstances.

[page 257] The Court of Appeal expressed the view (at [160]) that: On its proper construction, s 1013D requires the disclosure of a risk with important consequences to the investor as considered from the perspective of the investor. When there is a low probability of occurrence, but none the less its consequences are sufficiently serious, then a risk may require disclosure. The fact that such a risk is capable of management or being managed does not obviate the need to disclose the risk unless the likelihood is that management will not prevent the risk materialising.

Dispute resolution 6.47 Many financial product issuers (including all responsible entities of registered managed investment schemes) are required to hold an AFS licence: see 6.73 below. Licensees and non-licensees that issue financial products to retail clients must have appropriate alternative dispute resolution arrangements, under ss 912A(1)(g) and 1017G respectively. Information about the dispute resolution system that covers complaints by holders of the product, and about how that system may be accessed, must be included in the PDS, under s 1013D(1)(g). Cooling off 6.48 Where cooling-off arrangements (which allow retail clients acquiring certain types of financial products to cancel and receive a refund within 14 days) exist, these must be disclosed in the PDS under s 1013D(1) (i). Cooling off is required under s 1019A for certain registered managed investment schemes: see 6.64 below. Environmental, social or ethical considerations

6.49 If the product has an investment component, then s 1013D(1)(l) requires that the PDS disclose ‘the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment’. Detailed disclosure requirements for this item are prescribed, under s 1013D(4), by Corporations Regulations reg 7.9.14C. ASIC has developed guidelines for the disclosure requirement in s 1013DA, in ASIC Regulatory Guide 65 — Section 1013DA Disclosure Guidelines, November 2011. Products with an investment component include registered managed investment schemes: s 1013D(2A). Additional requirements 6.50 Part 7.9 Div 2 Subdiv B also includes provisions requiring that additional prescribed statements be included in the PDS where: the PDS states or implies that the financial product will be able to be traded on a financial market: s 1013H; the PDS relates to interests in a registered managed investment scheme that are ED (enhanced disclosure) securities as defined in Pt 1.2A: s 1013I; the PDS has been lodged with ASIC: s 1013J; and the PDS includes statements made by others, such as experts: s 1013K. [page 258]

General disclosure obligation 6.51 In addition to the specific disclosure required under s 1013D, and subject to ss 1013C(2), 1013F and 1013FA, a PDS must also contain ‘any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product’: s 1013E. Sections 1013D and 1013E are complimentary ‘in that s 1013E is designed to enhance the disclosure obligation by approaching disclosure from a different perspective’.33 A particular piece of information may need

to be disclosed under s 1013D or 1013E or both. Thus in WoodcroftBrown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 551; [2011] VSC 427 at [120]; aff’d Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307; [2013] VSCA 284, Judd J concluded that: … both provisions have scope to operate. They have different work to ensure that investors are given sufficient information. Just because it is unlikely that, where disclosure of risks are concerned, s 1013E will not add anything to the requirements of s 1013D(1) (c), does not in my view limit the scope of its potential operation.

Section 1013E draws attention to the notion of the ‘retail client’ and what might reasonably be expected to have a ‘material influence’ on their decision in relation to the particular financial product. As with the specific disclosure items in s 1013D, the general disclosure obligation is subject to the various limitations in ss 1013C and 1013F that it must be information that is actually known to a relevant person, and that it need not be included if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information in the PDS: see 6.52 below.

Limits on the disclosure obligation 6.52 As noted, the disclosure obligations in the full PDS are limited by ss 1013C(2) and 1013F. These sections perform a similar limiting function to s 710(2) and (3) of the Act in relation to prospectuses, although they are in different terms.

Matters actually known to the responsible person 6.53 The specific obligation in s 1013D and the general obligation in s 1013E are limited by the actual knowledge of the person preparing the PDS and certain others involved in its preparation, by s 1013C(2). It provides that the information required by those sections need only be included in the PDS to the extent to which it is actually known to: the responsible person; in the case of a PDS issued in connection with a secondary sale, the issuer of the financial product; any person named in the PDS as underwriter of the issue or sale of

the financial product; [page 259] any person named in the PDS as an AFS licensee providing services in relation to the issue or sale of the financial product and who participated in the preparation of the PDS; any person who has given the consent contemplated by s 1013K; any person named in the PDS with their consent as having performed a particular professional or advisory function; and if any of them is a body corporate, any director of that body corporate. The fact that the disclosure obligation is limited to those things within the actual knowledge of those involved in the preparation of the PDS is significant: cf s 710(1) which requires the inclusion in a prospectus of information that people involved in the preparation of a prospectus ‘in the circumstances ought reasonably to have obtained … by making inquiries’. The absence of this extended disclosure requirement is intended to remove the need for extensive due diligence on the part of the person preparing the PDS.34 However, some due diligence is still appropriate in light of ss 1021E(4) and 1022B(7): see 8.49 below. Note that in the context of a secondary sale (that is, the on-sale of an already issued financial product in circumstances requiring the provision of a PDS under s 1012C) the knowledge of the product issuer, as well as the seller, will be relevant: s 1013C(2)(b). Thus, the co-operation of the product issuer would appear to be required in the preparation of the sale statement.

Only reasonably expected information required 6.54 The disclosure obligations in ss 1013D and 1013E are further limited by s 1013F. It provides that information is not required to be included in a PDS if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the

information in the PDS. Relevant factors to be taken into account in determining this include the nature of the product (including its risk profile), the extent to which the product is well understood by the market, the kinds of things people can reasonably be expected to know, the effect of continuous disclosure in relation to ED securities, and the way in which the product is promoted, sold or distributed. There is a further regulationmaking power to specify additional factors, under s 1013F(2)(f). The fact that particular information is already publicly available is likely to be relevant. There is: … nothing conceptually wrong in the approach … of examining the availability in public documents of detailed financial data. It is difficult to contemplate how, as a matter to be taken into account in determining what a retail investor would reasonably expect to find in the PDS, it would not be relevant that the very information is available in the annual report, which itself is publicly available.35

[page 260]

Modified PDS content requirement for quoted financial products 6.55 Section 1013FA further limits the amount of disclosure required in a PDS for financial products that are ‘continuously quoted securities’ as that phrase is defined in Corporations Act s 9: see 5.12 above. The PDS need not reproduce information that is included in the most recent annual financial report, half-year financial report and continuous disclosure notices provided by the issuer. The PDS must refer to the information and it must be made available on request. ASIC may make a determination that s 1013FA is not to apply to an issuer if it has contravened certain disclosure and other obligations in the preceding 12 months: s 1013FA(3).

Modified PDS content requirement for simple managed investment schemes 6.56 Changes to the Corporations Regulations introduced by the Corporations Amendment (No 5) Regulations 2010 (as further modified

by the Corporations Legislation Amendment Regulations (No 2) 2011) substituted new content requirements for PDSs for simple managed investment schemes.36 Transitional arrangements allowed for issuers with existing PDSs to remain in the old regime until 22 June 2012 and to continue to issue supplementary PDSs until that date, or to opt in to the new, shorter PDS regime from mid-2011. A simple managed investment scheme is defined in Corporations Regulations reg 1.0.02; it is intended to cover managed funds invested in liquid financial instruments such as short-term bank deposits or transferrable securities. The definition refers to a registered scheme ‘which is or was offered because it meets 1 of the following requirements’: that it invests at least 80% of its assets: in money in an account with a bank on the basis that the money is available for withdrawal immediately during the bank’s normal business hours or at the end of a fixed period that is no longer than three months; in money on deposit with a bank on the basis that the money is available for withdrawal immediately during the bank’s normal business hours or at the end of a fixed period that is no longer than three months; or under one or more arrangements by which the responsible entity can reasonably expect to realise the investment, at the market value of the asset, within 10 days. The regime does not apply to registered managed investment schemes that are, or are intended to be, quoted on a financial market, are part of a stapled security, are property, mortgage or agricultural schemes, or are platforms (that is, registered schemes that operate as investor-directed portfolio services). Subdivision 4.2C of Pt 7.9 Div 4 of the Corporations Regulations determines the new content requirements for PDSs for these products. The regulations substitute new ss 1013C(1) and 1013L that apply to PDSs for simple managed investment [page 261]

schemes, and omit ss 1013D, 1013E and 1015D(3): see Pt 5C of Sch 10A to the Corporations Regulations. The effect of the modifications is to require that a PDS for a simple managed investment scheme instead meet the content requirements in Sch 10E to the Corporations Regulations. Under Sch 10E the matters such as the page length and font size for the PDS are prescribed. Specific information must be provided in the PDS under prescribed section headings; these must be numbered and titled as follows: 1.

About [name of responsible entity]

2.

How [name of simple managed investment scheme] works

3.

Benefits of investing in [name of simple managed investment scheme]

4.

Risk of managed investment schemes

5.

How we invest your money

6.

Fees and costs

7.

How managed investment schemes are taxed

8.

How to apply.

Schedule 10E goes on to set out specific instructions about matters to be disclosed under each of those headings. Additional information can be included but must not cause the PDS to exceed the maximum page limit. A ‘matter contained in writing’ may be applied, adopted or incorporated in the PDS in accordance with reg 7.9.11X. This would have the effect of treating the issuer as having provided the incorporated information, even though it exceeded the page limit and was not actually placed before the client, in determining the adequacy of disclosure.

Modified PDS content requirement for margin loans 6.57 The content requirements for PDSs for margin lending facilities are also modified by the Corporations Regulations; the relevant provisions are in Subdiv 4.2A of Div 4, Pt 7.9. A ‘margin loan’ for this purpose is a standard margin lending facility as defined in Corporations Act s 791EA(2), discussed in Chapter 3 above. Part 5A of Sch 10A modifies ss 1013C(1) and 1013L and omits ss 1013D and 1013E, Div 2 Subdiv 2, and s 1015D(3). Instead, the PDS must

comply with the content requirements in Sch 10C to the Corporations Regulations. It must include certain prescribed information under the following seven headings: 1.

About [name of provider of the margin loan] and [name of margin loan product]

2.

Benefits of [margin loan product]

3.

How [margin loan product] works

4.

What is a margin call?

5.

The risk of losing money

6.

The costs

7.

How to apply.

Schedule 10C goes on to prescribe the information to be provided under each heading. As with a PDS for a simple managed investment scheme discussed at 6.56, [page 262] a ‘matter contained in writing’ may be applied, adopted or incorporated in the PDS in accordance with reg 7.9.11E.

CONDUCTING THE OFFER Lodgment with ASIC 6.58 Most PDSs are not lodged with ASIC. The exception is PDSs relating to registered managed investment schemes that are or are to be listed must be lodged with ASIC: s 1015B. In this (limited) case the issuer or seller (as the case may be) and, if it is a body corporate, all its directors, must consent to the lodgment. Information that has been included by reference in a PDS in accordance with Corporations Regulations reg 7.9.15DA must be lodged with ASIC under Corporations Regulations reg 7.9.15DC. Where the PDS has been lodged with ASIC in accordance with this requirement and the product is not yet able to be traded on a financial

market, an exposure period of seven days is prescribed by s 1016B. It provides that the responsible person must not issue or sell a financial product to which the PDS applies until the period of seven days (or longer if extended by ASIC) after lodgment of the PDS has ended. PDSs relating to products other than listed schemes need not be lodged with ASIC. Instead, s 1015D imposes an obligation on the person responsible for preparing the statement to notify ASIC that the PDS is in use as soon as practicable, and in any event within five business days, after a copy of the PDS is first given to someone in a recommendation, issue or sale situation. This is done by lodging an electronic ‘in-use notice’ with ASIC in the prescribed form. A copy of the PDS must be retained for seven years, and provided to ASIC and others on request: s 1015D and Corporations Regulations reg 7.9.15DB.

Application forms 6.59 Generally, the issue or sale of financial product in circumstances that require a PDS can only be made in response to an eligible application: that is, one that is made by the applicant on an application form attached to, accompanying or derived from an up-to-date PDS: s 1016A. In ASIC’s view, in the case of electronic disclosure, ‘the requirement in s 1016A that an application form be included in or accompanied by a PDS is wide enough to enable a provider to incorporate an application form into a digital PDS, or give the application at the same time as the PDS’.37 ASIC has granted relief from s 1016A to facilitate the operation by ASX of an exempt market38 through which requests for the issue or redemption of interests in unlisted managed investment schemes that are registered to use the service can be made, and clients’ holdings recorded through CHESS.39 ASIC Class Order 13/1621 exempts responsible entities of managed investment schemes available through [page 263] the service from only issuing interests in response to an application form

that was included in or accompanied a PDS, and allows instead for the issue of interests on the basis of an electronic message through the service indicating that the investor has been given the current version of the PDS.

Dealing with application money 6.60 Application moneys must be dealt with in accordance with s 1017E. Section 1017E is supplemented and amended by Divs 3 and 5A of the Corporations Regulations. The requirements apply to money paid to an issuer of financial products, or to a seller of financial products in relation to which the seller has prepared a PDS, to acquire the financial product in circumstances where the product is not issued or transferred immediately upon receipt of the moneys. In broad terms, the money must be paid into a designated trust account held with an Australian ADI (or other account prescribed under Corporations Regulations reg 7.9.08) used solely for that purpose, on the day it is received or on the next business day. Interest paid on the account can go to the product provider if the requirements of reg 7.9.08A are met. The requirements in s 1017E apply regardless of whether the person paying the money is a retail client or not. In the case of money paid to a product issuer, the requirements apply regardless of whether or not a PDS was required and produced. However, they only apply to a product seller if the sale is made pursuant to a PDS. Although it is derived from s 722, which requires that application moneys be held on trust pending the issue of securities, it is both more prescriptive and extensive in operation than that section. In particular, s 1017E allows for money to be withdrawn from the account only in the prescribed circumstances. Also, s 1017E requires that the money be dealt with in one of the ways specified in the section within one month, or longer if that is reasonable in the circumstances. Under s 1017E(2A), subject to subs (2C), the money paid is taken to be held in trust by the issuer for the benefit of the applicant. The money must only be taken out of that account, relevantly, if it is taken out for the purpose of return to the person by whom it was paid; the product is issued to or transferred to, in accordance with the instructions of that person; or

is taken out for a purpose specified by the regulations: s 1017E(3). That statutory trust terminates in the circumstances identified in s 1017E(4) of the Corporations Act.40 Section 1017E(4) obliges the issuer either to return the application money to the applicant, or issue the financial product applied for, before the end of one month starting on the day on which the money was received. However, if it is not ‘reasonably practicable’ to do so within that month, this must be done ‘by the end of such longer period as is reasonable in the circumstances’. In this case, the first of the two alternatives (issuing the products or returning the money) that can be [page 264] done, must; ‘the application money must be returned with a month unless it is not reasonably practicable either to issue the product or return the application money’.41 Once the one-month period expires, the application moneys are held by the issuer on trust for return to the applicants under s 1017E(2A) of the Corporations Act. The issuer is obliged to return the money to each applicant.42

Quotation conditions 6.61 If the PDS states that the product will be listed for quotation on a financial market, application must be made within seven days of the date of the PDS, and listing must be achieved within three months, otherwise any subscription moneys must be returned: ss 1016D and 1017E. The provision corresponds in broad terms to s 723(3) which applies to the offer of securities: see the discussion in 5.44 above. If an application for quotation is not made within seven days, and trading does not commence within three months, s 1016E applies, giving the offeror certain alternatives (in relation to outstanding applications) set out in s 1016E(2).43

Minimum subscription condition 6.62 If the PDS contains a minimum subscription condition, the minimum subscription must be received before the products are issued or sold: s 1016C. The provision corresponds in broad terms to s 723(2) which applies to the offer of securities: see the discussion in 5.49 above. Again, if the condition is not met, the offeror has available to it the options set out in s 1016E(2), which include returning the money, issuing a supplementary PDS and giving applicants up to one month to withdraw their applications.

Transaction confirmation 6.63 Where there is a transaction by which a person acquires a financial product as a retail client or that occurs while the person holds the financial product (including a full or partial disposal of the product), confirmation of the transaction must be provided (unless an exception applies) in the manner prescribed by s 1017F. There are several significant exceptions to the confirmation requirement, contained in s 1017F(4) and Corporations Regulations reg 7.9.62. These relate to, among others, transactions involving regular contributions (such as pursuant to a regular savings plan or from an employee’s wages into a superannuation fund), some transactions involving superannuation products and RSAs, and certain transactions [page 265] involving deposit accounts (such as processing cheques, debiting fees and charges, and involving direct credit or direct debit arrangements). The person required to provide the confirmation is set out in reg 7.9.63A, which modifies s 1017F(2). In most cases the obligation to provide confirmation falls on the issuer of the product; however, where the transaction is a secondary sale made in circumstances requiring a PDS the seller is responsible for confirming the transaction. Acquisitions (other than by way of issue) and disposals made through an AFS licensee are generally confirmed by the licensee.

Detailed requirements relating to the content of the confirmation and the form in which it may be given are contained in Pt 7.9 Divs 5B and 6 of the Corporations Regulations. In general terms, the confirmation can be given on a transaction-by-transaction basis or by means of a standing facility which allows the holder of the product to obtain for themselves confirmation of the transaction (for example, through accessing a website). A standing facility, if used, must meet the requirements of s 1017F(5A) or s 1017F(5B).44 The content of the confirmation is also prescribed. Mandatory requirements are set out in s 1017F(8) and regs 7.9.63B– 7.9.63G. The confirmation may be provided in various ways, including electronically.

Cooling off 6.64 Part 7.9 Div 5 allows for ‘cooling off’ in connection with the issue, or sale pursuant to a PDS, to a retail client of certain financial products. The cooling-off right allows the client, within 14 days of the earlier of receiving the confirmation required under s 1017D or the end of the fifth day after the issue or sale, to return the product and obtain a refund. Section 1019A(1)(a) provides that cooling off is potentially available in respect of interests in registered managed investment schemes. However, the availability of the right is limited by Corporations Regulations reg 7.9.64; for example, cooling off is not available in relation to interests in registered managed investment schemes that are or are to be listed, or that are not liquid for the purposes of s 601KA of the Corporations Act at the time of issue. It is also not available in relation to financial products offered or issued under a distribution reinvestment plan or switching facility, or following an additional contribution made under an existing agreement or contract. Financial products issued as consideration for an offer made under a takeover bid under Ch 6 are also excluded. The unsatisfactory nature of the definition of ‘liquid’ in s 601KA means that a registered managed investment scheme can change from being liquid at the time the client applied for the product to being illiquid at the time it is issued. This may impact on a client’s ability to exercise cooling-off rights.45

[page 266] Where the right to return the product is available, the provisions of s 1019B and Corporations Regulations regs 7.9.64A–7.9.70 apply. In particular, these sections impose procedural requirements for the exercise of the cooling-off right and allow for the adjustment of the amount to be returned to the client to allocate market risk and take account of taxes and charges.

Correcting and updating disclosure 6.65 Part 7.9 Div 2 Subdiv D provides for the preparation and distribution of supplementary or replacement PDSs. These documents can be used to: correct a misleading or deceptive statement in the PDS; correct an omission from the PDS of information it is required to contain; update, or add to, the information contained in the PDS; or change a statement about minimum subscription requirements or a proposal to list. The effect of a supplementary PDS is that, when provided with the original PDS or to a person who has received the original PDS, the original PDS is taken to contain (or be corrected by) the information in the supplementary document, for the purpose of determining whether the required disclosure has been provided to investors.

Additional information 6.66 A person who has obtained, or should have been given, a PDS in relation to a financial product and who is not an existing holder of that product can request additional information from the person who has prepared the PDS, under s 1017A. So too can certain intermediaries, including AFS licensees and their authorised representatives. The responsible person must provide the information within one month (or

earlier if practicable) if the requisite jurisdictional nexus is made out and the following conditions are met: the responsible person has previously made the information generally available to the public; the information might reasonably influence a person’s decision, as a retail client, whether to acquire the financial product; it is reasonably practicable for the responsible person to provide the information; and the person requesting it pays a charge not exceeding the responsible person’s reasonable costs incurred in providing the information.

STOP ORDERS 6.67 ASIC has power under s 1012E(2) to issue stop orders, in circumstances where a ‘disclosure document or statement’ is defective within the meaning of s 1020E(11) or is not worded and presented in a clear, concise or effective manner. A ‘disclosure document or statement’ has the meaning set out in s 1022A(1) — it includes a PDS, and a supplementary PDS. A stop order can also be made where an advertisement or statement of a kind referred to in s 1018A(1) or (2) (see 6.68 below) is defective, or [page 267] where an issuer does not have in place the dispute resolution arrangements required by s 1017G. Ordinarily, a stop order can be issued only after ASIC has held a hearing giving interested persons an opportunity to be heard, but ASIC can issue interim stop orders without a hearing in certain circumstances. ASIC’s stop order power is explained in 5.54 above.

CONTROLS ON THE SALE PROCESS Restrictions on advertising financial products

6.68 Like offers of securities (see 4.35 above), offers of financial products cannot be advertised in some circumstances. More broadly, where advertising is permitted it can only occur where certain information is included. The restrictions on advertising financial products are contained in ss 1018A and 1018B. These restrictions apply where a financial product is available for acquisition by persons as retail clients (see 6.17 above) either by way of issue or pursuant to sale offers to which s 1012C applies. The thrust of the legislative controls on advertisements is to require them to identify the issuer of the financial product (and the seller, in the case of a regulated secondary sale) and to direct the attention of readers, listeners and viewers to a PDS. Section 1018A(1) contains the advertising requirements that apply where financial products are currently on offer to retail clients. Section 1018A(2) applies where the financial products are not yet available but it is reasonably likely that they will become available for acquisition by retail clients in the future. A person who publishes an advertisement or statement that contravenes s 1018A(1) or s 1018A(2) in the ordinary course of a media business, and who does not know, and had no reason to suspect, that its publication would amount to a contravention, does not themselves contravene the section, by virtue of s 1018A(5). ‘Media’ is defined for this purpose in s 1018A(6).

Advertising personal offers 6.69 Offers of interests in managed investment schemes that are made without a PDS under the ‘20 issues in 12 months’ exception contained in s 1012E must not be advertised: s 1018B.

Advertising offers that require a PDS 6.70 Section 1018A is triggered where a person advertises a financial product, or publishes a statement that is reasonably likely to induce people to acquire the financial product. Offers that require a PDS must not be advertised unless the advertisement contains the information required by s 1018A(1) or s 1018A(2) (as the case may be). However, certain publications in the nature

of corporate and media reports do not contravene s 1018(1) or s 1018(2) (even if they do not contain the information required by s 1018A(1) or s 1018A(2)), because of s 1018A(4). The burden of proving that the advertisement is authorised by that subsection is on the defendant. [page 268] A person who advertises an offer in contravention of s 1018A(1) or s 1018A(2) commits an offence by virtue of s 1311(1). Unlike the corresponding s 734, which regulates securities advertising, the offence is not expressed to be one of strict liability.

Other permitted advertisements 6.71 As with the restrictions on advertising offers of securities, contained in Pt 6D.2, there are exceptions to the prohibitions on advertising financial products. The availability of financial products can be advertised in accordance with s 1018A(1). The advertisement must identify the issuer of the product and, if it relates to a sale offer, the seller. It must indicate that a PDS is available for the product and state where it can be obtained. Further, it must indicate that a person should consider the PDS in deciding whether to acquire, or continue to hold, the product. Accordingly, it is not possible to meet the requirements of s 1018A(1) until a PDS is available. Section 1018A(2) allows the advertising and publicising of an offer before the product is released or becomes available. The advertisement or statement must identify the issuer and, where relevant, the seller of the product; state that a PDS will be made available when the product is released or otherwise becomes available, and indicate when and where the PDS is expected to be made available; and indicate that a person should consider the PDS in deciding whether to acquire, or continue to hold, the product. Section 1018A(3) allows dissemination of a PDS (other than a PDS subject to a stop order) without contravening the prohibition.

Section 1018A(4) provides general exceptions that mirror, in many respects, s 734(7): see 4.42 above. ASIC has a range of powers in relation to advertisements, including the power to require an issuer to substantiate claims made in its marketing materials.46 These powers are discussed in Chapter 15.

Hawking financial products 6.72 Hawking of financial products (other than securities and interests in registered managed investment schemes) is prohibited by s 992A. Hawking of managed investment products is prohibited by s 992AA. For a general discussion of hawking, see 4.43 and 14.86 above. Section 992A(1) prohibits the ‘offer of financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person’. This refers to a face-to-face meeting with the person. Section 992A(3) limits telephone canvassing; it prohibits a person from making an offer to issue or sell a financial product in the course of, or because of, an unsolicited telephone call unless the call complies with various requirements set out in s 992A and the regulations. Section 992A is [page 269] supplemented and modified by Corporations Regulations regs 7.8.21A, 7.8.22, 7.8.22A, 7.8.23, 7.8.24 and 7.8.25. Hawking of interests in registered managed investment schemes is prohibited by s 992AA. Offers made in the course of unsolicited meetings and unsolicited telephone calls are both prohibited. However, the prohibition does not apply if the offer is not to a retail client, the offer is an offer of interests in a listed scheme made by telephone by an AFS licensee, the offer is made by an AFS licensee to a client with whom it has dealt in interests in the previous year, or the offer is made under an eligible employee share scheme. ASIC has published extensive guidance on the hawking provisions, in

ASIC Regulatory Guide 38 — The Hawking Provisions, May 2005.

Impact of the AFS licensing laws 6.73 As Chapter 13 below explains, a person who carries on a financial services business in the jurisdiction must hold an AFS licence authorising it to carry on that business. The licensing requirement may impact on the offer and issue of financial products other than securities, most notably if the offeror is: (i) the responsible entity of a registered scheme; (ii) carrying on a business of issuing financial products; or (iii) carrying on a business of providing financial product advice in relation to those products.

Dealing in financial products 6.74 The responsible entity of a registered managed investment scheme is always required to be licensed, because of s 601FA. The issuers of other financial products may be required to be licensed, for example, if they carry on a business of dealing in financial products or providing financial product advice. ‘Dealing’ is defined in s 766C, and includes issuing, varying or disposing of a financial product. As to who is the issuer of a financial product, see s 761E and Corporations Regulations reg 7.1.04D, discussed at 6.33 above. A body corporate (other than an investment company) that issues shares or debentures in itself is not ‘dealing’, because of s 766(4). The carve-out from the definition of dealing also extends to governments, local government authorities, public authorities and agencies and instrumentalities of the Crown. However, when a body issues another type of financial product, it is treated as dealing in that product. If it is carrying on a business of doing so,47 it may be required by s 911A to hold a licence.

Providing financial product advice 6.75 ‘Financial product advice’ is defined in s 766B as: … a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision

[page 270] in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence.

The definition is interpreted broadly by ASIC: see ASIC Regulatory Guide 36 — Licensing: Financial Product Advice and Dealing, June 2016. However, it does not include statements made in a document prepared, or a statement given, in accordance with the requirements of Corporations Act Ch 7 (other than a Statement of Advice): s 766B(1A). An exemption covers the publication by a product issuer of certain communications in the media that (technically) amount to financial product advice. The issuer does not require a licence to provide general advice about its own products, provided it includes the prescribed ‘small print’ in the publication: reg 7.6.01(1)(o) of the Corporations Regulations. The publication must include the following information: (a) the advice has been prepared without taking account of the client’s objectives, financial situation or needs; (b) for that reason, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and (c) if the advice relates to the acquisition, or possible acquisition, of a particular financial product, the client should obtain a PDS relating to the product and consider the statement before making any decision about whether to acquire the product. The provision of advice about its products by an issuer to a financial services licensee (such as a financial planner, adviser or broker) is also covered by an exemption, allowing the issuer to provide guidance to advisers on their products. Regulation 7.6.01(1)(s) of the Corporations Regulations says that a licence is not required for the provision of general advice to a financial services licensee that is itself authorised to provide such advice, where the advice is provided by the issuer or a related body corporate of the issuer. General advice provided in certain documents required under the Corporations Act is covered by a licensing exemption granted by ASIC in ASIC Corporations (Financial Product Advice — Exempt Documents)

Instrument 2016/356. The exemption covers general advice given in, among others, financial reports, takeover documents, and continuous disclosure notices. ___________________________ 1.

Special Product Disclosure Statement (PDS) content requirements for superannuation products, RSA products, annuity products, and margin loans are contained in Pt 7.9 Div 4 of the Corporations Regulations 2001 (Cth) (Corporations Regulations).

2.

The overlap between the notion of investors and consumers of financial products is explored further in Chapter 15.

3.

Additional information requirements apply to certain superannuation products, under Corporations Act ss 1017BA–1017BE and 1017DA.

4.

See Woodcroft-Brown v Timbercorp Securities Ltd (2011) 85 ACSR 354; [2011] VSC 427 at [123]–[126]; upheld Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307; [2013] VSCA 284.

5.

CASAC Regulation of On-Exchange and OTC Derivatives Markets, July 1997, 3.9, discussed in Chapter 1, above.

6.

See also J Donnan, ‘Debentures, Derivatives and Managed Investment Schemes — the Characterisation and Regulation of Investment Instruments’ (2002) 13 JBFLP 28.

7.

See para (d) of the definition of security in s 761A, which defines security for the purposes of Corporations Act Ch 7, and s 700(1) which defines securities for the purposes of Corporations Act Ch 6D: see s 92(4).

8.

ASIC Report 365 — Hybrid Securities, August 2013, [13].

9.

See ASX Guidance Note 2 — Stapled Securities, March 2000. There is clearly a case for law reform in this area, to bring listed managed investment schemes (and probably, all other closed-end managed investment schemes) back under the Ch 6D disclosure regime from which they were removed by the FSR Act.

10.

Section 1010B(2) refers to ‘a managed investment product’, which is defined in s 761A as ‘a financial product described in paragraph 764(1)(b)’.

11.

Cf Explanatory Memorandum to the Financial Services Reform Bill 2001, [6.108]. In Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd (2005) 54 ACSR 111; [2005] NSWSC 544 at 1191–2, Barrett J notes that ‘carrying on a business generally involves conducting some form of commercial enterprise, systematically and regularly with a view to profit … although as a number of cases emphasise, there may be a finding that the business is carried on even where some of the usual elements are missing’. His Honour cites with approval the judgment of Gibbs J in Smith v Capewell (1979) 142 CLR 509, which explains the circumstances in which a single transaction may amount to the carrying on of a business. See also Commissioner of Taxation v Murry (1998) 193 CLR 605; 155 ALR 67; [1998] HCA 42 at [54]; Re Idylic Solutions Pty Ltd: Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276.

12.

See, for example, Samuel Holdings Pty Ltd v Securities Exchange Guarantee Corporation Ltd (2010) 80 ACSR 706; [2010] QSC 450.

13.

Reversed International Litigation Partners Pte Ltd v Chameleon Mining NL (2012) 246 CLR 455; (2012) 292 ALR 233; (2012) 86 ALJR 1289; (2012) 91 ACSR 473; [2012] HCA 45 [2012] HCA 45. The

High Court concluded that the litigation funding agreement was a credit facility and therefore outside the definition of a financial product; accordingly the application of s 763E was not in issue. 14.

Australian Securities and Investments Commission v West (2008) 66 ACSR 143; [2008] SASR 111 at [187].

15.

The exceptions to the requirement to provide a PDS are discussed in 6.27ff below.

16.

See Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2005) 55 ACSR 544; [2005] NSWSC 1065 at [10]–[11]; Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052; Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267 at [98]–[99], discussed at 4.21 above.

17.

That is, a superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth).

18.

The meaning of ‘exempt public authority’ is discussed in 4.28 above.

19.

An investment company is a body corporate, or an unincorporated body, that: (i) carries on a business of investment in financial products, interests in land or other investments; and (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of s 82, the terms of which provided for the funds subscribed to be invested for those purposes: see para (h) of the definition of professional investor in Corporations Act s 9.

20.

Many of the specific exemptions relate to the offer of particular financial products (such as insurance or superannuation products) that are not discussed in this book. The discussion that follows is restricted to those exemptions that may apply to offers of interests in managed investment schemes and other financial products that are or may be capable of being traded on financial markets.

21.

A financial product other than an interest in a registered managed investment scheme or regulated superannuation fund is of the same kind as another only if they are both issued by the same issuer on the same terms and conditions (other than price). If the product is an interest in a registered scheme or regulated superannuation fund, the product is of the same kind if it is an interest in the same scheme or fund.

22.

For the application of the Corporations Act to bodies corporate formed under state and territory law, see Pts 1.1 and 1.1A of the Act.

23.

Chugg v Pacific Dunlop Ltd (1990) 170 CLR 249 at 257–9; 95 ALR 481 at 486–8; Australian Securities & Investments Commission v Cyclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 058 at [37] and [39]–[40]; Australian Securities and Investments Commission v Great Northern Developments Pty Ltd (2010) 79 ACSR 684; [2010] NSWSC 1087 at [44].

24.

See Stoyeff v Masu Financial Management Pty Ltd (2008) 66 ACSR 585; [2008] FCA 897 at [17].

25.

Corporations Act s 1015C; Corporations Regulations regs 7.9.02A and 7.9.02B; ASIC Corporations (Facilitating Electronic Delivery of Financial Services Disclosure) Instrument 2015/647.

26.

Only PDSs for listed managed investment schemes need be lodged with ASIC: see s 1015B.

27.

Revised Explanatory Memorandum to the Financial Services Reform Bill 2001, [14.72]. The Explanatory Memorandum is discussed in Woodcroft-Brown v Timbercorp Securities Ltd (in liq) (2011) 85 ACSR 354; [2011] VSC 427 at [125]ff.

28.

Other than the particular financial products which do not require a PDS because of Corporations Regulations Pt 7.9 Div 2C, such as basic deposit products, non-cash payment facilities related to

deposit product, or travellers’ cheques. 29.

For present purposes, this does not include superannuation products or RSA, insurance products or deposits with ADIs.

30.

The distinction between ‘simple’ managed investment schemes and managed investment schemes that attract the full PDS requirement is explained at 6.56 below.

31.

Section 1015E prohibits a person from providing a PDS that has been altered without the authority of the issuer or seller (as the case may be). It also prohibits a person from providing a PDS that has been altered in a material respect, unless the date of the document has been changed.

32.

Re Wright Patton Shakespeare Capital Ltd and Australian Securities and Investments Commission [2008] AATA 1068 at [15] (McCabe SM); quoted with approval by Sifris J in Almond Investors Ltd v Emanouel (2012) 91 ACSR 220; [2012] VSC 413 at [41].

33.

Woodcroft-Brown v Timbercorp Securities Ltd (2011) 85 ACSR 551; [2011] VSC 427 at [119]; aff’d Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307; [2013] VSCA 284.

34.

See Revised Explanatory Memorandum to the Financial Services Reform Bill 2001, [14.74]; Woodcroft-Brown v Timbercorp Securities Ltd (2011) 85 ACSR 551; [2011] VSC 427 at [154]; aff’d Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307; [2013] VSCA 284.

35.

Woodcroft-Brown v Timbercorp Securities Ltd (2013) 96 ACSR 307; [2013] VSCA 284 at [156].

36.

For a detailed discussion of the PDS content requirements for simple managed investment schemes, see P F Hanrahan, Managed Investments Law & Practice, CCH Australia, Sydney, looseleaf, ¶63-200.

37.

ASIC RG 221.92.

38.

This facility is known as mFund Settlement Service.

39.

mFund is not a trading facility.

40.

Basis Capital Funds Management Ltd v BT Portfolio Services Ltd [2008] 219 FLR 157; 67 ACSR 297; [2008] NSWSC 766 at [119]; Re Parbery (as liquidators of Trio Capital Ltd (in liq)) (2012) 88 ACSR 700; [2012] NSWSC 597 at [14].

41.

Re Parbery (as liquidators of Trio Capital Ltd (in liq)) (2012) 88 ACSR 700; [2012] NSWSC 597 at [14]; Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 67 ACSR 297; [2008] NSWSC 766 at [129].

42.

Re Parbery (as liquidators of Trio Capital Ltd (in liq)) (2012) 88 ACSR 700; [2012] NSWSC 597; Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 67 ACSR 297; [2008] NSWSC 766; Samuel Holdings Pty Ltd v Securities Exchange Guarantee Corporation Ltd (2010) 80 ACSR 706; [2010] QSC 450.

43.

It is possible for the issuer to apply to the court for what is, in effect, an extension of time to meet this condition, under Corporations Act s 1322 which deals with procedural irregularities see, for example, Re Solco Ltd (2015) 106 ACSR 591; [2015] FCA 635; Re G8 Communications Ltd (2016) 112 ACSR 22; [2016] FCA 297 and the cases referred to therein.

44.

Section 1017F(5B) is inserted into the Corporations Act by reg 7.9.61D.

45.

See, for example, Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 67 ACSR 297; [2008] NSWSC 766 at [148]–[149].

46.

Under Pt 2 Div 2 Subdiv GC of the Australian Securities and Investments Commission Act 2001 (Cth).

47.

See Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd (2005) 54 ACSR 111; [2005]

NSWSC 544 at [38]–[39].

[page 271]

Chapter 7 CONTINUOUS DISCLOSURE Introduction Scope of this chapter Policy and history of the statutory continuous disclosure regime ASX Listing Rules Disclosure requirements under the ASX Listing Rules Exceptions to the disclosure requirement under ASX Listing Rules Statutory Continuous Disclosure Requirements Continuous disclosure by listed disclosing entities Continuous disclosure by other disclosing entities Liability for Contravention of Ch 6CA Criminal penalty for contravention Civil penalty liability for contravention Civil penalty liability of person involved in contravention Infringement notice regime Other remedies for continuous disclosure breaches

7.1 7.1 7.2 7.4 7.4 7.9 7.13 7.13 7.18 7.19 7.19 7.22 7.25 7.26 7.27

INTRODUCTION Scope of this chapter 7.1 This chapter deals with the continuous disclosure obligations of listed entities, arising under Australian Securities Exchange Listing Rule (ASX LR) 3.1 and Ch 6CA of the Corporations Act 2001 (Cth) (Corporations Act).1 We first address the policy [page 272]

and history of the continuous disclosure regime: 7.2–7.3. We then turn to disclosure obligations under the ASX Listing Rules (7.4–7.12) and deal with the statutory reinforcement of those obligations under Ch 6CA: 7.13–7.18. Last, we deal with liability for contraventions of Ch 6CA, including criminal and civil penalty liability (7.19–7.25); the application of the infringement notice regime (7.26); and other remedies for breach of the continuous disclosure provisions: 7.27.

Policy and history of the statutory continuous disclosure regime 7.2 Continuous disclosure involves prompt disclosure of new information concerning a listed company as it becomes available, by contrast with periodic disclosure such as annual and half-year accounts.2 The continuous disclosure regime is intended, among other things, to allow investors to make informed decisions and to prevent selective disclosure of market-sensitive information.3 Continuous disclosure is one of several forms of disclosure provided under the Corporations Act, including periodic accounting disclosure under Pt 2M.3; transaction-based disclosure in respect of major transactions such as takeovers; product-related disclosure, such as prospectuses and product disclosure statements under Ch 6D and Pt 7.9 (see Chapter 4), and disclosure about financial services under Ch 7: see Chapter 14. The continuous disclosure regime, together with those other forms of disclosure, seek to promote informed investor decision-making and investor protection and ensure that markets are fair, efficient and transparent.4 However, the effectiveness of disclosure [page 273] regimes may be limited, at least to some extent, by limitations on investors’ capacity to absorb complex information and biases in decision-making5; see also 15.5. The Companies and Securities Advisory Committee (CASAC) Report, An Enhanced Statutory Disclosure System, September 1991, recommended

the introduction of a statutory continuous disclosure regime. CASAC identified various purposes of a continuous disclosure regime, including overcoming the inability of general market forces to guarantee adequate and timely disclosure by disclosing entities; encouraging greater securities research by investors and advisers, thereby ensuring that securities prices more closely and quickly reflected underlying economic values; ensuring that equity and loan resources were more effectively channelled into appropriate investments and that funds were withheld or withdrawn from poorly performing disclosing entities, promoting capital market efficiency; lessening possible distorting effects of rumour on securities prices; and minimising opportunities for insider trading and similar market abuses. The report of the House of Representatives Standing Committee on Legal Constitutional Affairs, Corporate Practices and the Rights of Shareholders, November 1991, also recommended that a statutory continuous disclosure regime be introduced. The initial continuous disclosure provisions in ss 1001A–1001D of the Corporations Law, introduced by the Corporate Law Reform Act 1994 (Cth), were limited to intentional, reckless or negligent non-disclosure. These were replaced by Ch 6CA of the Corporations Act, introduced by the Financial Services Reform Act 2001 (Cth) with effect from 11 March 2002, which applied the civil penalty regime to continuous disclosure. The continuous disclosure regime was further amended by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9 Act) to introduce civil penalty liability for involvement in a breach of the continuous disclosure provisions (see 7.22–7.25) and the infringement notice regime: see 7.26. The Explanatory Memorandum to the CLERP 9 noted (at [4.219]): … continuous disclosure is fundamental to the integrity of Australian securities markets. It is important that all investors should have equal and timely access to price sensitive information released by disclosing entities. Inadequate disclosure has the potential to discourage investor participation in securities markets. This in turn could reduce the liquidity of these markets and hence the efficiency of the price discovery process.

[page 274] 7.3 The policy underlying the continuous disclosure regime has also been

recognised in the case law. In Jubilee Mines NL v Riley (2009) 253 ALR 673; 69 ACSR 659; [2009] WASCA 62 at [87], Martin CJ (with whom Le Miere AJA agreed) observed: … the evident purpose of each of the listing rule [3.1] and the relevant statutory provisions is to ensure an informed market in listed securities. Put another way, the legislative objective is to ensure that all participants in the market for listed securities have equal access to all information which is relevant to, or more accurately, likely to, influence decisions to buy or sell those securities.

In James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85; 81 ACSR 1; [2010] NSWCA 332 at [355], the Court of Appeal of the Supreme Court of New South Wales noted: The continuous disclosure regime, contained in s 674 and the Listing Rules, is designed to enhance the integrity and efficiency of Australian capital markets by ensuring that the market is fully informed. The timely disclosure of market sensitive information is essential to maintaining and increasing the confidence of investors in Australian markets, and improving the accountability of company management. It is also integral to minimising incidences of insider trading and other market distortions.

The Court of Appeal also noted that s 674 is ‘remedial legislation to enhance the public interest and to protect individual investors’ and should be construed beneficially so as to give the fullest relief that the fair meaning of its language will allow: at [356].

ASX LISTING RULES Disclosure requirements under the ASX Listing Rules 7.4 ASX LR 3.1 is the starting point for the statutory continuous disclosure regime. Under this rule, a listed entity is required immediately to notify the ASX of any information concerning the entity of which it is or becomes aware and which a reasonable person would expect to have a material effect on the price or value of the entity’s securities. ASX Guidance Note 8 (revised 17 August 2015) deals with ASX LR 3.1 and listed entities’ continuous disclosure requirements. 7.5 Several issues arise from the terms of that rule, namely when a listed entity is ‘aware’ of a matter, what is required by ‘immediate’ notification

and when a matter is ‘material’ for the purposes of that rule. The definition of the term ‘aware’ in ASX LR 19.12 has the effect that an entity is treated as having become aware of information if an officer of the entity (or, in the case of a trust, an officer of the responsible entity) has or ought reasonably to have come into possession of that information in the course of the performance of his or her duties as an officer of that entity; and the notion of awareness in ASX LR 3.1 extends to constructive awareness of information which an officer has, or ought reasonably to have, come into possession of in the course of performing their duties.6 [page 275] 7.6 A question also arises as to what is meant by the requirement for ‘immediate’ notification of information within the scope of the rule. ASX Guidance Note 8 indicates the ASX’s view that the concept of ‘immediately’ requires that disclosure be made ‘as quickly as it can be done in the circumstances (acting promptly) and not deferring, postponing or putting it off to a later time (acting without delay)’. That Guidance Note recognises that one of the matters relevant to the time taken to make disclosure will be the need for a company to ensure that an announcement is accurate, complete and not misleading. The Guidance Note also indicates that a trading halt may be used to assist with uncertainties as to disclosure; that the ASX does not expect a listed entity to request a trading halt until it has assessed whether particular information is market sensitive so as to require disclosure under ASX LR 3.1 and that the ASX expects a listed entity will seek a trading halt where price movements indicate that confidential information may have leaked, but the entity is not yet in a position to make a market announcement. 7.7 A further critical issue is, of course, when information is material for the purposes of the rule. In Jubilee Mines NL v Riley, above, Martin CJ (with whom Le Miere AJA agreed; McLure JA to the contrary) held that the reference to ‘material’ effect on the price or value of securities in ASX LR 3.1 should be read together with the concept of materiality in the statutory continuous disclosure requirement, now contained in s 677, so

that information would fall within the scope of ASX LR 3.1 if it would or would be likely to influence investors. The majority view in Jubilee Mines was followed by Gilmour J in Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201; 76 ACSR 506; [2009] FCA 1586 at [238]7 and the Full Court of the Federal Court of Australia took the same view in Grant-Taylor v Babcock & Brown Ltd (2016) 330 ALR 642; [2016] FCAFC 60. Information is material for the purposes of s 677 if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities: see 7.15 below. The scope of the information which is required to be disclosed under ASX LR 3.1 will depend upon the circumstances of the particular company.8 7.8 A note to LR 3.1 sets out a number of examples of transactions that could be notifiable under that rule. For example, a listed entity could be required to notify the ASX of, among other things, a transaction that will lead to a significant change in the nature or scale of the entity’s activities, a material mineral or hydro-carbon discovery, a material acquisition or disposal, the fact that the entity’s earnings will be materially different from market expectations, the appointment of a liquidator, receiver or administrator or an event of default under a material financing facility, the giving or receipt of a notice of intention to make a takeover offer or the giving of a rating to or a change in a rating applied to an entity or its securities. ASX Guidance Note 8 also indicates that the ASX will expect disclosure of changes in [page 276] earnings if the company becomes aware that its earnings differ ‘materially’ from market expectations, determined by reference to any published earnings guidance by the company; otherwise, analysts’ earnings forecasts; or otherwise, earnings for the prior corresponding period.

Exceptions to the disclosure requirement under ASX

Listing Rules 7.9 The disclosure requirement under ASX LR 3.1 does not apply if specified requirements are and remain satisfied, as set out below: ASX LR 3.1A. ASX Guidance Note 8 notes that the intention of the exception in ASX LR 3.1A is to balance the legitimate commercial interests of listed entities with the legitimate expectations of investors and regulators concerning the timely release of market sensitive information, and ensure information is not disclosed prematurely where it could misinform or mislead the market. It is necessary to satisfy at least one limb of the first requirement noted below and each of the latter two requirements in order to establish the exception. ASX LR 3.1B deals with information required to be disclosed to correct or prevent a false market. 7.10 The first requirement for this exception is that it would be a breach of a law to disclose the information; or the information concerns an incomplete proposal or negotiation; or the information comprises matters of supposition or is insufficiently definite to warrant disclosure; or the information is generated for the internal management purposes of the entity; or the information is a trade secret. 7.11 The second requirement for this exception is that the information is confidential and the ASX has not formed the view that the information has ceased to be confidential. The concept of ‘confidentiality’ adopted here appears to be directed to confidentiality, as a matter of fact, and should permit a listed entity to continue to satisfy the confidentiality exception, although it has provided information to its advisers, service providers or regulatory authorities on a confidential basis, in the ordinary course of its business and activities, so long as that information remains confidential in fact. On the other hand, that requirement for the exception is not likely to be satisfied if the relevant information becomes publicly known, or known to a sufficient number of persons that its confidentiality is lost, regardless of how that occurred. 7.12 The third requirement for this exception is that a reasonable person would not expect the information to be disclosed. The question whether a reasonable person would expect information to be disclosed must be

considered in the context of the particular listed company9 and the expectations of a reasonable person may vary depending upon the circumstances and on the particular matters to be disclosed. [page 277]

STATUTORY CONTINUOUS DISCLOSURE REQUIREMENTS Continuous disclosure by listed disclosing entities 7.13 Section 674(2) of the Corporations Act has the effect that, if: (1) a listed disclosing entity10 has information that a listing rule of a listed market requires it to notify to the market operator; and (2) that information is not generally available; and (3) a reasonable person would expect that information, if it were generally available, to have a material effect on the price or value of ED (enhanced disclosure) securities11 of the listed entity, the entity must notify the market operator of that information in accordance with that rule. This provision applies to an entity listed on the ASX, since the provisions of the ASX Listing Rules applicable to that entity (ASX LR 3.1) require it to notify the market operator of information about specified events or matters as they arise for the purpose of that operator making that information available to participants in the market: s 674(1). In the case of a registered scheme, the obligation to notify the ASX of the relevant information is imposed on the responsible entity: s 674(3).

Whether information is generally available 7.14 A contravention of s 674 will only be established if information that a listed entity fails to notify to the ASX, in breach of ASX LR 3.1, is not generally available. Information is treated as generally available if it: consists of readily observable matter; has been made known in a manner likely to bring it to the attention of those who commonly invest in the relevant securities, and a reasonable period has elapsed; or it consists of deductions, conclusions or inferences from such information: s 676. These

concepts correspond to those used in s 1042C of the Corporations Act in relation to insider trading: see Chapter 17. The exception in s 676(2)(a) for readily observable matter recognises that a listed company should not be exposed to liability for a failure to disclose information that is already available to the market by other means. It appears that the phrase ‘readily observable matter’ is not limited to matters that are readily observable by those present in Australia.12 On appeal in Grant-Taylor v Babcock & Brown Ltd above, the Full Court of the Federal Court treated that test (at [118]–[121]) as directed to whether information would be observed readily, easily or without difficulty, rather than as to whether it was in fact observed. That approach is consistent with that adopted in Australian insider trading cases: see 17.25. The exception in s 676(2)(b) [page 278] for information which has been made known in a manner likely to bring it to the attention of those who commonly invest in the relevant securities recognises that a previous announcement of the information, or its disclosure by another means which would bring it to the attention of investors, will allow the information to be absorbed by the market and presumably reflected in market prices. On the other hand, a recommendation made by a particular securities analyst to his or her clients would typically have a restricted circulation and would therefore not necessarily amount to public disclosure of information. A party who seeks to establish that information is not generally available under s 676(3), as a deduction, conclusion or inference from readily observable matter within s 676(2)(a) or information that has been made known in the specified manner under s 676(2)(b)(i), has the onus of establishing that matter: Grant-Taylor v Babcock & Brown Ltd above: at [124].

Materiality 7.15 A contravention of s 674 will only be established if the information that a listed entity has failed to notify to the ASX, in breach of LR 3.1, is

information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the listed entity: s 674(2)(c). A reasonable person is taken to expect information to have a material effect on the price or value of ED securities of a disclosing entity if ‘the information would, or would be likely to,13 influence persons who commonly invest in securities in deciding whether to acquire or dispose of the ED securities’: s 677. The materiality test is directed, at least primarily, to the impact of information on investor decision-making. In Jubilee Mines NL v Riley above (at [34]), Martin CJ (with whom Le Miere AJA agreed) observed that this test does not require information to have a ‘material’ effect on price, and avoids the need to address the question whether a reasonable person would be taken to expect a ‘material’ effect on price to be produced, by deeming that question to be answered in the affirmative if information would, or would be likely to, influence persons who commonly invest in relevant securities in deciding whether or not to subscribe for or buy or sell those securities. The ‘influence on investor decision-making’ test is also applied in the insider trading prohibition (see 17.17), but in the insider trading provisions this is the only basis on which materiality can be established. By contrast, the ‘influence on investor decision-making’ standard is not the only basis for a finding that information is continuously disclosable, so that: … information can fall within the scope of the legislative regime either if it has the characteristic referred to in [s 677] or alternatively, if it is for some other

[page 279] reason information which a reasonable person would be taken to expect to have a material effect on the price or value of securities.14

The materiality of information is to be determined with reference to any qualifying information which would also be announced and the relevant company’s actual intentions (in Jubilee Mines, not to carry out further exploratory work in response to the results of test drilling).15 The test for disclosure under s 674 is objective, and the views of management are relevant but not determinative.16 The question whether

information would influence investors involves a common sense test for the court upon a consideration of primary facts, although assistance can also be derived from experts who professionally buy and sell shares in large tranches and make investment decisions of the kind contemplated by s 677.17 In Jubilee Mines NL v Riley above (at [123]), the Court of Appeal treated its role as involving standing in the shoes of the hypothetical investors contemplated by this test in determining whether information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to buy or sell shares in the listed company. The question of materiality was also considered in Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 104 ACSR 195; [2015] FCA 149, where the plaintiffs contended, among other things, that Babcock & Brown Ltd (in liq) had breached its continuous disclosure obligations by failing to disclose that dividends had been unlawfully paid out of capital for several years and that its financial reports in those years therefore did not give a true and fair view of its financial position. Perram J (at first instance) held that a contravention of the continuous disclosure obligations was not established since, although the payment of the relevant dividends contravened the Corporations Act, that contravention was not of economic significance where there were sufficient profits in the consolidated BBL Group to pay the dividend, and was not material for the purposes of the continuous disclosure provisions. On appeal in Grant-Taylor v Babcock & Brown Ltd above, the Full Court of the Federal Court focused on the objective materiality of information, rather than to its impact on investordecision-making, in noting (at [96]) that an assessment of materiality would involve a balancing of the probability of an event and the magnitude of its anticipated impact on the company’s affairs, consistent with the approach generally adopted in American case law concerning insider trading. [page 280] In Earglow Pty Ltd v Newcrest Mining Ltd (2015) 106 ACSR 49; [2015] FCA 328, Beach J noted (at [80]–[84]) that the requirements

specified in s 677 were sufficient but not necessary to establishing materiality, and that the objective materiality of information, as distinct from a reasonable person’s expectation, would be relevant to causation, as to whether non-disclosure of adverse information had inflated the share price or the non-disclosure of favourable information had deflated that price. ASX Guidance Note 8 points to several factors that may assist in an assessment of materiality including whether information would influence an officer’s decision to buy or sell securities in the entity at the current market price, and whether an officer would feel exposed to an action for insider trading if he or she bought or sold securities at the current price where that information had not been disclosed to the market. 7.16 The case law has considered whether materiality should be assessed on an ex ante (before the event) or ex post (after the event) basis. In Rivkin Financial Services v Softcom Ltd (2004) 51 ACSR 486; 23 ACLC 42; [2004] FCA 1538 at [115] (an insider trading case), Emmett J adopted an ex post approach and treated the lack of market effect of disclosure of the relevant information as indicating its lack of materiality. Later cases have suggested that the issue of materiality is to be determined on an ex ante basis, having regard to the context in which the relevant disclosures were made, including information publicly available to the market.18 The case law generally treats evidence of the actual effect of information actually disclosed on a company’s share price as relevant, at least as a cross-check as to a different hypothetical disclosure, and this is an ex post inquiry.19 However, in Grant-Taylor v Babcock & Brown Ltd (in liq) above (at [64]), Perram J (at first instance) questioned the utility of having regard to subsequent developments, as distinct from applying a prospective approach, in determining the materiality of information. 7.17 The test of materiality in s 677 also raises the question of the scope of the reference to persons who ‘commonly invest’ in securities in that section. At first instance in Jubilee Mines above, the class of persons who ‘commonly invest’ for the purposes of s 677 was identified as those who commonly invest in the relevant class of companies and that approach was not challenged on appeal. In Grant-Taylor v Babcock & Brown Ltd (in liq) (at [70]), Perram J (at first instance) observed that the reference to

persons who ‘commonly invest’ in securities in this section referred to persons who ‘ordinarily or usually invest in listed securities’ and that class was not limited to professional investors but did ‘denote a degree of sophistication which might be expected from those who have more than a passing or occasional interest in the activities of securities exchanges’. On appeal in Grant-Taylor v Babcock & Brown Ltd above, the Full Court of the Federal Court took a somewhat different [page 281] approach (at [97]ff, [128]ff) and treated that phrase as directing attention to whether information would or would be likely to influence the hypothetical class of persons who fell within that category, rather than as involving any greater degree of sophistication. The decision of the High Court of Australia in Fortescue Metals Group Ltd v Australian Securities and Investments Commission above suggests that the business or commercial expertise of the audience that would be likely to receive a disclosure may be relevant to assessing its materiality.20 ASX Guidance Note 8 expresses the view that that reference is to those who commonly buy and hold securities for a period of time, based on a view of the inherent value of the securities. That reading involves something of a gloss on the language of this section, where those who engage in short-term trading or trading based other than on fundamental analysis might also properly be described as ‘investing’ in securities and there is now a substantial volume of short-term nonfundamental trading in the Australian markets.

Continuous disclosure by other disclosing entities 7.18 An unlisted disclosing entity, such as an unlisted managed investment scheme, is also required to provide continuous disclosure under s 675. Corporations Regulations 2001 (Cth) reg 6CA.1.01 provides an exemption from the disclosure requirement under s 675 which corresponds to the exceptions from disclosure under ASX LR 3.1A.

LIABILITY FOR CONTRAVENTION OF CH 6CA Criminal penalty for contravention 7.19 A failure to comply with s 674 of the Corporations Act is an offence: s 1311(1). The Criminal Code (Cth) applies to an offence under s 674: s 678. Section 3.2 of the Criminal Code provides that, in order for a person to be found guilty of committing an offence, the prosecution must prove the existence of such physical elements as are, under the law creating the offence, relevant to establishing guilt; and, in respect of each such physical element for which a fault element is required, one of the fault elements for the physical element. Neither the prohibition in ss 674(2) and 675(2) nor s 1311(1) state an express fault requirement for the physical element required for a contravention of those sections. Section 5.6 of the Criminal Code in turn provides that, if the law creating an offence does not specify a fault element for a physical element that consists only of conduct, intention is the fault element for that physical element; and, if the law creating that offence does not specify a fault element for a physical element that consists of a circumstance or result, recklessness is the fault element for that physical element. It appears that an offence arising from a contravention of s 674(2) or s 675(2) falls into the former category, on the basis that the physical element for the offence consists only of conduct, being the nondisclosure of information having the specified characteristics. [page 282] 7.20 A person who aids, abets, counsels or procures a contravention of s 674 of the Corporations Act may be liable under Criminal Code s 11.2. Accessorial liability under the Criminal Code will generally require at least that an accessory assisted, encouraged or induced a company to commit the offence, and knew the essential matters that constituted the offence. We discuss these requirements further in respect of civil penalty liability below: see 7.22. Under Pt 2.5 of the Criminal Code, a body corporate may be held criminally liable for offences committed by its employees or agents

where the relevant conduct was expressly or impliedly authorised or permitted by the body corporate, including by the body corporate’s board of directors or a high managerial agent of the body corporate intentionally, knowingly or recklessly engaging in the relevant conduct or by a failure to create and maintain a corporate culture which required compliance with the relevant provision: Criminal Code s 12.3. 7.21 In a prosecution for a contravention of s 674, the court may also grant an injunction against conduct constituting a failure to comply with the continuous disclosure provisions: s 1324A. If the court is satisfied that a listed entity has engaged in conduct contravening s 674, it may also make orders against that entity or any officer or employee who was involved in the contravention, requiring that entity or that officer to disclose information specified in the order to the public or a particular person or class of persons and to publish advertisements in terms specified by the order: s 1324B.

Civil penalty liability for contravention 7.22 Section 674(2) is also a financial services civil penalty provision for the purposes of Pt 9.4B of the Corporations Act. If the court is satisfied that a listed entity has contravened s 674(2), it must make a declaration of contravention which is conclusive evidence of the matters to which it referred: ss 1317E(1)–(2), 1317F. The court may also order a body corporate which contravenes s 674 to pay the Commonwealth a pecuniary penalty of up to $1 million if the contravention materially prejudiced the interests of acquirers or disposers of securities of the listed entity or shareholders in that entity, or is serious: s 1317G(1A)–(1B). For example, the court made an order for a pecuniary penalty in Australian Securities and Investments Commission v Southcorp Ltd (No 2) (2003) 130 FCR 406; 48 ACSR 187; [2003] FCA 1369, where a company admitted a contravention of s 674 in civil penalty proceedings after it had released information concerning the adverse financial impact of a poor wine vintage to a number of securities analysts which had not been disclosed to the ASX, and also in James Hardie Industries NV v Australian Securities and Investments Commission above.

7.23 Factors relevant to the level of penalty which should be imposed for a breach of the continuous disclosure provisions include the extent to which information not disclosed would have been expected to affect the price of the contravening company’s shares; the extent to which the contravention resulted from deliberate, reckless or negligent conduct by the corporation and the presence or absence of dishonesty; the period over which the contravention occurred; the existence of compliance systems at the time of the contravention and improvements which had subsequently been made to them; the seniority of the officers responsible for the nondisclosure [page 283] and whether they included directors; and the extent of any cooperation with the Australian Securities and Investments Commission (ASIC).21 In Australian Securities and Investments Commission v Newcrest Mining Ltd (2014) 101 ACSR 46; [2014] FCA 698, the Federal Court imposed a substantial pecuniary penalty of $1.2 million for two contraventions of the continuous disclosure regime, which did not involve a deliberate breach of the relevant provisions, but resulted from an erroneous understanding that the information had previously been disclosed. Middleton J noted (at [85]) the need for the penalty to reflect ‘the importance of a system of continuous disclosure to promote confidence in the integrity of the Australian capital markets’ and to ‘encourage the giving to the market timely indicators of corporate performance’. 7.24 If the court finds that a listed entity contravened s 674 in civil penalty proceedings, it may order that entity to compensate a third person for damage suffered by that person resulting from the contravention: s 1317HA. The court must apply the rules of evidence and procedure for civil matters in proceedings for a declaration of a contravention of a civil penalty provision or a pecuniary penalty order: s 1317L. The standard of proof in civil penalty proceedings is therefore on the balance of probabilities and not the criminal standard of proof beyond reasonable doubt, although the court will take into account the seriousness of the allegation in determining whether a matter has been proved on the balance

of probabilities in civil penalty proceedings: see 2.87–2.88. The court may relieve a person from liability arising from a contravention of s 674(2) if it appears to the court that the person has acted honestly and, having regard to all the circumstances, ought fairly to be excused: s 1317S.

Civil penalty liability of person involved in contravention 7.25 A person involved in a contravention of s 674(2) is also potentially liable for a pecuniary penalty order under s 1317G or a compensation order under s 1317HA: s 674(2A).22 The intention of this section is to impose liability on individuals with real involvement in a contravention of the continuous disclosure provisions, including persons who withheld information from their superiors leading to a contravention by the listed entity.23 A critical issue in respect of establishing accessorial liability for a continuous disclosure breach is whether it will be necessary to establish that the person alleged to have been involved had actual knowledge that the information which was not disclosed was such that a reasonable person would consider it to have a material effect on the price or value of the company’s securities if disclosed. The issue is critical [page 284] because many continuous disclosure cases will involve assessments that information is not material which are proved incorrect with hindsight. If subjective knowledge of materiality is required, then liability for knowing involvement will not be established in these cases. One commentator has expressed the view that: … directors who become aware of information potentially requiring disclosure but who form the view on reasonable grounds that disclosure is not required will not incur personal liability, even if a Court later comes to a different view on whether disclosure should have been made.24

If this view is correct, then liability for knowing involvement would not be established in this situation, and a director would not need to satisfy the requirements of the due diligence defence. This view is consistent with a

strict application of a requirement for knowledge of the essential elements of the contravention, treating subjective knowledge of materiality as an element of the contravention. However, the case law suggests that it may be sufficient to establish liability for knowing involvement that a person knows the facts that give rise to a breach of the continuous disclosure requirements, without recognising the fact of that breach.25 A due diligence defence is available if a person has taken all reasonable steps to prevent the contravention from occurring and believed on reasonable grounds that the entity was complying with its obligations: s 674(2B). Reasonable steps within the defence in s 674(2B) may include, for example, delegation and reliance on others. For example, that defence may be applicable if a corporate officer takes legal advice and considers that disclosure of a particular matter is not required on the basis of that advice (note, however, that the question whether information is materially pricesensitive in a particular case is a question of fact, and not a question of law).

Infringement notice regime 7.26 Part 9.4AA of the Corporations Act, also introduced by the CLERP 9 Act, allows ASIC to issue an infringement notice to a disclosing entity in respect of a contravention of s 674(2) or to an unlisted disclosing entity in respect of a contravention of s 675(2).26 The purpose of the infringement notice regime was described in the CLERP 9 Discussion Paper as follows: [page 285] This process would supplement existing criminal and civil court procedures. It would remedy a significant gap in the current enforcement framework by facilitating the imposition of a financial penalty in relation to relatively minor contraventions of the regime that would not otherwise be pursued through the courts and in relation to which ASIC considers a relatively small financial penalty would be justified. The capacity to issue an infringement notice would also allow ASIC to signal its views concerning appropriate disclosure practices to listed entities more effectively than through court action alone.

The infringement notice regime is an alternative to civil penalty proceedings under Pt 9.4B. ASIC may still choose to commence civil

penalty proceedings against a listed entity rather than issue an infringement notice in a particular case: s 1317DAB. The Treasury Commentary to the CLERP 9 Bill suggests that the infringement notice regime would be used in respect of less serious breaches of the continuous disclosure requirements, although it has been used in the substantial majority of regulatory actions in respect of continuous disclosure. ASIC Regulatory Guide 73: Continuous Disclosure Obligations: Infringement Notices (revised June 2012) sets out various factors which ASIC considers may be relevant to determining whether a breach is serious. These include the impact of that breach on the market for the entity’s securities, including any change in price of the securities and/or the number of securities traded during the period of that breach; the materiality of the information which is the subject of that breach, including whether that information went to the heart of the entity’s continued operations; the factual circumstances giving rise to that breach, such as whether the conduct giving rise to it was negligent, reckless or deliberate; the adequacy of the entity’s internal controls and whether they were complied with; the entity’s conduct before that breach, including whether it sought and followed professional advice in relation to the disclosure; and the entity’s conduct after that breach, including whether it took immediate steps to correct the failure to disclose ASIC may issue an infringement notice to a listed entity if it has reasonable grounds to believe that the entity has contravened the continuous disclosure provisions, within 12 months after the alleged contravention: s 1317DAC. An infringement notice may require a listed entity to pay a financial penalty of between $33,000 and $100,000, depending on its market capitalisation, or make a specified disclosure. Before ASIC makes a decision whether or not to issue an infringement notice, it must provide the listed entity with a written statement setting out its basis for issuing that notice, and the listed entity must be given an opportunity to give evidence and make submissions at a private hearing before ASIC in response to that statement: s 1317DAD. Once an infringement notice is issued, a listed entity has 28 days in which to comply with it, which period may be extended once by ASIC for up to a further 28 days: s 1317DAH. Subject to limited exceptions (including one for third party claims), no criminal or civil proceedings may

be brought or continued against a listed entity which complies with an infringement notice in respect of an alleged contravention: s 1317DAF(4)– (5). If a listed entity complies with the infringement notice, ASIC may publish a copy of the notice or an accurate summary of the notice, but must include express [page 286] statements in that publication that compliance with the notice is not an admission of guilt or liability and the listed entity is not regarded as having contravened the provisions: s 1317DAJ(1)–(2). If a listed entity does not pay the penalty specified in an infringement notice, ASIC may not then bring criminal proceedings against that entity. In other words, the issue of an infringement notice excludes the later commencement of criminal proceedings. However, ASIC may then bring civil or civil penalty proceedings in respect of the breach.

Other remedies for continuous disclosure breaches 7.27 ASIC may also accept an enforceable undertaking under s 93AA of the Australian Securities and Investments Commission Act 2001 (Cth) in relation to a contravention of the continuous disclosure provisions. ASIC may also impose an administrative penalty for a contravention of the continuous disclosure requirements, by preventing a listed entity from relying on the reduced disclosure requirements applicable to a prospectus for continuously quoted securities under s 713 of the Corporations Act. Alternatively, ASIC might bring civil proceedings against a listed entity seeking a declaration that it contravened s 674, and seeking injunctive relief to prevent a further contravention. A third party may also institute a proceeding alleging a contravention of s 674 and, if the court finds that third party has suffered, or is likely to suffer, loss or damage because of that contravention, the court may make an order requiring the listed entity or a person involved in the contravention to compensate that third party for the loss or damage which it has suffered or will suffer: s 1325.

Shareholders who claim to have suffered loss as a result of a contravention of the continuous disclosure requirements may also bring proceedings to seek to recover that loss as a class action: see Chapter 9. ___________________________ 1.

As to the scope of the continuous disclosure requirements, see R White, ‘Just in Time: ASX Listing Rule 3A(1)’ [1994] 18 BCLB [483]; W J Koeck, ‘Continuous Disclosure’ (1995) 13 C&SLJ 485; A Cassidy and L Chappel, ‘Australia’s Corporate Disclosure Regime: Lessons from the US Model’ (2003) 15 AJCL 81; G Golding and N Kalfus, ‘The Continuous Evolution of Australia’s Continuous Disclosure Laws’ (2004) 22 C&SLJ 385; E Raykovski, ‘Continuous Disclosure: Has Regulation Enhanced the Australian Securities Market?’ (2004) 30 Mon LR 269; M Welsh, ‘Enforcing Contraventions of the Continuous Disclosure Provisions: Civil Administrative Penalties’ (2007) 25 C&SLJ 315; D Reichel, ‘Continuous Disclosure in Volatile Times’ (2010) 28 C&SLJ 84; M Bloch, J Weatherhead and J Webster, ‘The Development and Enforcement of Australia’s Continuous Disclosure Regime’ (2011) 29 C&SLJ 253; G North, ‘Continuous Disclosure in Australia: The Empirical Uncertainties’ (2011) 29 C&SLJ 394; A Desai and I Ramsay, ‘The Use of Infringement Notices by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis’ (2011) 39 ABLR 260; L Hastings, ‘Enforcing the Continuous Disclosure Regime; Three Case Studies’ in M Legg (ed), Regulation, Litigation and Enforcement, Thomson Reuters (Professional) Australia, Sydney, 2011, pp 133–49; C Di Lernia, ‘Odyssey through a Forest? Continuous Disclosure and the Need for Practical Guidance’ (2012) 40 ABLR 424; D McFarlane, ‘Materiality in Corporate Continuous Disclosure: Historical Uncertainty, Current Challenges and Future Opportunities’ (2015) 33 C&SLJ 7; D McFarlane, ‘Significant Judicial Guidance on the Application of the Continuous Disclosure Obligations’ (2015) 33 C&SLJ 287.

2.

Golding and Kalfus, ‘The Continuous Evolution of Australia’s Continuous Disclosure Laws’, above at 385.

3.

Explanatory Memorandum to the Corporate Law Reform Bill (No 2) 1992, para 2; Australian Securities and Investments Commission v Southcorp Ltd (No 2) (2003) 130 FCR 406; 48 ACSR 187; [2003] FCA 1369 at [2]; see also Australian Securities and Investments Commission v Chemeq Ltd (2006) 234 ALR 511; 58 ACSR 169; [2006] FCA 936 at [42]–[46]; Australian Securities and Investments Commission v MacDonald (No 12) (2009) 259 ALR 116; 73 ACSR 638; [2009] NSWSC 714 at [179]; M Blair, ‘The Debate over Mandatory Disclosure Rules’ (1992) 15 UNSWLJ 177.

4.

IOSCO, Objectives and Principles of Securities Regulation (2010); L Enriques and S Gilotta, ‘Disclosure and Financial Market Regulation’ in N Moloney et al, The Oxford Handbook of Financial Regulation, Oxford University Press, Oxford, 2015, pp 515ff; G North, ‘Timely Public Disclosure of Company Information: A Likely Precondition for Optimal Long–term Corporate and National Outcomes’ (2014) 32 C&SLJ 560.

5.

Financial Conduct Authority (UK), Occasional Paper No 1, Applying Behavioural Economics at the Financial Conduct Authority; ASIC Report 230, Financial Literacy and Behavioural Change, March 2011; ASIC Report 427, Investing in Hybrid Securities: Explanations Based on Behavioural Economics, March 2015; DC Langevoort, ‘Taming the Animal Spirits of the Stock Markets: A Behavioural Approach to Securities Regulation’ (2002) 97 NWUL Rev 135; RJ Shiller, Irrational Exuberance, 2nd ed, Princeton University Press, New Jersey, 2005; D Kingsford Smith, ‘Regulatory Investment Risk: Individuals and the Global Financial Crisis’ (2009) 32 UNSWLJ 514; E Avgouleas, ‘What Future for Disclosure as a Regulatory Technique? Lessons from Behavioural Decision Theory and the Global Financial Crisis’ in

IG MacNeil and J O’Brien, The Future of Financial Regulation, Hart Publishing, Oxford, 2010, pp 205ff; J Malbon and L Nottage, Consumer Law and Policy in Australia and New Zealand, Federation Press, Sydney, 2013, p 11; N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, Oxford, 2014, p 58. 6.

See also Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201; 76 ACSR 506; [2009] FCA 1586 at [256]; on appeal (2011) 190 FCR 364; 274 ALR 731; 81 ACSR 563; [2011] FCAFC 19 (Full Court of the Federal Court) and (2012) 247 CLR 486; 291 ALR 399; 91 ACSR 128; [2012] HCA 39 (High Court).

7.

On appeal (2011) 190 FCR 364; 274 ALR 731; 81 ACSR 563; [2011] FCAFC 19 (Full Court of the Federal Court) and (2012) 247 CLR 486; 91 ACSR 128; [2012] HCA 39 (High Court).

8.

Flavel v Roget (1990) 1 ACSR 595 at 602–3; 8 ACLC 237.

9.

Flavel v Roget (1990) 1 ACSR 595; 8 ACLC 237; Riley (as trustee of Ker Trust) v Jubilee Mines NL (2006) 59 ACSR 252; [2006] WASC 199, on appeal (2009) 253 ALR 673; 69 ACSR 659; [2009] WASCA 62.

10.

A body is a ‘disclosing entity’ if securities of that body (other than interests in a managed investment scheme) are ED (enhanced disclosure) securities: s 111AC(1).

11.

The term ‘ED securities’ is defined in s 9 by reference to s 111AD, which in turn refers to ss 111AE–111AJ, and includes: securities in a class of securities quoted on the ASX; prospectus-related securities where a disclosure document has been lodged and there have always been at least 100 holders in the relevant class; and securities issued as consideration for a takeover offer or scheme of arrangement where there have always been at least 100 holders of securities in the relevant class since the securities were issued: ss 111AE(1), 111AF, 111AFA, 111AG. Securities are not ED securities in specified circumstances: s 111AE(2)–(3). The Corporations Regulations may also declare specified securities of bodies not to be ED securities: s 111AJ(1).

12.

R v Firns (2001) 51 NSWLR 548; 38 ACSR 223; [2001] NSWCCA 191.

13.

The reference to ‘likely’ to influence persons who invest in securities in s 677 means ‘probable’, not merely ‘possible’: R v Crabbe (1985) 156 CLR 464; 58 ALR 417; [1985] HCA 22; Boughey v R (1986) 161 CLR 10 at 14; 65 ALR 609 at 611; [1986] HCA 29; Riley (as trustee of Ker Trust) v Jubilee Mines NL, above at ACSR [286]. On appeal in Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) above (at [188]) Keane CJ noted that this test was not a high threshold; that decision was overturned on appeal, on a different ground: at (2012) 247 CLR 486; 91 ACSR 128; [2012] HCA 39 (High Court).

14.

Jubilee Mines NL v Riley (2009) 253 ALR 673; 69 ACSR 659; [2009] WASCA 62 at [58]. The difference may not be of great practical significance since, as their Honours recognised in Jubilee Mines NL v Riley (at [59]), it is difficult to think of a situation where material effect on price or value could be established without the information being such as to influence persons who commonly invest in securities whether or not to subscribe for, buy or sell them.

15.

Jubilee Mines NL v Riley, above.

16.

R v Firns (2001) 51 NSWLR 548; 161 FLR 294; 38 ACSR 223; [2001] NSWCCA 191 at [88]; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963 at [546]; James Hardie Industries NV v Australian Securities and Investments Commission, above at [349], [454].

17.

Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5), above at [482]; James Hardie Industries NV v Australian Securities and Investments Commission, above at [527].

18.

Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5), above (Gilmour J) (at [474]–[475]); on appeal (2011) 190 FCR 364; 274 ALR 731; 81 ACSR 563; [2011] FCAFC 19 (Full Court of the Federal Court); (2012) 247 CLR 486; (2012) 91 ACSR 128; [2012] HCA 39 (High Court).

19.

Jubilee Mines NL v Riley, above at [33], [130], [134]; Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5), above at [477]; James Hardie Industries NV v Australian Securities and Investments Commission, above at [534]ff.

20.

McFarlane, ‘Materiality in Corporate Continuous Disclosure: Historical Uncertainty, Current Challenges and Future Opportunities’, above at 20–1.

21.

Australian Securities and Investments Commission v Chemeq Ltd (2006) 234 ALR 511; 58 ACSR 169; [2006] FCA 936.

22.

See generally J McConville, ‘Introducing Personal Liability under the Continuous Disclosure Regime: The “Essentials” and “Non-Essentials”’ (2004) 16 AJCL 228; A Zandstra, J Harris and A Hargovan, ‘Widening the Net: Accessorial Liability for Continuous Disclosure Contraventions’ (2008) 22 AJCL 51 (arguing for a greater focus on accessorial liability on individuals who are involved in breaches of the continuous disclosure provisions); Reichel, ‘Continuous Disclosure in Volatile Times’, above.

23.

Explanatory Memorandum to the CLERP 9 Bill, [5.447]–[5.448].

24.

Reichel, ‘Continuous Disclosure in Volatile Times’, above.

25.

Heydon v NRMA Ltd (2000) 51 NSWLR 1; 36 ACSR 462 at 559–60 per Malcolm AJA, at 587–98 per McPherson AJA; King v GIO Australia Holdings Ltd (2001) 184 ALR 98; [2001] FCA 308; Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1; 205 ALR 402; [2003] FCAFC 289 at [5]ff per Moore J (with whom Mansfield J agreed, whereas Stone J took a stricter view); Adler v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission (2003) 46 ACSR 504; 21 ACLC 1810; [2003] NSWCA 131; Australian Securities and Investments Commission v Activesuper Pty Ltd (in liq) (2015) 105 ACSR 116; [2015] FCA 342 at [456].

26.

For commentary, see Welsh, ‘Enforcing Contraventions of the Continuous Disclosure Provisions: Civil or Administrative Penalties’, above; R Langley, ‘Over Three Years On: Time for Reconsideration of the Corporate Cop’s Power to Issue Infringement Notices for Breach of Continuous Disclosure’ (2007) 25 C&SLJ 439; M Niehme, M Hyland and M Adams, ‘Enforcement and Continuous Disclosure: The Use of Infringement Notices and Alternative Sanctions’ (2007) 21 AJCL 312.

[page 287]

Chapter 8 LIABILITY for DEFECTIVE DISCLOSURE Introduction Sources of Statutory Liability Specialist liability regimes for mandatory disclosure General prohibitions on misleading or deceptive conduct Information offences in relation to securities and financial products Relationship between the liability regimes Defects in Securities Offer Documents Prohibition on offering securities under a defective disclosure document: s 728 Criminal liability under s 728(3) Defences to civil and criminal liability Defects in PDSs and Other Pt 7.9 Documents Criminal liability for defective disclosure Defences to civil and criminal liability Misleading or Deceptive Conduct Statutory proscription Conduct that is misleading or deceptive State of mind of alleged contravener Forward looking statements Statements of opinion Silence as misleading or deceptive conduct Disclaimers and exclusion provisions Consequences of a contravention Information Offences in Pt 7.10 Dissemination of false or misleading information: s

8.1 8.5 8.6 8.9 8.12 8.14 8.15 8.16 8.22 8.25 8.31 8.32 8.34 8.35 8.37 8.43 8.48 8.49 8.50 8.51 8.56 8.57 8.58 8.59

1041E Improperly inducing dealing: s 1041F Establishing the state of mind of a defendant Powers of the Court Injunctions

8.64 8.69 8.70 8.71 [page 288]



Non-punitive orders Other orders, including for compensation

8.75 8.76

INTRODUCTION 8.1 What happens when the issuer or seller of a security or other financial product provides false or misleading information or fails to disclose material information to offerees? On what basis, and to what extent, can the company, its officers and others involved in making (or failing to make) the disclosure be held to account? Chapters 8 and 9 consider the consequences for an entity, its officers and advisers of defective disclosure in connection with securities and financial products. Liability can arise where a person: offers securities under a prospectus or offer information statement required under Pt 6D.2 of the Corporations Act 2001 (Cth) (Corporations Act) that is defective in one of the ways set out in Corporations Act s 728; gives a Product Disclosure Statement (PDS) or other disclosure document or statement required under Corporations Act Pt 7.9 that is defective in one of the ways set out in Corporations Act s 1022A; engages in misleading or deceptive conduct, for example, in connection with an unregulated offer of securities or financial products, or in ongoing disclosure to the market; or commits one of the ‘information offences’ in Corporations Act Pt 7.10, for example, by knowingly circulating false or misleading information with the intention of influencing the price of securities.

This chapter looks generally at the various legal bases upon which defective disclosure can attract liability. Chapter 9 focuses on issues specific to investor claims for defective disclosure, and includes an explanation of the current Australian law relating to securities class actions. 8.2 Disclosure may be defective by commission (misstatement) or by omission (non-disclosure). Liability for defective disclosure can arise where a person makes a statement or provides information about securities or other financial products which is inaccurate or misleading. The statement or information may be wrong in itself, or be a ‘half-truth’: that is, a statement rendered defective by the omission of some necessary qualification or explanation. Defective disclosure of this kind is sometimes referred to as a ‘misstatement’ or ‘misrepresentation’. Liability can also arise where a person has a positive legal obligation to disclose something, but does not. That positive disclosure obligation may be imposed by statute, as in Ch 6CA (continuous disclosure) and Ch 6D (fundraising) and Pt 7.9 (offer of financial products) of the Corporations Act. Or, in very limited circumstances, it may arise at general law, for example, if one person owes fiduciary duties to another in connection with a dealing in securities: see 5.30 above. This kind of defective disclosure is sometimes referred [page 289] to as ‘non-disclosure’. Non-disclosure can only give rise to liability where there was a positive obligation (for example, under the Corporations Act) on someone to make disclosure and the non-disclosure was material, or where the non-disclosure was misleading or deceptive. The positive obligation to disclose may include an obligation to ensure that new information arising after the disclosure is made, but before a transaction reliant on it occurs, is disclosed. There are various bases upon which misstatement or non-disclosure in relation to securities and other financial products may give rise to criminal or civil liability, for the person making (or obliged to make) the disclosure

and others (such as officers and advisers) who are associated with it. The source and nature of their liability depends on the type of financial product concerned, and the circumstances in which the defective disclosure occurred. In some circumstances the defect must have arisen intentionally or recklessly to give rise to liability; in others negligent or even innocent misstatement or non-disclosure will be enough. Importantly, certain defences to liability (such as the ‘due diligence’ defence) are available in some instances of defective disclosure but not others. 8.3 The statutory bases upon which liability for defective disclosure arises can be divided into three broad groups. The first and second are mutually exclusive in their operation — if the first applies, then the second is excluded. The third may apply in any circumstances. They are: provisions imposing criminal and civil liability under the specialist regimes for defective disclosure in, respectively, a disclosure document prepared under Corporations Act Ch 6D (for example, a prospectus or offer information statement); or a disclosure document or statement prepared under Corporations Act Pt 7.9 (for example, a PDS);1 provisions imposing civil liability for misleading or deceptive conduct in relation to financial products (including securities) or financial services under Corporations Act ss 1041H and 1041I; or in trade or commerce in relation to financial services (under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) ss 12DA and 12GF); or in trade or commerce (under ss 18 and 236 of the Australian Consumer Law (ACL));2 and provisions imposing civil and criminal liability for making false or misleading statements; fraudulently inducing dealing; or engaging in dishonest conduct in relation to financial products (including securities), under the information offences in Corporations Act Pt 7.10. [page 290] The range of consequences that can attach where a person contravenes

one of these liability provisions is expanded by Corporations Act Pt 9.5 and ASIC Act Pt 2 Div 2 Subdiv G, which confer powers on the court to make certain orders in respect of contraventions of the Corporations Act and the ASIC Act. 8.4 Chapters 8 and 9 concentrate on the statutory bases for liability contained in the Corporations Act and the ASIC Act. However, defective disclosure can also give rise to civil or criminal liability under the general law, in various circumstances. Misrepresentation may be grounds for rescission in contract; fraudulent misrepresentation may give rise to liability for damages in tort; and innocent misrepresentation may be a basis for liability for damages under (where applicable) South Australian and Australian Capital Territory legislation. Defective disclosure may also contravene the state criminal law; for example, if it results in a person obtaining financial advantage by deception. Some relevant general law bases for liability are discussed briefly in Chapter 9. It is worth noting that, at least in relation to public offers, the statutory causes of action where available have now largely swallowed up any potential claim in respect of defective disclosure that might otherwise be available at general law.

SOURCES OF STATUTORY LIABILITY 8.5 As the foregoing discussion explains, the main sources of liability for defective disclosure in connection with securities and other financial products contained in the Corporations Act and the ASIC Act can be divided into three broad groups. This part provides a broad overview of the liability provisions. The remainder of the chapter explains each of the liability provisions in detail.

Specialist liability regimes for mandatory disclosure 8.6 The first group of liability provisions consists of the specialist civil and criminal liability regimes that apply to fundraising documents used in connection with offers of securities (Corporations Act Ch 6D) and product information documents used in connection with offers of other financial

products, such as interests in registered managed investment schemes (Corporations Act Pt 7.9). The key provisions are summarised Table 8.1. Table 8.1: Liability for defective disclosure under the specialist regimes Operative provision Offering securities under a defective disclosure document is prohibited by Corporations Act s 728.

Criminal liability Civil liability Contravention of A person who suffers loss Corporations Act s or damage that results 728(1) is an offence if the from a contravention of defect is materially Corporations Act s adverse from the point of 728(1) may recover the view of the holder of the amount of the loss or securities to whom the damage under document is directed: Corporations Act s 729. CA s 728(3). [page 291]

The consequences of defective disclosure in connection with an offer of financial products other than securities are set out in Corporations Act Pt 7.9 Div 7.

Giving a disclosure document or statement that the preparer knows to be defective is an offence under Corporations Act s 1021D. Giving a disclosure document or statement that is defective is prohibited by Corporations Act s 1012E, unless the person took reasonable steps to ensure the document or statement was not defective.

A person who suffers loss or damage because of a contravention referred to in Corporations Act s 1022B(1)(c) may recover the loss or damage under Corporations Act s 1022B(2).

8.7 Under each regime, liability for defective disclosure, both criminal and civil, may extend beyond the principal wrongdoer (generally the issuer or seller as the case may be) to officers, advisers and others associated with the disclosure. Under s 11.2(1) of the Commonwealth Criminal Code, ‘a person who aids, abets, counsels or procures the commission of an offence by another person is taken to have committed that offence and is punishable accordingly’. Accordingly, any person (such as an officer or adviser) who aids, abets, counsels or procures the commission by the company of an offence under s 728(3), s 1021D or s 1021E is also criminally liable in their own right for the contravention. Certain persons, named in the table in s 729(1), share civil liability for defective disclosure in fundraising documents required under Corporations Act Ch 6D: see 9.7. Under s 1022B, civil liability for defective disclosure in a disclosure document or statement required under Corporations Act Pt 7.9 extends to persons involved in the preparation of the document that caused or contributed to the defect: see 9.13. 8.8 The legislation establishes various defences to liability under these specialist regimes. Sections 731, 732 and 733 set up defences against prosecutions under s 728(3) and actions under s 729 for defective disclosure in disclosure documents required under Corporations Act Ch 6D: see 8.25. Section 731 establishes a due diligence defence for prospectuses; s 732 establishes a lack of knowledge defence for offer information statements; and s 733 establishes a reasonable reliance defence for all Ch 6D fundraising documents. Section 1022B(7) provides a defence to civil actions under s 1022B(2) for defective disclosure in a PDS or other disclosure document or statement required under Corporations Act Pt 7.9. A person is not liable under s 1022B(2) in a situation described in s 1022B(1)(c) if the person took reasonable steps to ensure the disclosure document or statement would not be defective.

General prohibitions on misleading or deceptive conduct 8.9 The second group of liability provisions consists of the general prohibitions on misleading or deceptive conduct contained in Corporations Act s 1041H, ASIC Act s 12DA and ACL s 18. Engaging in misleading or deceptive conduct in contravention of these provisions can give rise to civil, but not criminal, liability. The application of these provisions to defective disclosure in a fundraising document [page 292] under Corporations Act Ch 6D, or to conduct that relates to a disclosure document or statement provided under Corporations Act Pt 7.9, is specifically excluded by the legislation: see 8.14. Importantly, no defences to liability for misleading or deceptive conduct are available (other than a general defence for publishers under Corporations Act s 1044A, ASIC Act s 12GI(4) and ACL s 251). However, proportionate liability rules apply under Corporations Act Pt 7.10 Div 2A and ASIC Act Pt 2 Div 2 Subdiv GA (but not under the ACL as applied by the states). Since 2004, the potential liability of professional advisers (such as accountants and lawyers) for misleading or deceptive conduct has been modified by Corporations Act s 1044B and ASIC Act s 12GNA. The effect of these provisions is that a professional standards law of a state or territory applies to limit occupational liability relating to an action for contravention of, respectively, Corporations Act s 1041IH and ASIC Act s 12DA in the same way that it limits occupational liability arising under a law of the state or territory. 8.10 The key provisions giving rise to civil (but not criminal) liability for misleading or deceptive conduct in relation to financial products and services are Corporations Act s 1041H and ASIC Act s 12DA. To the extent that the ACL is part of the law of the Commonwealth, it does not apply to conduct in relation to financial services or financial products: see ss 131 and 131A of the Competition and Consumer Act 2010 (Cth) (CCA).3 However, to the extent that the ACL is part of the law of the

states, by the fair trading legislation,4 it may also apply to conduct to which s 1041H and ASIC Act 12DA apply. It is significant to note that, while agencies and instrumentalities of the Crown in right of a state or territory generally enjoy Crown immunity from Ch 7 of the Corporations Act and Pt 2 of the ASIC Act, they are generally subject to state fair trading laws when engaging in trade or commerce. Liability for engaging in misleading or deceptive conduct does not depend on the state of mind of the wrongdoer — the provisions are wholly concerned with the effect of the conduct on the person to whom it was directed. As the High Court stated authoritatively in Yorke v Lucas (1985) 158 CLR 661 at 666 (Mason ACJ, Wilson, Deane and Dawson JJ): … it is, of course, established that contravention of that section does not require an intent to mislead or deceive and even though a corporation acts honestly and

[page 293] reasonably, it may nonetheless engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

The key statutory provisions are summarised in Table 8.2. Table 8.2: Statutory prohibitions on misleading or deceptive conduct Statutory prohibition Corporations Act s 1041H provides that ‘a person must not, in this jurisdiction, engage in conduct in relation to a financial product or a financial service that is misleading or deceptive or likely to mislead or deceive’.

Application Does not apply to conduct that contravenes Corporations Act s 728 (misleading or deceptive fundraising document) or in relation to a PDS or other disclosure document within the meaning of Corporations Act s 953A or Corporations Act s 1022A.

Civil liability A person who suffers loss or damage by conduct of another person engaged in contravention of Corporations Act s 1041H may recover the amount of the loss or damage under Corporations Act s 1014I.

ASIC Act s 12DA provides that ‘a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive’.

ACL s 18 as it applies as Commonwealth law (by operation of the CCA) provides that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive’. ACL s 18 as it applies as state law (by operation of the relevant state fair trading legislation) provides that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive’.

Does not apply to A person who suffers loss conduct that contravenes or damage by conduct of Corporations Act s 728 another person that (misleading or deceptive contravenes ASIC Act s fundraising document) or 12DA may recover the in relation to a PDS or amount of the loss or other disclosure damage under ASIC Act s document within the 12GF. meaning of Corporations Act s 953A or Corporations Act s 1022A. Does not apply to A person who suffers loss conduct in relation to or damage because of the financial products or conduct of another financial services, by person that contravened virtue of ss 131 and 131A ACL s 18 may recover the of the CCA. Applies to amount of the loss or conduct by corporations damage under ACL s 236. and certain conduct by natural persons. Does not apply to A person who suffers loss conduct that contravenes or damage because of the Corporations Act s 728 conduct of another (misleading or deceptive person that contravened fundraising document) or ACL s 18 may recover the in relation to a PDS or amount of the loss or other disclosure damage under ACL s 236. document within the meaning of Corporations Act s 953A or Corporations Act s 1022A, by virtue of

Corporations Act s 1041K. 8.11 Civil liability for contraventions of Corporations Act s 1041H, ASIC Act s 12DA and ACL s 18 arises under, respectively, Corporations Act s 1041I, ASIC Act s 12GF and ACL ss 236 and 237. In each case liability extends to the person who engaged in the misleading or deceptive conduct and any other person ‘involved in the contravention’. A person is involved in the contravention for this purpose if, among other things, they ‘aided, abetted, counselled or procured the contravention’ [page 294] or they were ‘in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention’: see, for example, Corporations Act s 79.5

Information offences in relation to securities and financial products 8.12 The third group of liability provisions consists of specific prohibitions on certain conduct related to financial products (including securities), that are contained in Corporations Act Pt 7.10. These provisions are sometimes referred to as ‘information offences’. Contravention of these provisions is a criminal offence, and also may give rise to civil liability. Defective disclosure in fundraising documents, or related to PDSs and other Pt 7.9 documents, is not carved out of the liability regime established by these provisions. Part 7.10 of the Corporations Act prohibits a range of undesirable conduct in relation to financial products (including securities), such as market manipulation and insider trading. Part 7.10 is discussed in detail in Chapters 16 and 17 below. Certain of the provisions of Pt 7.10 — particularly those that prohibit a person making false or misleading statements, inducing people to deal in financial products by incorrect or

incomplete information, or engaging in dishonest conduct — may be contravened by defective disclosure. These provisions are summarised in the Table 8.3. Table 8.3: Information offences in Pt 7.10 Prohibited conduct Section 1041E(1) prohibits a person from making a statement or disseminating information that is false in a material particular or is materially misleading if it is likely to induce dealing or affect price, and the person is reckless as to its truth or knows or ought to know it is false or misleading.

Criminal liability Contravention of s 1041E(1) is an offence: see Corporations Act s 1311(1).

Civil liability A person who suffers loss or damage that results from a contravention of Corporations Act s 1041E may recover the amount of the loss or damage under Corporations Act s 1014I.

[page 295] Section 1041F(1) prohibits a person from inducing another person to deal in financial products by knowingly or recklessly making statements, promises or forecasts that are false, misleading or deceptive, by dishonestly concealing material facts, or by recording or storing information the person knows to be false or

Contravention of s 1041F(1) is an offence: see Corporations Act s 1311(1).

A person who suffers loss or damage that results from a contravention of Corporations Act s 1041F may recover the amount of the loss or damage under Corporations Act s 1014I.

misleading. Section 1041G(1) prohibits a person who carries on a financial services business from engaging in dishonest conduct in relation to a financial product or financial service in the course of that business.

Contravention of s 1041G(1) is an offence: see Corporations Act s 1311(1).

A person who suffers loss or damage that results from a contravention of Corporations Act s 1041G may recover the amount of the loss or damage under Corporations Act s 1014I.

8.13 The effect of s 11.2 of the Commonwealth Criminal Code is that a person who ‘aids, abets, counsels or procures the commission of an offence’ by another person under Corporations Act s 1041E, s 1041F or s 1041G ‘is taken to have committed that offence and is punishable accordingly’. Civil liability under Corporations Act s 1041I extends to a person who has engaged in conduct in contravention of s 1041E, s 1041F or s 1041G and ‘any other person involved in the contravention’ within the meaning of Corporations Act s 79: see 8.11 above.

Relationship between the liability regimes 8.14 The liability pattern established by the Corporations Act is to have a separate liability regime for disclosure that is mandatory under Ch 6D (fundraising) and Pt 7.9 (offering financial products), that is administered by ASIC and in relation to which defences to civil liability are available. The general prohibitions on misleading or deceptive conduct contained in Corporations Act s 1041H, ASIC Act s 12DA and ACL s 18 do not apply in these circumstances, because: to the extent that the ACL is part of the law of the Commonwealth, it does not apply to conduct in relation to financial services or financial products: see ss 131 and 131A of the CCA. For this purpose, the broad definitions of ‘financial product’ and ‘financial service’ in ss 12BAA and 12BAB of the ASIC Act apply; to the extent that the ACL is part of the law of the states, by the fair trading legislation, it does not apply to conduct that contravenes s

728 (misleading or deceptive fundraising document) or in relation to a PDS or supplementary PDS, by virtue of Corporations Act s 1041K; [page 296] Corporations Act s 1041H does not apply to conduct that contravenes s 728 (misleading or deceptive fundraising document) or in relation to a PDS or supplementary PDS, by virtue of Corporations Act s 1041H(3); and ASIC Act 12DA does not apply to conduct that contravenes s 728 (misleading or deceptive fundraising document) or in relation to a PDS or supplementary PDS, by virtue of ASIC Act s 12DA(1A). The effect of the exclusions is to give exclusive operation to the relevant specialist liability regime with respect to conduct that contravenes 728, and conduct in relation to a disclosure document or statement within the meaning of s 1022A.6 For these purposes, conduct contravenes s 728 ‘even if the conduct does not constitute an offence, or does not lead to any liability, because of the availability of a defence’: see Corporations Act s 1041H(3), ASIC Act s 12DA(1A) and Corporations Act s 1041K. In each case the carve-out refers to ‘conduct that contravenes’ the relevant section. In the case of s 728, the relevant conduct is the making of an offer. Other conduct engaged in connection with the offer is not carved out, and may still be subject to s 1041H, s 12DA and state fair trading legislation. The carve-out for mandatory disclosure in relation to offers of financial products other than securities (such as interests in managed investment schemes and derivatives) works slightly differently. The carve-out is for conduct ‘in relation to a disclosure document or statement within the meaning of s 1022A’. The limits of the carve-out are not clear — it may be that it would be extended only to conduct engaged in in relation to the document, rather than the offer. So passing on the document (for example,

under s 1012A) would appear to be conduct in relation to the document, while statements made outside the document would not.

DEFECTS IN SECURITIES OFFER DOCUMENTS 8.15 This part explains the liability regime that applies where there is a defect in a prospectus or offer information statement prepared and lodged with ASIC under Pt 6D.2 of the Corporations Act. The consequences of defective disclosure in such a document are set out in Pt 6D.3 of the Corporations Act. A person who makes an offer of securities under a defective disclosure document will contravene Corporations Act s 728, but will not (for the reasons explained above) contravene the general prohibitions on engaging in misleading or deceptive conduct contained in Corporations Act s 1041H, ASIC Act s 12DA or ACL s 18. Part 6D.3 of the Corporations Act applies in relation to information failures in or from a disclosure document lodged with ASIC in accordance with Ch 6D of the Corporations Act. It therefore applies to defective prospectuses (including transaction-specific prospectuses and two-part simple corporate bond prospectuses), short-form prospectuses, profile statements, and offer information statements issued in relation to securities. The pattern of Pt 6D.3 is as follows: [page 297] section 728(1) prohibits a person from offering securities under a defective disclosure document. Contravention of s 728(1) is an offence in some circumstances; section 729 gives a person who suffers loss or damage as a result of a contravention of s 728 a right to recover the amount of the loss or damage from one or more of the people made liable under that section; and sections 731–733 then provide certain defences to liability for those people.

The elements of the liability regime are explained below.

Prohibition on offering securities under a defective disclosure document: s 728 8.16 It is a contravention of s 728 of the Corporations Act to offer securities under a defective disclosure document that is lodged with ASIC under Ch 6D. The person offering the securities, and certain others made responsible by the legislation, will be liable to compensate those harmed by that defective disclosure unless one of the statutory defences to liability is made out. The conduct attracting liability is proscribed by s 728. Section 728(1) is directed at three distinct types of information failure or defect: the making of a statement that is misleading or deceptive; the failure to provide information that must by law be provided; and the failure to keep a current disclosure document updated during the offer period. It provides that: A person must not offer securities under a disclosure document if there is: (a) a misleading or deceptive statement in: (i)

the disclosure document; or

(ii) any application form that accompanies the disclosure document; or (iii) any document that contains the offer if the offer is not in the disclosure document or the application form; or (b) an omission from the disclosure document of material required by section 710, 711, 712, 713, 714 or 715; or (c) a new circumstance that: (i)

has arisen since the disclosure document was lodged; and

(ii) would have been required by section 710, 711, 712, 713, 714 or 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged.

Contravention of s 728(1) may lead to civil liability under s 729 and is an offence under s 728(3) if the misleading or deceptive statement or the omission or new circumstance is materially adverse from the point of view of an investor. Because s 728(3) does not specify a fault element, the requisite fault element is intention, knowledge or recklessness: s 5.6 of the Criminal Code 1995 (Cth). However, the legislation provides certain

defences to both civil and criminal liability. Where they are made out, the effect of the defences is that a person who contravenes s 728(1) does not commit an offence under s 728(3), and is not liable under s 729. The defences are contained in ss 731–733: see 8.25ff below. [page 298] Civil liability is imposed by s 729 in favour of a person who suffers loss or damage because of an offer made in contravention of s 728 against certain persons named in a table contained in s 729(1): see Chapter 9 below. The various elements that must be proved to establish a contravention of Corporations Act s 728 are explained below.

Liability only arises where there is a ‘disclosure document’ 8.17 Section 728 applies only where there is a ‘disclosure document’ as defined in the Corporations Act.7 A disclosure document for an offer of securities means: a prospectus for the offer; a profile statement for the offer; or an offer information statement for the offer. Each of ‘prospectus’, ‘profile statement’ and ‘offer information statement’ is in turn defined in s 9 in such a way as to restrict the application of the provision to documents that are lodged with ASIC. The effect of the definitions is that s 728 only applies to disclosure documents that are lodged with ASIC in accordance with s 718. Documents that are not lodged with ASIC (whether because they relate to an unregulated offer, or because the offeror is in breach of s 718) are not subject to s 728. Instead, defects in such documents may attract liability under s 1041H or ASIC Act s 12DA: see below. The defect must be in or from the disclosure document, the application form or a document containing the offer for s 728 to apply.

Defects in disclosure 8.18 As noted above, s 728 is directed at three different information failures or defects — the inclusion of misleading or deceptive statements, the omission of information required by law to be included, and the failure to withdraw or update a disclosure document where circumstances change during the currency of the offer. Liability can arise under the first alternative if the misleading or deceptive statement appears in the disclosure document itself; in any application form that accompanies the disclosure document; or in any document that contains the offer if the offer is not in the disclosure document or the application form. The effect of s 727(1) is that an offer of securities must be made in or accompanied by the disclosure document, and s 723(1) has the effect that securities may only be issued if they are applied for on a form that was issued in or together with the disclosure document. Misleading or deceptive statement 8.19 Under s 728(1)(a), a contravention occurs if there is a ‘misleading or deceptive statement’ in a disclosure document, application form or accompanying offer. This means that there must have been a ‘statement’, and that the statement must have been misleading or deceptive. Note that the extended meaning of ‘statement’ in s 9 does not apply in Ch 6D — in the absence of that extended meaning a statement [page 299] would appear to require the expression of something in words. The meaning of ‘misleading or deceptive’ is discussed in 8.43ff below. The predecessor section to s 728, which was s 996 of the Corporations Law, prohibited the issue of a prospectus where ‘a material statement in the prospectus is false or misleading’. Section 728 departs from that approach in two ways. First, the test is whether the statement is misleading or deceptive, rather than whether it was false or misleading, although it is not clear whether there is any practical difference between the two

formulations. Second, there is no need for the person claiming to show that the statement was material. By virtue of s 728(2), a person is taken to make a misleading statement about a future matter (including the doing of, or refusing to do, an act) if they do not have reasonable grounds for making the statement. This subsection does not limit the meaning of a reference to a misleading statement or a statement that is misleading in a material particular. ASIC Regulatory Guide 170 — Prospective Financial Information deals with forward looking statements: see 8.49ff below. Failure to include information required by law 8.20 A contravention of s 728(1)(b) occurs if there is an omission from the disclosure document of material required by ss 710–714 or s 715. These sections, which prescribe the contents of the disclosure document, are discussed in 5.9ff above. New circumstance requiring disclosure 8.21 Section 728(1)(c) provides that a person must not offer securities under a disclosure document if there is a new circumstance that has arisen since the disclosure document was lodged and that would have been required by ss 710–714 or s 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged. The prohibition applies until the non-disclosure is cured by the offeror lodging a supplementary or replacement document in the manner envisaged by s 719: see 5.52.

Criminal liability under s 728(3) 8.22 In addition to resulting in civil liability under s 729 (discussed in Chapter 9 below), a contravention of s 728(1) is an offence if the misleading or deceptive statement or the omission or new circumstance is materially adverse from the point of view of an investor: s 728(3). In other words, criminal liability is imposed where the result of a contravention of s 728(1) was that ‘bad news’ was withheld from investors. Proceedings may be instituted within five years after the act or omission alleged to constitute the offence, or with the Minister’s consent, at any later time: s 1316.

The penalty for an offence under s 728(3) is 200 penalty units or five years’ imprisonment, or both. Where a body corporate is convicted the penalty is a fine not exceeding five times the maximum amount otherwise applicable: s 1312. Where there has been a substantive offence of failing to do a prescribed act and the contravention continues, there can be liability to a further penalty for continuing offences: s 1314. [page 300]

Physical and fault elements of the offence 8.23 For the purposes of the Commonwealth Criminal Code, the physical element of the offence is making (or continuing to make) the offer in circumstances prohibited by s 728(1). The section does not specify a fault element. As the physical element of the offence consists of conduct (making an offer), the requisite fault element would appear to be intention: see s 5.6(1) of the Criminal Code. Intention is defined in s 5.2 of the Criminal Code.

Primary and secondary offenders 8.24 The prohibition in s 728(1) is directed at the person making the offer of securities. Under s 700(3), this is the person who has the capacity, or who agrees, to issue or transfer the securities if the offer is accepted. In the case of a primary offer of securities, this will be the issuing body corporate. In the case of a secondary offer that requires disclosure under Ch 6D, this will be the vendor. This person is the primary offender where a contravention of s 728 occurs. It is important to note that the classes of persons made civilly liable for a breach of s 728(1) by s 729 are not by that section also made criminally liable for the breach. Instead, criminal liability for aiding, abetting, counselling or procuring a contravention of s 728(3) arises under s 11.2 of the Criminal Code. Under s 11.2(1) of the Criminal Code, ‘a person who aids, abets, counsels or procures the commission of an offence by another person is taken to have committed that offence and is punishable accordingly’. Section 11.2(2) of the Code goes on to provide that, for the

person to be guilty: ‘(a) the person’s conduct must have in fact aided, abetted, counselled or procured the commission of the offence by the other person; and (b) the offence must have been committed by the other person’. However, because of s 11.2(5) a person may be found guilty of aiding, abetting, counselling or procuring the commission of an offence even if the principal offender has not been prosecuted or has not been found guilty. A person cannot be convicted for aiding, abetting, counselling or procuring the commission of an offence under s 728(3) unless the requisite intention is proved. Under s 11.2(3) the officer must have intended that his or her conduct would aid, abet, counsel or procure the commission of any offence (including its fault elements) of the type the other person committed; or that his or her conduct would aid, abet, counsel or procure the commission of an offence and have been reckless about the commission of the offence (including its fault elements) that the company in fact committed. Section 11.2(3) has effect subject to subs (6), which goes on to provide that any special liability provisions that apply to an offence apply also to the offence of aiding, abetting, counselling or procuring the commission of that offence. Under s 11.2(4) of the Criminal Code, a person cannot be found guilty of aiding, abetting, counselling or procuring the commission of an offence if, before the offence was committed, the person terminated his or her involvement, and took all reasonable steps to prevent the commission of the offence. [page 301] For a person to be found guilty of aiding and abetting the commission of an offence by a principal, requires a link in purpose between that person and a principal. In addition to the link in purpose, the aider and abettor must by words or conduct do something to bring about the commission of the offence.8 A person can be liable as an accessory only if they: (i) have ‘the required knowledge of the nature of the criminal purpose’; and (ii) they have ‘taken steps to assist in, and/or to promote the commission of

the criminal purpose’. Wilful blindness is treated as equivalent to knowledge but neither negligence nor recklessness is sufficient.9

Defences to civil and criminal liability 8.25 Sections 731–733 make available various defences to civil and criminal liability for contraventions of s 728(1). Where a particular defence is available to the person and is made out, the person does not commit an offence under s 728(3), and is not civilly liable under s 729 for a contravention of s 728(1). The availability of the defences varies depending on the type of disclosure document, the nature of the defect and the identity of the person seeking the protection of the defence. The available defences are summarised in Table 8.4. Table 8.4: Defences to liability Where the defect in or from a … is a … misleading or prospectus deceptive statement or omission



misleading or deceptive statement or omission

profile statement or offer information statement





these defences are to these people … available … reasonable everyone in the inquiries: s 731 table in s 729(1)

reasonable reliance: s 733(1) withdrawal of consent: s 733(3)

lack of actual knowledge: s 732

everyone in the table in s 729(1) a person described in items 3, 4 or 5 of the table in s 729(1) everyone in the table in s 729(1)

reasonable reliance: s 733(1) withdrawal of consent: s 733(3)

everyone in the table in s 729(1) a person described in items 3, 4 or 5

failure to disclose a any disclosure new matter document

lack of actual awareness: s 733(4)

of the table in s 729(1) everyone in the table in s 729(1)

[page 302]

Reasonable inquiries defence: s 731 8.26 The first of the statutory defences is contained in s 731. The defence in s 731 is available only in relation to false or misleading statements in, and omissions from, prospectuses. It does not apply to information failures in offer information statements or profile statements, or where the conduct contravening s 728(1) was the failure to update a disclosure document for new developments after lodgment. (In these cases a more expanded defence is available — that of lack of actual knowledge of the defect.) The defence is available to any person named in the table in s 729 as potentially liable for a breach of s 728(1). The person seeking to rely on the defence must establish two things. The first is that they made all inquiries (if any) that were reasonable in the circumstances. The second is that, after so doing, they believed on reasonable grounds either that the statement was not misleading or deceptive (where a contravention of s 728(1)(a) is alleged) or that there was no omission (where a contravention of s 728(1)(b) is alleged). The first thing that the person seeking to rely on the defence must prove is that they made all inquiries (if any) that were reasonable in the circumstances. In deciding what is reasonable in the circumstances it seems likely that a court would have regard to established best practice in the preparation and verification of prospectuses.10 This will depend ultimately on the size, nature and complexity of the offer, and of the corporation and its business. It will also depend on the position of the individual person seeking to rely on the defence, as what is reasonable may differ depending on whether the defendant is, for example, an executive or non-executive director, or an external adviser to the offeror.

The drafting owes something to the defences to liability for defects in a registration statement (a loose equivalent to our prospectus) under United States securities law. The United States Securities Act of 1933 provides in §11(3)(A) that, in respect of the ‘non-expertised’ part of the registration statement,11 a person (other than the issuer) is not liable in respect of an error in or omission from the registration statement if they are able to establish (15 USC 77k) that they: … had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

The standard of reasonableness for the United States statute is set out in §11(c), which provides that: [page 303] In determining … what constitutes reasonable investigation and reasonable grounds for belief, the standard of reasonableness shall be that required of a prudent man in the management of his own property.

The ‘reasonable investigation’ defence in the United States securities law is separate from the defence in §12(2) that the person ‘did not know, and in the exercise of reasonable care could not have known, of such untruth or omission’. The practice in Australia since 1991 has been to develop and implement a ‘due diligence’ procedure for preparing and verifying the contents of a prospectus. Due diligence procedures are described in 5.34ff. Prior to the commencement of the Corporate Law Economic Reform Program Act (1999) (Cth) (CLERP Act) in March 2000, it was a defence to liability for a defective prospectus if the defendant could establish that the defect was due to the act or default of another person, to an accident or to some other cause beyond the defendant’s control, and that they took ‘reasonable precautions and exercised due diligence to ensure that’ the defect did not occur.12 While this explicit ‘due diligence’ defence no longer appears in the Corporations Act, a properly constituted and executed due diligence process will assist a defendant in establishing (for the purposes of

s 731) both the nature and extent of the inquiries undertaken, and that the inquiries were reasonable in the circumstances. The process by which the defendant established the reasonableness of the inquiries is important — often this is done by reference to agreed materiality thresholds (qualitative and quantitative) or by the offeror conducting a sensitivity analysis with its advisers of its particular business, sector and offer. The second thing that the person seeking to rely on the defence must prove is that after making whatever inquiries were reasonable they ‘believed on reasonable grounds that’ the statement was not misleading or deceptive, or that there was no omission (as the case may be). This requirement has both a subjective and an objective element. The subjective element lies in the fact that the person must believe that there was no defect. If a person knew a statement was false or that there was an omission that person would not be able to establish the requisite belief (and where the person is a body corporate the knowledge of its officers will be relevant because of s 769B). The objective requirement is that the belief must be reasonably held: that is, that having regard to the information available to the person their belief was not irrational.

Lack of knowledge defence: s 732 8.27 This defence is only available in respect of defective disclosure in an offer information statement or a profile statement.13 [page 304] The defence is available to a person if they can prove that they did not know that the statement was misleading or deceptive, or that there was an omission. This defence is easier to establish than the reasonable inquiries defence that applies in relation to prospectuses. In effect, the practical difference between the two defences is that there may be no need to conduct due diligence in order to establish the defence under s 732. The Explanatory Memorandum to the CLERP Bill draws this distinction (at [8.38]), which states that: The defence provisions are modified to take account of the reduced disclosure requirements for profile statements and OISs (in particular, there is no requirement for the

issuer of an OIS to undertake reasonable inquiries). A person will not be liable if they prove that they did not know that the statement was misleading or deceptive or that there was a material omission from the statement.

The test in s 732 is actual knowledge of the defect.

Reasonable reliance defence: s 733(1) 8.28 Section 733(1) creates a general defence available in relation to all disclosure documents. It provides that a person does not commit an offence against s 728(3), and is not liable under s 729 for a contravention of s 728(1), because of a misleading or deceptive statement in, or omission from, a disclosure document if they can prove reasonable reliance on information provided by another person. Specifically, the person must prove: … that they placed reasonable reliance on information given to them by: (a) if the person is a body — someone other than a director, employee or agent of the body; or (b) if the person is an individual — someone other than an employee or agent of the individual.

Section 733(3) makes it clear that, for the purposes of s 733(1), a person is not the agent of a body or individual merely because they perform a particular professional or advisory function for the body or individual. So a person who places reasonable reliance on information provided to them by their solicitor or accountant acting in that capacity may be able to take advantage of the defence in certain cases. The reliance placed on the information provided by a third party must be reasonable.14 The person seeking to rely on the defence should have established that the person was competent to provide the information and that it was appropriate for the person to have provided that information. Generally, the person providing the information should be doing so in the course of their ordinary professional capacity; for example, it may be reasonable to rely on a valuer or real estate agent to provide information about the property market, but not a solicitor or accountant. It is not necessarily fatal to a defence of reasonable reliance that the defendant cannot show that it took reasonable precautions and exercised due diligence to avoid

[page 305] the contravention.15 But the adjective ‘reasonable’ implies that the person should have acted reasonably in regard to circumstances which it knew or ought to have known. If it were put on inquiry that the information was suspect and made no investigation, the defence would not be available.

Withdrawal of consent defence: s 733(3) 8.29 For those people whose liability under s 729 for a contravention of s 728(1)(a) or s 728(1)(b) arises out of having given their consent to be named in the disclosure document, it is a defence to that liability if their consent is withdrawn in the manner contemplated by s 733(3). This defence is available to a person who is named in a disclosure document as a proposed director or underwriter, making a statement included in the document, or making a statement on the basis of which a statement is included in the document. To avail themselves of the defence, the person must show that they ‘publicly withdrew their consent to being named in the document in that way’. This provision is derived in part from the former ss 1008 and 1009 of the Corporations Law. Under those sections it was clear when the withdrawal of consent was to have occurred. Under the former s 1008(4) of the Corporations Law, a director or proposed director was not liable if it was proved that, after the issue of the prospectus and before any allotment or issue under the prospectus, the person, on becoming aware of any false or misleading statement in, or omission from, the prospectus, withdrew the person’s consent to the issue of the prospectus and gave reasonable public notice of the withdrawal and of the reasons for the withdrawal. Under the former s 1009(3), experts and others making statements in the prospectus were not liable with respect to those statements if they withdrew their consent in writing before the prospectus was lodged, or if after the issue of the prospectus and before any allotment or issue under the prospectus, on becoming aware of any false or misleading statement in, or omission from, the prospectus, they withdrew their consent to the issue of the prospectus and gave reasonable public notice of the withdrawal and of the reasons for the withdrawal.

Unlike its predecessors, s 733(3) does not specify the time at or by which the consent must be withdrawn, or require that the person state their reasons for withdrawing their consent. Presumably the consent must be withdrawn before securities are issued or sold under the disclosure document, although this is not clear on the face of the section.

Lack of awareness defence: s 733(4) 8.30 A separate defence exists for contraventions of s 728(1)(c). A contravention of s 728(1)(c) occurs where an offer of securities is made under a disclosure document if there is a new circumstance that arises after the disclosure document is lodged with ASIC, and that would have required disclosure under ss 710–715 if it had arisen [page 306] before the document was lodged. Section 733(4) provides that a person does not commit an offence against s 728(3), and is not liable under s 729 for a contravention of s 728(1), because of a new circumstance that has arisen since the disclosure document was lodged if the person proves they were not aware of it. The test in s 733(4) is closer to s 732 than s 731, in that it turns on the actual knowledge of the person. There is no requirement, to establish the defence, for the person to undertake any form of due diligence during the offer period to ensure that any new circumstances come to their attention. In a sense this is a relaxation of the standard that applied under the former Corporations Law provisions. Note that under s 730 a person referred to in the table in s 729 is under an obligation to notify the offeror in writing as soon as practicable if they become aware during the application period of a defect in the document, including where a material new circumstance arises.

DEFECTS IN PDSs AND OTHER PT 7.9 DOCUMENTS

8.31 The liability rules for defects in PDSs and other Pt 7.9 documents and statements adopt a different structure from those in Ch 6D of the Corporations Act, discussed above. Division 7 of Corporations Act Pt 7.9 is entitled ‘Enforcement’. It begins, in Subdiv A, by laying down a large number of offences that relate to non-compliance with different aspects of Pt 7.9. Included among these are criminal offences that are committed by the person who prepares a PDS or supplementary PDS that is defective and gives it to another person: ss 1021D and 1021E. Subdivision B is separate; it imposes civil liability on certain persons in certain circumstances related to non-compliance with different aspects of Pt 7.9, including where a person gives a defective disclosure document or statement: s 1022A(1)(c). The discussion that follows concentrates on the liability of the person who prepares a PDS or supplementary PDS for an offer of financial products. As noted in 6.33 above, the PDS for an offer of financial products for issue must be prepared by the issuer, and the PDS for a regulated sale of financial products must be prepared by the seller: s 1013A. The liability of persons associated with the offeror (such as its advisers or officers) is also considered. Criminal liability under s 1021C for failing to give a PDS at all is discussed in Chapter 6 above. Other offences created under Subdiv A that are not discussed here relate to: regulated persons other than the preparer giving defective disclosure documents (s 1021F); contraventions of s 1012G (ss 1021FA and 1021FB); failure by a licensee to take reasonable steps to ensure its representatives provide PDSs when required (s 1021G); failure by the preparer to ensure that the PDS complies with certain technical requirements (s 1021H); [page 307] provision of a PDS prepared by the wrong person (s 1021I);

failure to take steps to prevent the dissemination of a disclosure document known to be defective (s 1021J); unauthorised alteration of a PDS or supplementary PDS (s 1021K); giving or failing to withdraw consent to the inclusion of defective information (s 1021L); failure to comply with the requirement to lodge in-use notices and to keep and provide copies of PDSs and supplementary PDSs (s 1021M); failure to provide additional disclosure requested under s 1017A (s 1021N); failure to pay application moneys into a designated account (s 1021O); and offences relating to Div 5A offers: that is, unsolicited off-market offers to acquire shares (s 1021P).

Criminal liability for defective disclosure 8.32 A person who has prepared a PDS or supplementary PDS that is defective faces criminal liability if their conduct comes within s 1021D, s 1021E or s 1021H. A person who aids, abets, counsels or procures the commission of an offence by the preparer also contravenes that section: see s 11.2 of the Commonwealth Criminal Code, discussed at 8.24 above. A PDS or supplementary PDS is defective for the purposes of the offence provisions in Subdiv A if it contains a misleading or deceptive statement, or it omits certain information required by Pt 7.9, but only if the statement or omission ‘is or would be materially adverse from the point of view of a reasonable person considering whether to proceed to acquire the financial product concerned’: see s 1021B(1). The information that must not be omitted is, for a PDS, information required under s 1013C (other than material required by s 1013B or s 1013G) and for a supplementary PDS, information required under s 1014E. Failure to include material required by s 1013B or s 1013G in a PDS is a separate offence, under s 1021H. 8.33 Section 1021D applies to a person who ‘prepares (or has someone else prepare for them) a disclosure document or statement’ including a PDS or supplementary PDS. The person commits an offence if the person

‘knows that the disclosure document or statement is defective’ and the person does one of the following things: gives the document to another person ‘in circumstances in which it is required by a provision of this Part to be given to that other person’ (s 1021D(1)(c)(i)); gives the document to another person, or makes it available to them, ‘reckless as to whether the other person will or may rely on the information in it’ (s 1021D(1)(c)(ii)); or gives the document to another person, or makes it available to them, ‘reckless as to whether the other person, or someone else, will or may give it, or make it available, to another person as mentioned in para (1)(c)(i) or (ii)’ (s 1021D(2)(c)). [page 308] Here (and in s 1021E: see below) ‘give’ means ‘give by any means (including orally) and is not limited to giving in accordance with s 1015C’: ss 1021D(3) and 1021E(5). Section 1021E is in similar terms to s 1021D, but it applies regardless of whether the person knew the document was defective. The person commits an offence if they do one of the prohibited acts by giving or making available the defective document, unless they can make out the defence in s 1021E(4). The offence is one of strict liability: s 1021E(3).

Defences to civil and criminal liability 8.34 The effect of s 1021E(4) is that ‘in any proceeding against a person for an offence based on s 1021E(1) or (2), it is a defence if the person took reasonable steps to ensure the disclosure document or statement would not be defective’. The defendant bears the evidentiary burden of proving that the defence is made out: see the note to ss 1021E(4) and 13.3(a) of the Commonwealth Criminal Code. It is a defence to civil liability arising out of a defective PDS under s 1022B(1)(c) if the person took reasonable steps to ensure that the disclosure document was not defective: s 1022B(7).

MISLEADING OR DECEPTIVE CONDUCT 8.35 The foregoing discussion dealt with the specialist liability regimes, created under the Corporations Act, that apply to defective disclosure in: prospectuses and offer information statements used in offers of securities conducted in accordance with Pt 6D.2; and PDSs and supplementary PDSs used in offers of financial products (other than securities) under Pt 7.9. The general prohibitions on misleading or deceptive conduct contained in Corporations Act s 1041H, ASIC Act s 12DA and ACL s 18 do not apply to defective disclosure in these documents,16 for the reasons explained at 8.14 above. This part moves on to discuss defective disclosure in relation to securities and financial products that occurs outside these documents. There are numerous examples of situations where a person may make disclosure about securities or other financial products outside such a document. For example, a person may make disclosure about an unregulated offer (such as an offer to sophisticated or professional investors) in an information memorandum. They may make disclosure in an advertisement, notice or other published statement about a (regulated or unregulated) offer. They may say something that affects the value of securities in an interview or discussion with another person, or in a communication (such as a continuous disclosure [page 309] notice) lodged with an exchange. In all these situations, the general prohibitions on misleading or deceptive conduct contained in the Corporations Act, the ASIC Act and the ACL may potentially apply. 8.36 The relevant prohibitions on misleading or deceptive conduct are contained in Corporations Act s 1041H, ASIC Act s 12DA and ACL s 18. Each section is couched in very broad terms. Section 1041H(1) of the Corporations Act provides that ‘a person must not, in this jurisdiction,

engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or likely to mislead or deceive’. Section 12DA of the ASIC Act provides that ‘a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive’. Section 18 of the ACL provides that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive’. In each case contravention is not an offence, and therefore leads not to a penalty, but to the possibility of a civil claim for injunctive relief or for damages under Corporations Act s 1041I, ASIC Act s 12GF and ACL ss 236 and 237 respectively: see Chapter 9 below. Contravening conduct can be restrained by injunction, for example under Corporations Act s 1324, ASIC Act s 12GD and ACL s 232. This is an important remedy for regulators, including ASIC. Following a contravention of s 1041H the court can also make various remedial orders under s 1325 including orders affecting the operation of contracts. The powers of the court to make orders with respect to contraventions is summarised in 8.70 below. The words of each of the sections are derived from the former s 52(1) of the TPA (now renamed the CCA). They give rise to similar issues.17 As a remedy for loss caused by a misrepresentation, TPA s 52(1) proved to be very fertile. Plaintiffs who could bring themselves within its scope had a better remedy than common law remedies such as the action for the tort of deceit or the tort of negligence. By the time the first general prohibition on misleading or deceptive conduct was introduced into the securities laws (in the form of s 995 of the (then) Corporations Law) in 1989, there was a profusion of reported cases expounding s 52(1). Many of those cases assist in the interpretation of Corporations Act s 1041H, ASIC Act s 12DA and ACL s 18. There can be other forms of misleading or deceptive conduct besides misstatements or non-disclosure, but in the following treatment the emphasis will be on misstatements and non-disclosure.

Statutory proscription 8.37 The relevant statutory provisions all proscribe misleading or

deceptive conduct; which provision applies depends on the type of conduct engaged in. The relationship between the provisions is explained above. In broad terms: Corporations Act s 1041H applies to ‘conduct in relation to a financial product or a financial service’; [page 310] ASIC Act s 12DA applies to ‘conduct in relation to financial services’ that is ‘in trade or commerce’; ACL s 18, to the extent it is part of Commonwealth law, does not apply to conduct that is the supply, or possible supply, of services that are financial services, or of financial products. It applies to all other conduct ‘in trade or commerce’ engaged in by a corporation or, in certain limited circumstances, by a natural person:18 see CCA ss 131 and 131A; and ACL s 18, to the extent it is part of state law, applies to conduct by any person that is ‘in trade or commerce’. As a practical matter, proceedings are usually commenced under more than one of the provisions. 8.38 Section 1041H applies to conduct in relation to a financial product or a financial service. Financial product has the meaning given by Pt 7.1 Div 3 of the Corporations Act: see Chapter 3 above. Financial service has the meaning given by Pt 7.1 Div 4. Importantly for the present purposes, the definition of ‘financial product’ includes a ‘security’: see ss 764A(1)(a) and 761A. This means that conduct in relation to securities (whether or not it amounts to a financial service) is potentially within the ambit of s 1041H. The definition of ‘financial service’ in s 766A(1) says that a person provides a financial service if, among other things, they deal in a financial product. Dealing is defined in s 766C to mean: applying for or acquiring a financial product;

issuing a financial product; in relation to securities or managed investment interests — underwriting the securities or interests; varying a financial product; or disposing of a financial product. Arranging for a person to engage in this conduct is also dealing, by operation of s 766C(2). However, a person’s conduct does not amount to dealing, and therefore is not a financial service, if: it involves a person dealing on their own behalf, whether directly or through an agent (such as a broker), unless the person is the issuer of the financial product and the dealing relates to that product (s 766C(3)); it involves a person dealing on behalf of someone else as their agent (in which case it is dealing by the principal rather than the agent) (s 766C(4)); [page 311] it involves a dealing by a body corporate19 (other than an investment company)20 in its own securities21 (s 766C(4) and (5)); or it is sub-underwriting: s 766C(6). Section 1041H(2) gives examples of engaging in conduct in relation to financial products. It contains a non-exclusive list of matters that are included in the reference in subs (1) to conduct in relation to a financial product. In relation to securities, the list expressly includes dealing in securities and, without limiting the generality of dealing, also includes (among other things): issuing securities; publishing a notice22 in relation to securities; making, or making an evaluation of, an offer under a takeover bid or a recommendation relating to such an offer; and carrying on negotiations, or making arrangements, or doing any other act, preparatory to, or in any way related to, these activities.

8.39 The conduct in question must be ‘in relation to’ a financial product or financial service. In Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; 66 ACSR 688; [2008] FCAFC 120 at [9], Finkelstein J observed that: … the words ‘in relation to’ require a relationship or connection between two subject matters. In the context of Pt 7.10 generally, and s 1041H in particular, the expression ought to receive broad construction. One important object of the part is to ensure that participants in the market for financial products and financial services act with integrity and honesty and that consumers are adequately protected. To further this object I do not think the connection between misleading statements on the one hand and shares in a company on the other must necessarily be immediate or direct. I particularly do not accept as a necessary condition for conduct to be ‘in relation to a financial product’ that the conduct must ‘on its face’ refer to or, as the [first instance] judge would have it, ‘deal with’ the financial product. With great respect to those who hold the opposite view, that approach gives s 1041H an unnecessarily narrow construction; a construction that will not promote its objects.

In Narain, publication on ASX of a statement that a reasonable person would expect to have a material effect on the price or value of shares was held to be conduct that ‘relates to’ those shares. Having reviewed the applicable case law on the relationship between the conduct and the thing to which it relates, Jacobson and Gordon JJ concluded (at [68]–[73]) that ‘the relationship which is contemplated [page 312] by s 1041H(1) is at the lower end of the spectrum so that an indirect or less than substantial connection is sufficient’.23 8.40 For ASIC Act s 12DA to apply, there must be conduct in relation to financial services as defined in the ASIC Act, and it must be ‘in trade or commerce’. The definition of ‘financial service’ in Pt 2 Div 2 of the ASIC Act is different from the definition that applies to Pt 7.10 of the Corporations Act.24 The relevant definition is in s 12BAB of the ASIC Act. In addition to things which are a financial service for the purposes of Ch 7 of the Corporations Act (that is, dealing in financial products, providing financial

product advice, making a market in financial products, operating a registered scheme, and providing custodial or depository services), the ASIC Act captures: operating a financial market or a clearing or settlement facility; and providing a service that is otherwise supplied in relation to a financial product. The definition of ‘financial service’ in s 12BAB of the ASIC Act includes dealing in financial products. The definition of ‘dealing’ in the ASIC Act is wider than the definition of dealing in the Corporations Act, because certain conduct that is expressly excluded from the definition of ‘dealing’ by ss 766C(3A)–766C(6) of the Corporations Act is not excluded from the ASIC Act definition. Most significantly, conduct included in the definition of ‘financial service’ for the purposes of the ASIC Act includes a person dealing on behalf of someone else as their agent; and dealing by a body corporate in its own securities. For example, in Ambergate Ltd v CMA Corporation Ltd (admins apptd) (2016) 110 ACSR 642; [2016] FCA 94 the respondent made statements connected with the issue of shares. They were held (at [56]) to ‘concern dealing in, or arranging for someone to deal in, financial products and therefore relate to the provision of financial services’. Therefore (former) s 52 of the TPA did not apply; instead s 12DA of the ASIC Act would apply. The definition also includes providing a services that is ‘otherwise supplied in relation to a financial product’: ASIC Act s 12BAB(1)(g). A ratings agency expressing an opinion as to the creditworthiness of certain financial products has been held to be providing a financial service on this basis,25 and to have provided financial product advice under s 12BAB(5). [page 313] 8.41 For ACL s 18 to apply, the conduct must be ‘in trade or commerce’. Insofar as it is part of Commonwealth law, ACL s 18 will not apply to ‘the supply, or possible supply, of services that are financial services, or of financial products’: CCA s 131A. The relevant definitions of ‘financial services’ and ‘financial products’ are, for this purpose, those found in the

ASIC Act. Insofar as it is part of state law, ACL will apply to all conduct ‘in trade or commerce’ engaged in in the relevant state, including conduct relating to financial products and financial services.

In trade or commerce 8.42 Section 12DA of the ASIC Act, and ACL s 18, depend on the conduct being ‘in trade or commerce’. The terms ‘trade’ and ‘commerce’ are of the widest import. In Re Ku-ring-gai Co-operative Building Society (No 12) Ltd (1978) 36 FLR 134; 22 ALR 621 at FLR 167, Deane J observed that: The terms ‘trade’ and ‘commerce’ are not terms of art. They are expressions of fact and terms of common knowledge. While the particular instances that may fall within them will depend upon the varying phases of development of trade, commerce and commercial communication, the terms are clearly of the widest import … they are not restricted to dealings or communications that can properly be described as being at arm’s length in the sense that they are within open markets or between strangers or have the dominant objective of profit making. They are apt to include commercial or business dealings in finance between a company and its members which are not within the main stream of ordinary commercial activities and which, while being commercial in character, are marked by a degree of altruism which is not compatible with a dominant objective of profit making.

For conduct to be caught by ASIC Act s 12DA and ACL s 18, it must be ‘in’ trade or commerce. It has been held that the phrase refers only to conduct ‘which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character’, rather than: … encompassing conduct in the course of the myriad of activities which are not, of their nature, of a trading or commercial character but which are undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business.26

It is clear that conduct engaged in in connection with the offer and sale of financial products by an issuer can be conduct to which s 12DA applies. In Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 58 at [151], Martin J took the view that ‘the availability of s 12DA to an investor has been made plain’ by the ‘clear expression of the purview of s 12DA which is to be found in’ Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; 60 ACSR 292; [2007] HCA 1. His Honour referred to the following passage from the

judgment of Hayne J (with whom Kirby J (on this point), Heydon and Crennan JJ agreed) in Sons of Gwalia (at [135]): [page 314] A person who buys, or subscribes for, shares in a company, relying upon misleading or deceptive information from the company, or misled as to the company’s worth by its failure to make disclosures required by law, may have a claim for damages against the company. That claim may be framed in the tort of deceit but, more probably than not, will now be framed as a claim under consumer protection provisions of the Trade Practices Act 1974 Cth (ss 52, 82) or investor protection provisions of the Corporations Act 2001 Cth (eg, ss 1041H, 1041I and 1325) (the 2001 Act) or the Australian Securities and Investments Commission Act 2001 Cth (eg, ss 12DA, 12GF and 12GM).

In Orison Pty Ltd v Strategic Minerals Corporation NL (1987) 77 ALR 141; 13 ACLR 314 a statement was made by directors to shareholders in the explanatory notes accompanying a notice of meeting to consider and approve a proposed acquisition. This conduct was held to be capable of being conduct in trade or commerce.27 In Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, conduct involving sending a ‘prospectus’ relating to a demutualisation proposal was held to be in trade or commerce. In Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224 at [454] it was held that it was ‘clear’ that representations in an information memorandum (about how moneys invested would be applied; and that the investment offer would fall within the small scale private offer exemption in s 708(1)) were made in trade or commerce. In New Cap Reinsurance Corporation Ltd v Daya (2008) 66 ACSR 95 Barrett J considered that conduct at a due diligence committee meeting may possibly be in trade or commerce. However, in Glavanics v Brunninghausen (1996) 19 ACSR 204 at 226, Bryson J considered that a one-off private sale of shares in an unlisted company was not conduct in trade or commerce. The legislation does not refer to the trade or commerce of any particular person; the person engaged in the conduct may not themselves be the person engaged in the relevant trade or commerce. Accordingly, in Houghton v Arms (2006) 225 CLR 553; [2006] HCA 69 at [35]: … statements made by a person not himself or herself engaged in trade or commerce may

answer the statutory expression if, for example, they are designed to encourage others to invest, or to continue investments, in a particular trading entity.

Conduct that is misleading or deceptive 8.43 For conduct to contravene the statutory proscription, it must be ‘misleading or deceptive or likely to mislead or deceive’. The making of a representation is an instance of engaging in conduct. Although in many instances the conduct is the making of a representation preparatory to the making of a contract, the giving of warranties involving false matters as part of a contract can also constitute misleading or deceptive conduct.28 8.44 The central notion in the statutory proscription is that of misleading conduct. It has been judicially remarked that the word ‘deceptive’ adds nothing to ‘misleading’ [page 315] and is redundant.29 Similarly, the words ‘likely to mislead or deceive’ add little. At most they show that there is no need to prove that the conduct in question actually deceived or misled anyone.30

Test to be applied 8.45 When is conduct (in the form of making a statement or withholding information about securities or other financial products) misleading? There are in the cases numerous formulations of the basic test. For example, in Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 at [81], Brereton J summed up the key principles in the following terms: Conduct is misleading and deceptive if it leads the victim into error … The section is contravened even if the perpetrator acted honestly and reasonably and without intent to mislead or deceive and without negligence. While the issue of whether conduct is misleading or deceptive, is to be determined objectively, and while evidence that some person has in fact formed an erroneous conclusion is admissible and may be persuasive, it

is neither essential to nor conclusive of whether the conduct was misleading or deceptive or likely to mislead or deceive … But although the test is objective, the attributes of the target audience are relevant, and once the relevant section (or sections) of the public, by reference to whom the question of whether conduct is (or is likely to be) misleading or deceptive falls to be tested is identified, then ‘the matter is to be considered by reference to all who come within it, including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations’. (Citations omitted.)

Whether conduct is misleading or deceptive is for the court to decide; evidence that particular persons have been misled is not conclusive.31 Conduct which is alleged to be misleading or deceptive must be evaluated by looking at the relevant course of conduct as a whole, including what was not done as well as what was done. In Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; 212 ALR 357; [2004] HCA 60 at [109],32 McHugh J said: The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52

[page 316] has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself. It invites error to look at isolated parts of the corporation’s conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct. (Citations omitted.)

8.46 The approach to be adopted in assessing whether conduct is misleading or deceptive was summarised by Gordon J in Australian Competition and Consumer Commission v Telstra Corporation Ltd (2007) 244 ALR 470; [2007] FCA 1904 at [14]–[15]33 in the following terms: The relevant legal principles have been well traversed by Australian courts. A two-step analysis is required. First, it is necessary to ask whether each or any of the pleaded representations is conveyed by the particular events complained of … Second, it is necessary to ask whether the representations conveyed are false, misleading or deceptive or likely to mislead or deceive. This is a ‘quintessential question of fact’. (Citations omitted.)

Conduct contravenes the prohibition if it is likely to lead a reasonable person experiencing the conduct (or member of the class of people experiencing it) into error.34 For conduct to be misleading or deceptive it is

not necessary that it convey express or implied representations; it is sufficient that it ‘leads or is likely to lead into error’.35 This is sometimes described as being led to ‘labour under some erroneous assumption’. In Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; [2000] HCA 12 at [108] the High Court describes this as the so-called doctrine of erroneous assumption. A person can be led into error even where statements or representations are literally true. In National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369; [2004] FCAFC 90 at [50], Jacobson and Bennett JJ found that ‘a document which, when read as a whole, is factually true and accurate may still be capable of being misleading if it contains a potentially misleading primary statement which is corrected elsewhere in the document but without the reader’s attention being adequately drawn to the correction’. The test is the effect of the conduct as a whole on a reasonable member of the class to which it was directed. In National Exchange (2004) 49 ACSR 369; [2004] FCAFC 90 at [18], Dorsett J extracts a number of propositions about the test for whether conduct is misleading or deceptive, from the High Court’s decision in Campomar, above. Those propositions (with citations omitted) are: Conduct will only be misleading or deceptive, or likely to mislead or deceive, if there is a nexus between such conduct and any actual or anticipated misconception or deception. [page 317] In identifying such nexus regard must be had to the circumstances of the particular case, including the remedies sought. Section 52 of the TPA does not confer any entitlement to a remedy for breach or anticipated breach. One must look elsewhere in the TPA for such entitlement and construe the act as a whole. In some cases, a representation may be made to identified individuals; in other cases the representation may be to the public at large or to a section of it. In the former case the process of deciding whether or not the representation is misleading or deceptive or likely to be so may be ‘direct and uncomplicated’. In the latter case ‘the

issue with respect to the sufficiency of the nexus between the conduct or the apprehended conduct and the misleading or deception or likely misleading or deception of prospective purchasers is to be approached at a level of abstraction not present where the case is one involving an express untrue representation allegedly made only to identified individuals’. When the representation is made to the public or to a section of it, one must consider its effect upon an ordinary or reasonable member of the class in question. Although such class may include a wide range of persons, the ordinary or reasonable member will objectively be identified as having certain characteristics. In particular he or she can be expected to take reasonable care for his or her own interests and otherwise to behave reasonably. It is necessary to inquire as to how a particular or anticipated misconception has arisen or may arise. In so doing, the court will consider ‘the effect of the relevant conduct on reasonable members of the class’. Conduct will only be misleading or deceptive or likely to mislead or deceive if the representee ‘labours under some erroneous assumption’ or may be expected so to labour. Such an assumption or anticipated assumption may be obvious, predictable or fanciful. In assessing the reactions or likely reactions of the ordinary or reasonable member of the class, the court may decline to treat as reasonable, assumptions which are extreme or fanciful. The initial question which must be determined is whether the misconception or deception, alleged or anticipated, is properly attributable to an ordinary or reasonable member of the class. The ‘question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in [s 52 of the TPA]’. In Domain Names Australia Pty Ltd v .au Domain Administration Ltd (2004) 139 FCR 215; [2004] FCAFC 247 at [17], the Full Federal Court dealt with the principles that govern the likelihood of recipients of a representation being misled:36

It has long been established that: When the question is whether conduct has been likely to mislead or deceive it is unnecessary to prove anyone was actually misled or deceived.

[page 318] Evidence of actual misleading or deception is admissible, and may be persuasive, but is not essential. The test is objective and the court must determine the question for itself. Conduct is likely to mislead or deceive if that is a real or not remote possibility, regardless of whether it is less or more than 50%. (Citations omitted.)

The existence or otherwise of such a likelihood is a jury question for the trier of fact.37 8.47 The question whether a person’s conduct is misleading or deceptive can arise where no person has been or claims to have been misled; for example, where an injunction is being sought under s 1324. In deciding objectively whether a person’s conduct is likely to mislead or deceive the public, regard must be had to the effect of the conduct on some notional person. Who is that person and what notional level of intelligence and knowledge is that person supposed to have? Where conduct is directed to a specific person, this question is answered in accordance with the principles set out in Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60. But where conduct is directed to the public at large or to sections of the public (such as in a public offer of securities) the relevant approach is set out in Campomar, above. So, in Reiffel v ACN 075 839 226 Ltd (2003) 132 FCR 437; 45 ACSR 67; [2003] FCA 194 at [50], Gyles J noted that consideration of these sections in the context of a prospectus directed to a class consisting of a large number of different people with no link apart from their common investment is approached at a level of abstraction not present where the representation is made to a particular individual or small group of known persons. It is necessary to contemplate the effect of the conduct on the hypothetical reasonable members of the class.38 The correct approach is to look to the notional representative class to which the relevant statutory regime was directed.39 Generally, the test to be applied is

whether a significant proportion of the target audience, or a not insignificant number of reasonable or ordinary persons in the class, would be misled or deceived.40 Where the conduct is directed to a particular type of consumer, the court considers the class of consumer likely to be affected by the conduct and may posit a member of that class.41 It is necessary to consider the effect of the conduct or representations [page 319] upon ordinary and reasonable members of this class.42 In Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; 91 ACSR 128; [2012] HCA 399 at [36] the plurality described the intended audience for a statement made by a listed company as being ‘sufficiently identified as investors (both present and possible future investors) and, perhaps, as some wider section of the commercial or business community’. This hypothetical construct avoids using the very gullible or the highly astute to assess effect or likely effect.43 Since Corporations Act s 1041H and ASIC Act s 12DA are part of legislation intended for the protection of persons who invest in securities, the notional person is, presumably, a reasonable person about to make a decision about securities. That person could be one who had never previously invested in securities and who lacks any special knowledge of securities. It depends on the facts and circumstances of the case. In Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590, the Federal Court found that the dissemination of information in a ‘prospectus’ sent to members of a motoring association and an associated insurance company was misleading and deceptive. They were both companies limited by guarantee and the information was about motions proposing reorganisation involving issues of shares which were to be put to general meetings of the companies. Both Gummow J, at first instance, and the Full Court, on appeal, noted that the addressees included significant numbers of persons who had no experience in dealing with shares, corporate reorganisation or prospectuses. That category could be expected to include people who were less astute, less intelligent or less well informed than the average member of the

community. This is a relevant consideration in deciding whether conduct is misleading or deceptive. Where representations made in connection with an excluded offer are confined to a class of offerees who may be supposed to have considerable investing experience as professionals, the test would presumably be applied in the light of that experience. Before it can be said that conduct is likely to mislead or deceive there must be a ‘real or not remote’ chance or possibility that it will do so regardless of whether it is less or more than 50%.44

State of mind of alleged contravener 8.48 It is now well settled that a statement may be misleading or deceptive even where there is no intention on the part of the maker to mislead or deceive. In other words, a claim for misleading or deceptive conduct under the statutory proscription depends upon the effect or probable effect of the conduct on the person to whom [page 320] that conduct is directed, rather than upon any lack of care by, or the state of mind of, the person who engaged in that conduct. A person’s conduct can be misleading or deceptive without that person having an intent to mislead or deceive or even without his or her acting unreasonably.45 A contravention ‘may occur without knowledge or fault on the part of the corporation, and notwithstanding the exercise of reasonable care’.46 There are, however, some situations where the state of mind of the person whose conduct is alleged to be misleading or deceptive is relevant. One is where the person sued is sued not as the principal contravener but as a ‘person involved’: it is then necessary to show that person knew of the facts that made the conduct misleading or deceptive: see 9.20 below. A second situation is where the alleged misleading conduct consists of a representation as to a future matter. In that case, establishing that the person making the representation did not have reasonable grounds for

making the representation goes to the fundamental question of whether the representation was misleading. For the purposes of s 1041H, Corporations Act s 769C says that if a person does not have reasonable grounds for making the representation, it is taken to be misleading. ASIC Act s 12BB is to similar effect in relation to ASIC Act s 12DA, and ACL s 4 in relation to ACL s 18, although the burden of establishing that reasonable grounds existed is dealt with differently. A third situation where the state of mind of the person making the representation is relevant is where the statement is one of opinion: see 8.50 below.

Forward looking statements 8.49 Statements as to future matters are not misleading merely because the predicted state of affairs does not come to pass. However, statements as to future matters are taken to be misleading if the person making them does not have reasonable grounds for making them. Under Corporations Act s 769C, if a person makes a representation with respect to any future matter (including the doing of, or refusing to do, an act) and the person does not have reasonable grounds for making the representation, the representation is taken to be misleading. Whether a person had reasonable grounds for making a representation as to a future matter must be assessed at the date of the representation.47 [page 321] Section 769C applies for ‘the purposes of [Ch 7 of the Act] or of a proceeding under this Chapter’. The burden of proving lack of reasonable grounds seems to be on the person alleging the misrepresentation.48 Section 12BB of the ASIC Act, which applies to actions under s 12DA of that Act, is in similar terms. However, in the ASIC Act the burden of proof is reversed by s 12BB(2). It says: For the purpose of applying subs (1) in relation to a proceeding concerning a representation made with respect to a future matter … the person … is taken not to have reasonable grounds for making the representation unless evidence is adduced to the contrary.

Section 4 of the ACL is in similar terms to s 12BB of the ASIC Act. Therefore: In a claim under s 1041H of the Corporations Act, s 769C of the Corporations Act has the effect that a representation with respect to a future matter would be taken to be misleading unless the [defendant] had reasonable grounds for making it, but there is no shift of an evidentiary onus to the Defendant. If a claim under s 18 of the Australian Consumer Law were available, then the defendants would bear an evidential burden to demonstrate some reasonable ground for making a representation under s 4 of the Australian Consumer Law and, if some evidence were put forward, [the plaintiff] would bear the onus of proving that the defendants did not have reasonable grounds for making the representation. If a claim under s 12DA of the Australian Securities and Investments Commission Act were available, then s 12BB of the Australian Securities and Investments Commission Act would have the effect that a representation with respect to a future matter would be taken to be misleading unless the relevant defendant had reasonable grounds for making it, and the defendant would be taken not to have reasonable grounds for making the relevant representation unless evidence was adduced to the contrary. … [In] the context of s 51A of the Trade Practices Act 1974 (Cth) … relatively little evidence is required to discharge the evidential burden (if applicable to them) and, once evidence is adduced by a respondent discharging its evidential burden, the plaintiff must satisfy the ‘dispositive burden’ of showing that the defendant did not have reasonable grounds for making the representation.49

The reasonable grounds requirement has been described by ASIC as meaning ‘that there should be a relevant factual foundation for the information and that the information is not contrived’.50 ASIC Regulatory Guide 170 — Prospective Financial Information, April 2011 sets out ASIC’s views on what are reasonable grounds for stating prospective financial information. [page 322] None of Corporations Act s 769C, ASIC Act s 12BB or ACL s 4 limits the circumstances in which a statement as to a future matter may be misleading or deceptive. General law principles apply. In James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 at 372 Toohey J, speaking in relation to the former s 52 of the TPA, formulated the following propositions about statements as to the future: The mere fact that representations as to future conduct or events do not come to pass does not make them misleading … Nevertheless, a statement relating to the future may contain an implied statement as to present or past fact. It may represent impliedly that the promisor has a present intention to make good the promise and it may represent impliedly

that he has the means to do so … A statement involving the state of mind of the maker of the statement, eg, promises, predictions and opinions, ordinarily conveys the meaning that the maker of the statement had a particular state of mind when the statement was made and that there was basis for that state of mind. If the meaning contained in or conveyed by the statement is false in that or in any other respect, there will have been a contravention of s 52. (Citations omitted.)

Care must be exercised before making positive unqualified predictions. If the maker knows, or ought from the circumstances to know, of a risk that the prediction will not be fulfilled, that risk or the circumstances not being generally known, failure to disclose the risk can constitute misleading or deceptive conduct.51 That can be so even if the maker of the prediction believed or had reasonable grounds to believe that the prediction would be fulfilled. The misleading or deceptive conduct lies in the failure to qualify the prediction or disclose the risk of non-fulfilment. It is probably necessary for the risk to be disclosed in a way that enables the persons addressed to evaluate the risk for themselves rather than to say that the risk has been factored in to produce a stated figure. In the United States a forecast is misleading for the purposes of the Securities Act 1933 (US) §11 if it is not based on facts from which a reasonably prudent investor would conclude that it was highly probable that the forecast would be realised.52

Statements of opinion 8.50 In Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; 73 ACSR 1; [2009] HCA 25 at [33] French CJ said: A statement of opinion may be a statement with respect to a future matter. It may take the form of a prediction. A forward estimate relating to the financial results of a business is a class of prediction. In strict logic there may be some category overlap between opinions and statements of fact. Opinions may carry with them one or more implied representations according to the circumstances of the case. There will ordinarily be an implied representation that the person offering the opinion actually holds it. Other implied representations may be that the opinion is based upon reasonable grounds, which may include the representation that it was formed on the basis of reasonable inquiries. In the case of a person professing

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expertise or particular skill or experience the opinion may carry the implied representation that it is based upon his or her expertise, skill or experience.

What representations an opinion carries are ultimate a question of fact. In Forrest v Australian Securities and Investments Commission (2012) 291 ALR 399; [2012] HCA 39 the plurality held that whether a statement of opinion is misleading is a question of fact to be determined in the circumstances and by reference to the intended audience. French CJ, Gummow, Hayne and Kiefel JJ said at [33]: … it is ultimately unprofitable to attempt to classify the statement according to some taxonomy, no matter whether that taxonomy adopts as its relevant classes fact and opinion, fact and law, or some mixture of these classes. It is necessary instead to examine more closely and identify more precisely what it is that the impugned statements conveyed to their audience.

Their Honours described the steps to be taken as follows at [38]: First, it is necessary to examine the whole of the impugned statements to see the context in which reference was made to the making of a contract or agreement. Second, it is necessary to undertake that task without assuming that what is said must be put either into a box marked ‘fact’ (identified according to whether an Australian court would enforce the agreement) or into a box marked ‘opinion’ (identified according to whether the speaker thought that an Australian court could or would enforce the agreement).

Silence as misleading or deceptive conduct 8.51 Silence or ‘non-disclosure’ may be misleading or deceptive and therefore contravene the statutory proscriptions in various circumstances.53 Those circumstances may differ depending on the nature of the conduct and the context in which it occurred. They may include: where the non-disclosure gives rise to a ‘half-truth’; in cases ‘of supervening falsity’; where the non-disclosure is in breach of a positive obligation to disclose that otherwise arises at law; or in circumstances that give rise to a reasonable expectation that silence would be broken if particular matters exist. As Black CJ observed in Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 at 609–10:

Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of ‘mere silence’ or of a duty of disclosure can divert attention from that primary question. Although ‘mere silence’ is a convenient way of describing some fact situations, there is in

[page 324] truth no such thing as ‘mere silence’ because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.

Half-truths 8.52 A half-truth arises where a person making the statement omits to mention a qualification, in the absence of which some absolute statement is rendered misleading. When a document contains a statement that is true, non-disclosure of an important qualifying fact will be misleading or deceptive if the recipient would be misled, absent such disclosure, into believing that the statement was complete. In some cases it might not be necessary to invoke non-disclosure at all where a statement which is literally true, but incomplete in some material respect, conveys a false representation that it is complete.54 In the context of the former s 52 of the TPA, it has been held that circumstances can mean that a failure to disclose will be misleading or deceptive conduct even when there is no misrepresentation.55. According to the Henjo case, silence on the part of X may amount to misleading or deceptive conduct where Y, to the knowledge of X, is led by circumstances to believe that a certain state of affairs exists and X knows that that state of affairs does not exist. In other words, it is not only a half-truth stated by X which will require filling out, but also a half-truth conveyed by circumstances. It seems that X should have contributed to the circumstances that induce Y’s mistaken belief: contrast RhonePoulenc (at 77), where silence by a seller was held not to be misleading or deceptive conduct because of a finding of the majority that an assumption by purchasers was not induced by any conduct of the persons alleged to have

contravened s 52. Unless the alleged contravener has contributed to the misleading circumstances in some way, the element of ‘engaging in conduct’ is missing. Section 769B(10) and ASIC Act s 12BA(2) include omissions in the concept of ‘engaging in conduct’ but only when they are refusals to act, and that, presumably, means deliberate omissions.

Supervening falsity 8.53 Silence can also be misrepresentation when there is an omission to speak when, after a correct statement has been made, there is some change known to the maker of the statement which makes that earlier statement incorrect so that it is then misleading. In the law of misrepresentation, if a representation which is intended to induce the making of a contract is true when made, but becomes false to the knowledge of the person making it before the contract is concluded, and the person continues by [page 325] conduct to make the representation, the representor is liable as if the representation had been false to his or her knowledge when originally made.56 This rests on a theory of continuing representation up to the making of the contract.

Existing legal duty of disclosure 8.54 At common law and in equity apart from those cases there is no duty to disclose unless the parties are entering one of the accepted forms of contract of utmost good faith or they are in a fiduciary relationship such as that between trustee and beneficiary, broker (or other agent) and principal, or director and company. Failure to perform a duty of disclosure imposed by general law may constitute misleading or deceptive conduct for which proceedings under Corporations Act s 1041H, ASIC Act s 12DA or ACL s 18 may be brought. However, failure to disclose information required under the statutory disclosure regimes in Ch 6 (takeovers), Ch 6D (fundraising) and

Pt 7.6 (financial product disclosure) cannot give rise to a claim under the general prohibitions on misleading or deceptive conduct. In the context of securities transactions, the duties owed by directors may underpin a claim for misleading or deceptive conduct as a result of non-disclosure. In several cases, directors’ conduct in failing to provide members of a company with a fully informative notice of meeting has been held to be misleading or deceptive. Where a general meeting of the shareholders of a company has been called to consider a resolution which affects the company and its shareholders, the directors are bound to make a full and fair disclosure of all matters which are within their knowledge and which would enable the shareholders to make a properly informed judgment on the issue in question.57 In Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 55 ACSR 583; [2005] FCA 1429 at [37], Goldberg J concluded that the obligation is even more significant where they have either made a recommendation to shareholders as to what they should do or have advised shareholders as to how they (the directors) propose to vote.58 In Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590 at 601–2, the Full Court said: A duty to make disclosure of relevant information arises as part of the fiduciary duties of the directors to the company and its members in relation to proposals to be considered in general meeting and under s 1022 of the Law in respect of the contents of a prospectus. The fiduciary duty is a duty to provide such material information as will fully and fairly inform members of what is to be considered at the meeting and for which their proxy may be sought. The information is to be such as will enable members to judge for themselves whether to attend the meeting and vote for or against the proposal or whether to leave the matter to be determined by the majority attending and voting at the meeting … A proper discharge of the duty may require that the directors take reasonable steps to ascertain relevant information for communication to members if that information

[page 326] is not known to the board. Directors must not consciously refrain from seeking relevant information or turn a blind eye to relevant material in order to avoid placing before members’ information which may contradict or qualify any particular position taken or advocated by the directors or a majority of them.

Reasonable expectation of disclosure 8.55 Even if there is no existing positive duty to disclose, non-disclosure

may amount to misleading or deceptive conduct if the factual circumstances of the case are such as to give rise to a reasonable expectation that silence would be broken if particular matters exist. In Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 a buyer of land was told that a driveway provided access from a road. In fact the driveway was subject to a road licence which made it a public road. Failure of the seller and its agent to disclose that fact was held to be misleading and deceptive conduct.59 As French CJ and Kiefel J point out in Miller & Associates Insurance Broking v BMW Australia Finance:60 The language of reasonable expectation is not statutory. It indicates an approach which can be taken to the characterisation, for the purposes of the [statutory provisions], of conduct consisting of, or including, non-disclosure of information. That approach may differ in its application according to whether the conduct is said to be misleading or deceptive to members of the public, or whether it arises in commercial negotiations. An example in the former category is non-disclosure of material facts in a prospectus. (Citations omitted.)

Their Honours went on to observe (at [23]) that ‘reasonable expectation analysis is unnecessary in the case of a false representation where the undisclosed fact is the falsity of the representation’. In Clifford v Vegas Enterprises Pty Ltd, a case involving alleged nondisclosure in connection with a private sale of shares, Besanko J (with whom North and Jessup JJ agreed) said of the test: In order to determine whether a failure to disclose a matter is misleading or deceptive conduct all of the circumstances must be examined. If having regard to the circumstances assessed objectively a person in the appellant’s position would be entitled to expect or infer (has a reasonable expectation) that a particular matter would be disclosed and the respondent does not disclose that matter then that may well constitute misleading or deceptive conduct or conduct likely to mislead or deceive. It is true that it is important not to overlook the fact that the ultimate question is whether the respondent’s conduct is misleading or deceptive or likely to mislead or deceive.61

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Disclaimers and exclusion provisions 8.56 Disclaimers made at the time of the alleged misleading conduct are

to be distinguished from provisions in a contract made subsequently to that conduct. An exclusion clause, even one which would be upheld under the law of contract, will not exclude liability under the statutory proscription. If the relevant conduct was misleading and as a result of the conduct a person was induced to enter into a contract and suffered loss, an action to recover lies under regardless of the terms of the contract.62 Given an already operative misrepresentation which induced entry into a transaction, no contract can exclude the legal effect of the misrepresentation under the prohibitions.63 The fact that persons suffering loss say as part of the contract, that they were not induced by the conduct may possibly bear on the question whether they should be believed when they say they were so induced. That is not likely to be so where the provision is a printed term.64 A disclaimer by the maker of a statement at the time of making it will not automatically take the case out of the section. However, the disclaimer may be framed in such a way as to show that the statement was not the cause of the representee being led into error. There would be a question of fact whether the disclaimer negated the representation.65

Consequences of a contravention 8.57 A person who suffers loss or damage by the misleading or deceptive conduct of another person can recover the amount of loss or damage by an action against that person, or any person involved in the contravention, under Corporations Act s 1041I, ASIC Act s 12GF or ACL s 236 (as the case may be). The right of action is discussed in Chapter 9 below. ASIC has standing to apply for relief in relation to misleading or deceptive conduct that contravenes the Corporations Act or the ASIC Act, including for injunction.

INFORMATION OFFENCES IN PT 7.10 8.58 It is possible that defective disclosure, in addition to contravening either the specialist liability regimes or the general prohibitions on misleading or deceptive conduct, may also contravene s 1041E, s 1041F or

s 1041G of the Corporations Act. For convenience, these sections are referred to here as the ‘information offences’. In each case contravention is a criminal offence. It may also give rise to civil liability under s 1041I. [page 328]

Dissemination of false or misleading information: s 1041E 8.59 Section 1041E prohibits the making of a statement or the dissemination of information (whether in the jurisdiction or elsewhere) that, in either case, is false in a material particular or materially misleading, if it is: likely to induce persons in the jurisdiction to apply for financial products; likely to induce persons in the jurisdiction to dispose of or acquire financial products; or likely to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in the jurisdiction. ‘Likely’ in this context means a ‘real and not remote chance’, rather than ‘more probably than not’.66 In determining whether a representation is likely to induce a person to act, it is not necessary to demonstrate that a person has so acted.67 The exercise required of the court by s 1041E is both hypothetical and predictive. The determination required by s 1041E is impressionistic; a court makes the finding in a common sense way, having regard to the terms of the representation made.68 The fact that ‘persons were not in fact induced is not necessarily determinative of the predictive exercise the court is required to undertake in determining whether a breach of s 1041E has been established. However … in certain instances where conduct has run its course, a court would rarely be justified in ignoring the actuality of what had happened’.69 The word ‘induce’ has been defined as ‘to bring on or about, to affect, cause, to influence an act or course of conduct, lead by persuasion or reasoning, incite by motives, prevail on’.70 By way of analogy, in Ryan v

Triguboff [1976] 1 NSWLR 588 Lee J held that the word ‘inducing’ in the definition of ‘dealing in securities’ in s 4 of the Securities Industry Act 1970 (NSW) meant to prevail on, persuade or bring about. A similar construction was given to the word ‘induce’ where it occurs in s 75B of the CCA.71 In Trade Practices Commission v Service Station Association Ltd (1992) 109 ALR 465 at 477–8, Heerey J noted that the ordinary meaning of the word ‘induce’ (where used in the former s 96(3)(b) of the TPA, which prohibits a supplier inducing, or attempting to induce, a second person not to sell at a price less [page 329] than a price specified by the supplier) was ‘consistent only with the inducer intending a particular effect on the person induced’.72 8.60 Conduct of this kind only contravenes s 1041E if, when making the statement or disseminating the information, the maker or the person disseminating, either: does not care whether the statement or information is true or false; or knows or ought reasonably to have known that the statement or information is false in a material particular or materially misleading. Section 1041E is derived partly from s 73 of the Securities Industry Act 1970 (NSW) and partly from s 94 of the Securities Act 1971 (Qld). Until 2001, the provision appeared in s 999 of the Corporations Law. A person who suffers loss by conduct of another person that was engaged in contravention of s 1041E has a civil action under s 1041I. A contravention is also an offence attracting a penalty (s 1311), and may be the subject of orders under ss 1324 and 1325.

Elements of s 1041E 8.61 A primary question about the scope of this provision is whether it is addressed to statements or information about particular financial products

or about a class of financial products, or about financial products in general, or any combination of those categories. A financial journalist could publish a statement about a possible change in a company’s credit rating which could depress the market value of a class of shares. Section 1041E is wide enough to cover that example. It is also apt to cover a statement made about a particular financial product. Unlike the position under an earlier provision in s 73 of the Securities Industry Act 1970 (NSW),73 it is not required that the statement be with respect to any particular financial product. In order to establish a contravention of s 1041E, the prosecution must show that the relevant statement is false or misleading in a material particular, or materially misleading. This will depend on the document itself — each case depends on its own facts and it is not sufficient to look at the document in the abstract and theorise what its effect might be. The document must be viewed in the circumstances existing at the time. The test is: ‘When the document is examined in light of those circumstances, would it have been likely to induce members of the public to purchase securities?’74 A statement may be false because the facts stated are incorrect. For example, in R v Wright [1980] VR 593, the defendant was a director of a listed mining company who authorised the dispatch of a letter to the stock exchange, containing statements concerning a preliminary report submitted by a consulting geologist which misstated the contents of that report. Wright was found to have contravened the provision of the Securities Industry Act 1975 (Vic) which corresponds to s 1041E. In that [page 330] case, the court relied on evidence received from a stockbroker and merchant banker indicating that, in their opinion, the price of the company’s shares was likely to rise as a result of the publication of the letter in finding that the relevant statement was likely to have the requisite effect on the price of the company’s shares. In Flavel v Giorgio (1990) 2 ACSR 568, the court held that a statement made in a prospectus, to the effect that production of a rifle was planned to commence, was false where it was inconsistent with a decision by the directors, made immediately

prior to the issue of the prospectus, to hold all capital expenditure until a substantial order was received. Whether a statement or information is false or misleading ‘in a material particular’ will be determined by reference to whether the content of that statement would have induced a reasonable investor (or, possibly, an investor within the class of persons likely to invest in the particular financial products) to buy or sell those financial products. A statement as to the future is not false or misleading, by reason only that it is proved untrue by later events. However, such a statement will be false or misleading if it did not accurately represent the state of mind of its maker at the time it was made, or if its maker was recklessly indifferent to its accuracy at that time. In R v Wright [1980] VR 593; 4 ACLR 931 at 933, Young CJ (with whom Murphy J agreed) took the view that, to establish its case under the predecessor section to s 1041E, the Crown was obliged in the present case to prove four elements: that the applicant disseminated information; that the information disseminated was misleading in a material particular; that the information disseminated was likely to have the effect of raising the market price of shares in the company; and that when he disseminated the information the appellant knew or ought reasonably to have known that the information was misleading in a material particular. Counsel for the appellant sought to recast the third proposition as requiring proof that the misleading material particular was likely to have the effect of raising the market price of the shares. However, his Honour rejected this construction, holding that: … it is the information that must be likely to induce the sale or purchase of securities likely to have the effect of raising or lowering the market price of securities … It would have been unreal and ineffective to have drafted the section so as to strike at the dissemination of information which is false or misleading in a material particular only where the material particular was likely to have one or other of the results mentioned in the section. It could rarely, if ever, be said that the material particular was likely to have one of the results mentioned. It is rather the information containing the material particular that, if false or misleading, may have one of the specified consequences.

When marking off the statements or information to fall within the section, the legislature has used alternative criteria: potential to induce application for, disposal or acquisition of financial products, or potential to affect the trading price of financial products traded on a financial market operated in the jurisdiction.75 Presumably, the

[page 331] test of whether either potential was present is an objective one: whether a reasonable person on hearing the information would have been induced to apply for or dispose of or acquire the relevant financial products or would have expected the market price of financial products traded on a financial market operated in the jurisdiction to alter. In Australian Securities Commission v McLeod (2000) 34 ACSR 135; [2000] WASCA 101 at [48], Owen J (with whom Ipp and Anderson JJ agreed) held that ‘the appellant was required to establish that members of the investing public would probably purchase shares as a consequence of the impugned statement’. In order to establish a contravention of s 1041E, the prosecution need not establish that the relevant statement or information actually induced anyone to apply for, dispose of or acquire financial products, or that it had an actual effect on the price for trading in the relevant financial products on a financial market operated in the jurisdiction. A contravention of the section will be established on an objective test, if the statement or information was likely to have done so. Whether a statement or information is likely to induce the sale or purchase of financial products by other persons is an objective question, which will depend upon the likely effect of the statement on the market for the relevant financial products. To prove the likely effect of the misleading information on the market price the prosecution may introduce opinion evidence from people experienced in the relevant financial market: R v Loiterton (2005) 54 ACSR 728; [2005] NSWSC 905. However, evidence of actual deception of an individual or individuals may not be admissible in proceedings under s 1041E.76

Requisite fault element to establish a contravention 8.62 Because s 1041E appears in Ch 7 of the Act, the Commonwealth Criminal Code applies in relation to it (with the exception of Pt 2.5, the operation of which is expressly excluded by s 769A). Section 1041E(2) provides that, for the purposes of the application of the Code in relation to an offence based on s 1041E(1), para (1)(a) is a physical element, the fault element of which is specified in para (1)(c). This means that if a person

makes a statement or disseminates information that is false in a material particular or is materially misleading, the physical element of the offence is made out. For the fault element to be made out, the person must do so either recklessly, or with actual or constructive knowledge of the defect. Section 1041E(3) goes on to provide that for the purposes of the offence, strict liability applies to subparas (1)(b)(i), (ii) and (iii). This means that to establish an offence it is not necessary to show any intention on the part of the person contravening the section to induce people to deal or to affect the price of the securities. Therefore, any one of a number of different kinds of mental element can lead to a contravention. If the person making the statement or disseminating the information knows that it is false in a material particular or materially misleading, that person has [page 332] a mental state which attracts the provision. It is noteworthy that for this type of mental element there must be knowledge not only that the statement or information is false or misleading, but also that it is false in a material particular or materially misleading. Presumably, materiality is to be tested in relation to the potential of the statement or information to induce subscriptions, sales or purchases or to affect the market price. To be material the particular would have to be one to which a reasonable person would attach importance as a factor inducing a subscription, sale or purchase, or as a factor influencing market price. A person may know that it is false in some particular not material in that sense, but not know that it is false in any material particular. The requisite mental element will be present if, without knowing that the statement was false or misleading, the person making it ought reasonably to have known that it was false or misleading in a material particular. Should the maker, having regard to his or her general knowledge and experience in relation to the matters stated and regarded as a reasonable person, have realised the falsity of the statement or that it was capable of leading another person into erroneous belief?

As an alternative to knowledge of falsity s 1041E is satisfied by another form of mental element: namely, not caring whether the statement of information is true or false. In using the formula of not caring whether the statement is true or false, parliament has adopted a concept accepted in Derry v Peek (1889) 14 App Cas 337. To make a statement not caring whether the statement is true or false is to make that statement dishonestly. One is dishonest if one makes a statement without believing in its truth. Proof of dishonesty appears in the abstract to be a difficult matter. But Salmon J (as he then was) in R v Mackinnon [1959] 1 QB 150 has said: [O]nce it is proved that the forecast is misleading, false or deceptive, and that there were no reasonable grounds for believing it, there exists powerful evidence that the accused who made the forecast for some purpose of his own either must have known it was untrue or had no reasonable belief in its truth. Often in the case of alleged fraudulent statements the only evidence of dishonesty consists of evidence that no grounds exist on which any reasonable man could have believed in the truth of the statement. In my experience, juries are not slow in a proper case to draw the inference of fraud.

Consequences of a contravention 8.63 Contravention of s 1041E is an offence, by operation of s 1311 of the Corporations Act, punishable by a fine of up to 200 penalty units or imprisonment for five years or both. For a body corporate the maximum fine is five times that amount: s 1312. A person who suffers loss or damage as a result of a contravention of s 1041E can bring proceedings under s 1041I: see Chapter 9 below.

Improperly inducing dealing: s 1041F 8.64 Section 1041F of the Corporations Act imposes civil and criminal liability on any person inducing others to deal in financial products by improper means. It provides that: A person must not, in this jurisdiction, induce another person to deal in financial products:

[page 333] (a) by making or publishing a statement, promise or forecast if the person knows, or is reckless as to whether, the statement is misleading, false or deceptive; or

(b) by a dishonest concealment of material facts; or (c) by recording or storing information that the person knows to be false or misleading in a material particular or materially misleading if: (i)

the information is recorded or stored in, or by means of, a mechanical, electronic or other device; and

(ii) when the information was so recorded or stored, the person had reasonable grounds for expecting that it would be available to the other person, or a class of persons that includes the other person.

A contravention of s 1041F is an offence punishable by a fine of up to 200 penalty units or imprisonment for five years or both: s 1311 and Sch 3. For a body corporate the maximum fine is five times that amount: s 1312. Unlike ss 1041A–1041D, s 1041F is not a civil penalty provision. This provision is derived from the former s 1000 of the Corporations Law, which in turn was derived from s 13 of the Prevention of Fraud (Investments) Act 1958 (UK). However, there are significant differences between the former and current provision, and it may be that the scope of s 1041F is narrower than its predecessor. Note that s 1041F, because it is directed in part at the publication of statements, has significant potential application to media organisations, website publishers, internet chat rooms and bulletin board conveners, and other publishers. Specific defences to civil and criminal liability are available in relation to the publication of advertisements published by a publisher in the ordinary course of its business, under s 1044A.

Elements of s 1041F 8.65 To establish a contravention of s 1041F the prosecutor or a plaintiff must show that a person was induced to deal in financial products, and either that: a statement, promise or forecast was made by a person who knew, or was reckless as to whether, it was misleading, false or deceptive; a material fact was concealed by a person dishonestly; or information that a person knows is defective is stored electronically in circumstances where the person had reasonable grounds for expecting that it would be accessed by others. Liability under s 1041F could extend to, for example:

a company on whose behalf a prospectus was issued; the officers of that company; any broker advising clients about an issue or sale of securities; a bidder in a takeover offer promising that payment will be made to acceptors; the board of directors of a target company making statements; or a company circularising its shareholders about a rights issue in which it makes a forecast about future dividends. [page 334]

Induce a person to deal 8.66 Section 1041F prohibits a person from inducing another person to deal by doing one of the acts prohibited by the section. The former s 1000 of the Corporations Act extended beyond actual inducement, to also prohibit attempts by a person to induce people to deal in securities. However, the prohibition in s 1041F does not extend to attempting to induce people to deal. This would appear to require that a prosecutor or plaintiff establish that a person was actually induced to deal by the contravening conduct.

Misleading, false or deceptive statements, promises or forecasts 8.67 Section 1041F(1)(a) prohibits a person from inducing another to deal through making statements, promises or forecasts when the person knows that they are misleading, false or deceptive, or is reckless as to whether they are misleading, false or deceptive. The prosecution or plaintiff would have to prove that the statement was misleading, false or deceptive. The statement, promise, forecast or matter from which there is a material omission need not be in writing. In R v M [1980] 2 NSWLR 195; (1979) 4 ACLR 610, the Court of Criminal Appeal considered the application of s 73 of the Securities Industry Act 1970 (NSW) (which substantially corresponds to s 1041F(1)(a)) in circumstances that shares had been sold to a broker before the end of an accounting

period to crystallise a ‘profit’ in place of a substantial loss, under an arrangement to buy them back after the accounting period, and noted that it was well established that the falsity of a statement may arise, not only because a fact therein is falsely alleged, but because the statement, by omitting material facts, creates a false impression.

Recklessness 8.68 The section prohibits a person from inducing dealing through recklessly making a false statement. The fact that the section is derived from s 13 of the Prevention of Fraud (Investments) Act 1958 (UK) suggests that ‘reckless’ should be interpreted in such a way that there is no need to establish that the person was dishonest in the sense that the word is used in para (1)(b). But what degree of carelessness is envisaged? There is an English case on the amended s 13 which provides some guidance. In R v Grunwald [1963] 1 QB 935, the director of a company operating as merchant bankers and licensed dealers in securities, had authorised the sending of a letter by a firm of solicitors as part of a takeover bid. In the letter the merchant bankers as offeror, offered to acquire all the shares in a target company for a stated price and promised that on the offer becoming unconditional the offeror would pay the acceptors. In fact, the merchant bankers were lending their name as the licensed offeror to enable other persons to effect a takeover. There had previously been several successful takeovers involving the same procedure, but on this occasion the funds necessary to pay acceptors did not become available. The director of the merchant bankers was charged with inducing agreements for the disposal of securities by the reckless making of a statement and promise. [page 335] Paull J held that there was no evidence on which the director could be convicted (and so the case should not go to the jury). The reason was the failure of the prosecution to prove that the statement and promise had been made recklessly. The director’s statement would be reckless if the

director had not inquired of the real bidders as to whether they had made adequate arrangements to finance the takeover.

Establishing the state of mind of a defendant 8.69 To establish a contravention of Corporations Act s 1041E, s 1041F or s 1041G, it will be necessary to establish the state of mind of the defendant. Further, where proceedings are brought under Corporations Act 1041I or ASIC Act s 12GF against a person alleged to have been involved in a contravention, it will be necessary for the reasons set out above to establish the state of their knowledge about the essential facts making up the contravention. Where it is necessary to prove the state of mind (defined in Corporations Act s 769B(1)(c) and ASIC Act s 12GH(5) to include knowledge, intention, opinion, belief or purpose, or reasons therefore) of a person, Corporations Act s 769B and ASIC Act s 12GH apply. To establish the state of mind of a body corporate, it is enough to show the state of mind of a director, employee or agent (acting within the scope of their authority) by whom the conduct was engaged in: Corporations Act s 769B(3) and ASIC Act s 12GH(1). These sections are modelled on the former s 84(1) of the TPA. Similarly, the state of mind of an employer or principal other than a body corporate is arrived at by imputing the state of mind of an employee or agent who engages in conduct within actual or apparent authority: Corporations Act s 769B(6) and ASIC Act s 12GH(3). A body corporate being a legal abstraction cannot naturally have knowledge. But Corporations Act s 769B and ASIC Act s 12GH respectively impute knowledge to a body corporate. Where it is necessary to prove knowledge of a body corporate to make it liable under Pt 7.10 of the Corporations Act or ASIC Act s 12DA, it can be enough to show that a director, employee or agent of the body engaging in the misleading or deceptive conduct had the required knowledge, provided that the director, employee or agent was acting within the scope of that person’s actual or apparent authority. Hence, when it is claimed that a body corporate is liable for a

misstatement constituting misleading or deceptive conduct it must be shown that the person making or adopting the statement was not only a director, employee or agent but had authority from the body corporate to make statements of the kind in question. That authority could be actual authority being authority actually conferred directly or indirectly by the board or other governing body of the body corporate. Alternatively, it could be the authority which outsiders could reasonably assume the person to have because of representations made expressly or impliedly on behalf of the body corporate.

POWERS OF THE COURT 8.70 Each of the liability regimes outlined above contains a specific statutory civil remedy for those affected by defective disclosure. As indicated, those remedies are [page 336] contained in s 670B (defective takeover documents); s 729 (defective securities offers); s 1022A (defective PDSs and related documents); s 1041I (contravention of the information offences); ASIC Act s 12GF; and ACL ss 236 and 237 (misleading or deceptive conduct). These specific remedies, which are discussed at length in Chapter 9, are not the only ones available under statute for defective disclosure. They operate alongside Pt 9.5 of the Corporations Act and Pt 2 Div 2 Subdiv G of the ASIC Act and corresponding provisions in the ACL, which give the court power to make other orders in certain circumstances. The orders that can be made include injunctions, non-punitive orders, and other orders (including orders to pay compensation to affected persons).

Injunctions 8.71 Section 1324(1) and (2) of the Corporations Act empowers the court to grant an injunction in respect of a contravention of any provision of the Corporations Act. Section 12GD allows the court to grant an

injunction in respect of a contravention of Pt 2 Div 2 of the ASIC Act (including s 12DA). Section 1324(1) is the restraining injunction power. It gives the court power to grant an injunction to restrain a breach, or potential breach, of the Corporations Act. The injunction may be granted in respect of conduct that is a contravention of the Act or that amounts to involvement in a contravention of the Act. Section 1324(2) is the performance injunction power. It gives the court power to grant an injunction requiring a person to do an act or thing required by the Corporations Act. 8.72 The principles governing the grant of an injunction on the application of ASIC are summarised by White J in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342 at [622].77 First, the jurisdiction which the court exercises under s 1324 is statutory and not traditional equitable jurisdiction. Second, the court is not confined by the considerations that would apply if it was exercising such equitable jurisdiction. Third, the court should consider whether the injunction will have some utility or will serve some purpose manifested by the Act. Relatedly, the court should give greater weight to the question of whether the injunction will serve a purpose contemplated by the Act when ASIC is the applicant for relief. Further, the grant of an injunction under s 1324 marks the court’s disapproval of the relevant conduct and operates as a deterrent to others. Relatedly, s 1101B of the Act empowers the making of orders in respect of contraventions of Ch 7 if, in the opinion of the court, it is desirable to do so. Section 12GC of the ASIC is in relevantly identical terms to s 1324 of the Act. 8.73 In Australian Securities and Investments Commission v MauerSwisse Securities Ltd (2002) 42 ACSR 605; [2002] NSWSC 741 at [36], Palmer J set out the principles in the following terms: [page 337] the jurisdiction which the court exercises under CA s 1324 is a

statutory jurisdiction, not the court’s traditional equity jurisdiction; Parliament has made it increasingly clear by successive statutory enactments that the court, in exercising its statutory jurisdiction under s 1324, is not to be confined by the considerations which would be applicable if it were exercising its traditional equity jurisdiction; among the considerations which the court must take into account in an application for an injunction under CA s 1324 are the wider issues referred to by Austin J in [Australian Securities and Investments Commission v Parkes (2001) 38 ACSR 355 and Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114 and by Davies AJ in [Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561]; they may be gathered under the broad question whether the injunction would have some utility or would serve some purpose within the contemplation of the Corporations Act; these considerations are to be taken into account regardless of whether the application is for a permanent injunction under s 1324(1) or for an interim injunction under s 1324(4); where an application under s 1324(4) is made by ASIC rather than a private litigant the court is more likely to give greater weight to the broad question whether the injunction would serve a purpose within the contemplation of the Corporations Act; where there is an appreciable — that is, not fanciful — risk of particular future contraventions of the Corporations Act by a defendant, it would serve a purpose within the contemplation of the Corporations Act that the court grant not only a permanent injunction but, in an appropriate case, an interim injunction restraining such conduct. Section 1324 evinces an intention that the possibly severe consequences and the relative promptness of proceedings for contempt of court be added to criminal prosecutions as a deterrent to contraventions of the Corporations Act; although the questions whether there is a serious question to be tried and where the balance of convenience lies will not circumscribe the court’s consideration in an application for an interim injunction under s 1324(4), the interests of justice will always require that those

questions be examined carefully when restrictions are sought to be imposed before the case has been properly examined by the court, even where the protection of the public is said to be involved: see per Young J (as his Honour then was), in Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd (1986) 11 ACLR 566 at 570–1; the balance of convenience will be viewed differently according to whether the applicant under s 1324(4) is ASIC or a private litigant. Where ASIC is acting to protect the public interest, the absence of an undertaking as to damages, exempted by s 1324(8), will usually be of little consequence. However, where the proceedings are brought to advance a plaintiff’s private interests, then if such an undertaking is not proffered even though it is likewise exempted by subs (8), the court may take that circumstance into account as a matter of practicality, common sense and fairness in determining where the interests of justice lie and whether ‘it is desirable’ to grant the injunction: see per Young J in Lombard Nash at 571. The court’s power to grant injunctions under the ACL is contained in ACL s 232. [page 338] 8.74 Under s 1324(10), a court has power to order the payment of damages, either in addition to or in substitution for the grant of the injunction. However, the power to award damages under s 1324(10) is contingent upon the making of an application for injunction under s 1324(1). In the absence of a claim for an injunction the court has no power to award damages.78 An application under s 1324 may be made by the Australian Securities and Investments Commission (ASIC) or by any person ‘whose interests have been, are, or would be affected’ by the relevant act or failure to act.79 Section 12GD of the ASIC Act provides for prohibitory injunctions to restrain contraventions of ASIC Act Pt 2 Div 2 (that is, unconscionable conduct and consumer protection in relation to financial services). As with

s 1324(1) of the Corporations Act, ASIC Act s 12GD gives the court power to restrain conduct that contravenes the relevant provisions, or amounts to involvement in a contravention. Standing is conferred on ‘the Minister, ASIC, or any other person’. Section 12GD does not provide for mandatory injunctions or damages in the alternative.

Non-punitive orders 8.75 Courts may order the disclosure of information or the publication of advertisements in connection with a contravention of Ch 5C (registered schemes); Ch 6CA (continuous disclosure); Ch 6D (fundraising); or Pt 7.10 (conduct in relation to financial products), under s 1324B. Similar orders can be made in respect of contraventions of Subdivs C, D or E of ASIC Act Pt 2 Div 2 under s 12GLA. The court’s power in ASIC Act s 12GLA also allows it to make community service orders and probation orders for contraventions of these provisions.

Other orders, including for compensation 8.76 Courts have broad powers under s 1325 to make a range of other orders, including orders compensating a person for loss or damage, in respect of contraventions of Ch 5C (registered schemes); Ch 6CA (continuous disclosure); Ch 6D (fundraising); or Pt 7.10 (conduct in relation to financial products). Similar powers exist under ASIC Act s 12GM and ACL s 237. Section 1325 allows the court to make ‘other orders’ in respect of conduct by an officer that contravenes, or amounts to involvement in a contravention of, Chs 5C, 6CA or 6D or Pt 7.10 of the Corporations Act. These are the provisions of the Act dealing with (respectively) managed investment schemes, continuous disclosure, fundraising, and market misconduct and other prohibited conduct relating to financial products and financial services. Where a person has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged [page 339]

in contravention of one of these provisions, they have standing to seek a remedy. Section 1325(2) provides that: The court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in contravention of Chapters 5C, 6CA or 6D or Part 7.10, or on the application of ASIC in accordance with subsection (3) on behalf of such a person or 2 or more such persons, make such order or orders as the court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.

A limitation period of six years applies. The range of orders available under s 1325(5) includes damages. Investor remedies for defective disclosure are discussed in Chapter 9 below. ___________________________ 1.

There is also a specialist liability regime for conduct ‘that relates to a disclosure document or statement within the meaning of s 953A’: that is, to Financial Services Guides, Statements of Advice and other documents provided by Australian financial services licensees to their clients under Pt 7.7 of the Act. This is discussed in Chapter 14 below.

2.

The ACL, which is contained in Sch 2 to the Competition and Consumer Act 2010 (Cth), replaced the misleading and deceptive conduct provisions formerly located in the Trade Practices Act 1974 (Cth) (TPA) and relevant state fair trading legislation for conduct engaged in from 1 January 2011.

3.

Australian Competition and Consumer Commission v Fisher & Paykel Customer Services Pty Ltd [2014] FCA 1393 at [24]; Redmond Family Holdings v Gc Access Pty Ltd [2016] NSWSC 796 at [53].

4.

The ACL is applied as a law of each respective state and territory by the following Acts: Fair Trading Act 1987 (NSW) Pt 3; Fair Trading Act 1999 (Vic) Pt 2; Fair Trading Act 1989 (Qld) Pt 3; Fair Trading Act 1987 (SA) Pt 3; Fair Trading Act 2010 (WA); Australian Consumer Law (Tasmania) Act 2010 (Tas); Fair Trading (Australian Consumer Law) Act 1992 (ACT); Consumer Affairs and Fair Trading Act (NT) Pt 4. In each case the ACL applies to, and in relation to, persons carrying on business within the particular jurisdiction, bodies corporate incorporated or registered under the law of a particular jurisdiction, persons ordinarily resident in the particular jurisdiction, and persons otherwise connected with the jurisdiction, and extends to conduct, and other acts, matters and things occurring or existing outside or partly outside the particular jurisdiction (NSW s 32; Qld s 4A; Vic s 13; SA s 18; WA s 24; Tas s 10; ACT s 11; NT s 31).

5.

See generally, A Black, ‘Directors’ Statutory and General Law Accessory Liability for Corporate Wrongdoing’ (2013) 31 C&SLJ 511.

6.

Bendigo and Adelaide Bank Ltd v Cairncross (2011) 84 ACSR 589; [2011] NSWSC 610 at [54]; Explanatory Memorandum to the Financial Services Reform Bill 2001, [15.11].

7

See Supercar International Holdings Ltd v Sommers (2011) 84 ACSR 466; [2011] NSWSC 336. Failure to provide a prospectus when one is required is a strict liability offence under s 727.

8

Re Pong Su (Ruling No 21); R v Ta Song Wong (2005) 202 FLR 1; [2005] VSC 96 at [59].

9

Giorgianni v R (1985) 156 CLR 473 at 487–8.

10.

See ASIC Report 484: Due Diligence Practices in Initial Public Offerings, July 2016, discussed in Chapter 5 above.

11.

That is, the part not purporting to be made on the authority of an expert or a public official document or statement, and not purporting to be a copy of, or extract from, a report or valuation of an expert.

12.

Former s 1011 of the Corporations Law. For a discussion of the due diligence defence, see D Croker, Prospectus Liability Under the Corporations Law, CCH and CCLSR, Melbourne, 1998, pp 59– 63.

13.

As explained in Chapter 5, profile statements remain available as a form of disclosure ón the books’ but are not used: see ASIC Regulatory Guide 254 — Offering Securities under a Disclosure Document, March 2016.

14.

The case law relating to Corporations Act s 189 may provide some guidance here: see generally J H Farrar and P F Hanrahan, Corporate Governance, LexisNexis, Sydney, 2016, Ch 9.

15.

Adams v Eta Foods Ltd (1987) 19 FCR 93; 78 ALR 611 at 620.

16.

Also excluded from the operation of ss 1041H and 12DA are conduct in relation to a Financial Services Guide or a Statement of Advice (see Corporations Act ss 953A and 1022A): see Chapter 14 below. Nor do these provisions apply to conduct that contravenes Corporations Act s 670A (misleading or deceptive takeover document).

17.

Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590 at 600.

18.

By virtue of the application provisions of the CCA, ACL s 18 applies as a law of the Commonwealth to natural persons who engage in trade and commerce between Australia and places outside Australia, among the states, within a territory or between two territories or a territory and a state, by way of supply of goods or services to the Commonwealth, or where ‘engaging in conduct’ involves the use of postal, telegraphic or telephonic service: CCA s 6.

19.

Or unincorporated body, public authority, instrumentality or agency of the Crown, government or local government authority.

20.

That is, an entity that carries on a business of investment in securities, interests in land or other investments, and that in the course of carrying on that business invests funds subscribed, whether directly or indirectly, after an offer or invitation to the public (within the meaning of s 82) made on terms that the funds subscribed would be invested: s 766C(5).

21.

In the case of a government, debentures, stocks or bonds issued or proposed to be issued by that government.

22.

Notice is defined in s 9 to include a circular and an advertisement.

23.

See also Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342 at [349] and Ambergate Ltd v CMA Corporation Ltd (admins apptd) (2016) 110 ACSR 642; [2016] FCA 94 at [56]; Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd (2016) 111 ACSR 638; [2016] FCA 292 at [28]; ABN AMRO Bank NV v Bathurst Regional Council (2014) 99 ACSR 336; [2014] FCAFC 65 at [759]; Australian Securities and Investments Commission; Sino Australia Oil and Gas Ltd (in liq) v Sino Australia Oil and Gas Ltd (in liq) [2016] FCA 934

at [50]. 24.

By operation of s 5(1) of the ASIC Act, financial service where used in Pt 2 Div 2 of the ASIC Act has the meaning given by s 12BAB of that Act. In the remainder of the ASIC Act, it has the same meaning as it has in Ch 7 of the Corporations Act.

25.

ABN AMRO Bank NV v Bathurst Regional Council (2014) 99 ACSR 336; [2014] FCAFC 65 at [758]– [759].

26.

Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; [1990] HCA 17 (Mason CJ, Deane, Dawson and Gaudron JJ) at CLR 602–4; see also Hearn v O’Rourke (2003) 129 FCR 64; [2003] FCAFC 78 at [28]–[36] (Dowsett J; Finn and Jacobson JJ agreeing).

27.

See also Cleary v Australia Co-operative Foods (No 2) (1999) 32 ACSR 701.

28.

Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470.

29.

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198; 42 ALR 1 at 6 (Gibbs CJ). Presumably, in enacting s 995 (the predecessor to CA s 1041H and ASIC Act s 12DA), the legislature wanted to bring over to the Corporations Act the learning that had developed in relation to s 52 of the TPA and, out of an abundance of caution, repeated the tautology.

30.

Parkdale, above, at CLR 198 (Gibbs CJ); Yorke v Lucas (1985) 158 CLR 661 at 675; 61 ALR 307 at 316 (Brennan J). See also Forrest v Australian Securities and Investments Commission (2012) 91 ACSR 128; [2012] HCA 39 at [59].

31.

McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394 at 397–8 per Smithers J and at 412–13 (Fisher J), approved in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198; 42 ALR 1 at 6 (Gibbs CJ). See also Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 55 ALR 25 at 30.

32.

Approved in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; 257 ALR 610; 73 ACSR 1; [2009] HCA 25 at [102]; see also ABN AMRO Bank NV v Bathurst Regional Council (2014) 99 ACSR 336; [2014] FCAFC 65 at [770].

33.

Followed in Forty Two International Pty Ltd v Barnes [2014] FCA 85; (2014) 97 ACSR 450 at [446] and Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789; Redmond Family Holdings v Gc Access Pty Ltd [2016] NSWSC 796 at [50].

34.

Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640.

35.

Miller & Associates Insurance Broking v BMW Australia Finance (2010) 241 CLR 357; [2010] HCA 31 at [15] (French CJ and Kiefel J).

36.

These principles were expressly adopted in James Hardie Industries NV v Australian Securities and Investments Commission (2010) 81 ACSR 1; [2010] NSWCA 332 at [91]; Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 58.

37.

Australian Competition and Consumer Commission v Telstra Corp Ltd (2004) 208 ALR 459; [2004] FCA 987 (Gyles J); Domain Names Australia, above at [18].

38.

Campomar, (2000) 202 CLR 45; [2000] HCA 12 at [101]–[105]; ABN AMRO Bank NV v Bathurst Regional Council (2014) 99 ACSR 336; [2014] FCAFC 65 at [772].

39.

See National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369; [2004] FCAFC 90.

40.

National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369; 61 IPR 420; [2004] FCAFC 90 at [23]; Bodum v DKSH Australia Pty Ltd (2011) 280 ALR 639; 92 IPR 222;

[2011] FCAFC 98 at [209]; Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 106 ACSR 343; [2015] FCA 589 at [434]. 41.

Switzerland Australia Health Fund Pty Ltd v Shaw (1988) 81 ALR 111; ATPR ¶40-866; FAI General Insurance Co Ltd v RAIA Insurance Brokers Ltd (1992) 108 ALR 479 at 496.

42.

See Campomar (2000) 202 CLR 45; [2000] HCA 12 at [102] and [103] (Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ); Google Inc v Australian Competition and Consumer Commission (2013) 249 CLR 435 at [6]–[9] (French CJ, Crennan and Kiefel JJ).

43.

Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd t/as Bet365 [2015] FCA 1007 at [67]–[77]; Comité Interprofessionnel du Vin de Champagne v Powell (2015) 330 ALR 67; [2015] FCA 1110 at [167]–[183]; Flexopack SA Plastics Industry v Flexopack Australia Pty Ltd [2016] FCA 235 at [259]–[270].

44.

Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union (1979) 27 ALR 367 at 380; 42 FLR 331 at 346 (Deane J); Sheen v Fields Pty Ltd (1984) 51 ALR 345; 58 ALJR 93; Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 55 ALR 25 at 30.

45.

See Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228; 18 ALR 639 at 647; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197; 42 ALR 1 at 5; Yorke v Lucas (1985) 158 CLR 661 at 675; 61 ALR 307 at 316 per Brennan J; Famel Pty Ltd v Burswood Management Ltd (1989) 15 ACLR 572; Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590 at 603; Heydon v NRMA Ltd (2000) 51 NSWLR 1; 36 ACSR 462; 19 ACLC 1 at [307] (Malcolm AJA).

46.

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 203.

47.

Pramoko v Grande Enterprises Ltd (2016) 108 ACSR 469 at 481; Redmond Family Holdings v Gc Access Pty Ltd [2016] NSWSC 796 at [52].

48.

Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; [2009] QSC 58; Clifford v Vegas Enterprises Pty Ltd [2011] FCAFC 135 at [148].

49.

Redmond Family Holdings v Gc Access Pty Ltd [2016] NSWSC 796 at [52], referring to Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200 at [34]; North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1 at [30].

50.

ASIC Regulatory Guide 170, referring to George v Rockett (1990) 170 CLR 104; and Re Aldred & Dept of the Treasury (1994) 35 ALD 685.

51.

Wheeler Grace & Pierucci Pty Ltd v Wright (1989) ATPR ¶40-940 at 50,251; Famel Pty Ltd v Burswood Management Ltd (1989) 15 ACLR 572.

52.

Beecher v Able 374 F Supp 341, Southern District New York, 2010.

53.

Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 at [16].

54.

Miller & Associates Insurance Broking v BMW Australia Finance (2010) 241 CLR 357; [2010] HCA 31 at [23].

55.

RhonePoulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 68 ALR 77 at 85; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 95; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649 at 666; Warner v Elders Rural Finance Ltd (1992) 113 ALR 517; Beach Petroleum NL v Johnson (1993) 115 ALR 411; Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590.

56.

Jones v Dumbrell [1981] VR 199; (1968) 5 ACLR 417.

57.

Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 486; [1939] ALR 124 at 129 per Latham CJ; Bulfin v Bebarfalds Ltd (1938) 38 SR (NSW) 423 at 432–8.

58.

See also see also Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94; Devereaux Holdings Pty Ltd v Pelsart Resources NL (No 2) (1985) 9 ACLR 956.

59.

See also Warner v Elders Rural Finance Ltd (1992) 113 ALR 517; Beach Petroleum NL v Johnson (1993) 115 ALR 411 at 587; Fraser v NRMA Holdings Ltd (1994) 14 ACSR 656 at 671; on appeal, 15 ACSR 590 at 601.

60.

Miller & Associates Insurance Broking v BMW Australia Finance (2010) 241 CLR 357; [2010] HCA 31 at [19].

61.

[2011] FCAFC 135.

62.

Pappas v New World Oil Developments (1993) 117 ALR 304.

63.

Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 at 371.

64.

Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 at 613–14.

65.

Leda Holding Pty Ltd v Oraka Pty Ltd (1998) ATPR ¶41-601.

66.

See Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 at [634], referring to Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees’ Union [1979] FCA 85; (1979) 42 FLR 331 at 346 (Deane J); Global Sportsman Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 2 FCR 82 at 87. See also Casaclang v Wealthsure Pty Ltd (2015) 107 ACSR 274; [2015] FCA 761 at [257].

67.

Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 201–2 (Deane and Fitzgerald JJ).

68.

James Hardie Industries NV v Australian Securities and Investments Commission (2010) 81 ACSR 1; [2010] NSWCA 332 at [184], [242]–[243].

69.

James Hardie Industries NV v Australian Securities and Investments Commission (2010) 81 ACSR 1; [2010] NSWCA 332 at [341]; Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 at [638].

70.

J Nolan and M Connolly (eds), Black’s Law Dictionary, 5th ed, West Publishing Company, St Paul, 1979.

71.

Yorke v Lucas (1983) 49 ALR 672 at 681.

72.

An appeal from his Honour’s decision was dismissed in Trade Practices Commission v Service Station Association Ltd (1993) 44 FCR 206; 116 ALR 643.

73.

The earlier provision was considered in R v M (1979) 4 ACLR 610.

74.

Australian Securities Commission v McLeod (2000) 34 ACSR 135; [2000] WASCA 101 at [32].

75.

The scope of this limb of s 1041E will depend on the scope of the concept of a financial market ‘operated’ in the jurisdiction. The better view appears to be that this limb of s 1041E does not apply where financial products are traded on the over-the-counter markets, because conduct constituted by a person making or accepting offers or invitations to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only does not constitute ‘operating a financial market’ for the purposes of Ch 7: s 767A(2) and see Chapter 10 below.

76.

Wright Heaton Ltd v PDS Rural Products Pty Ltd (1982) 7 ACLR 140.

77.

Referring to Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605; [2002] NSWSC 741 at [36]. See Australian Securities and Investments Commission v Macro

Realty Developments Pty Ltd (2016) 111 ACSR 638; [2016] FCA 292 at [52]. 78.

Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) 135 FLR 314 at 323–4; 22 ACSR 270 at 278–9; Waterhouse v Waterhouse (1999) 46 NSWLR 449 at 488–91; Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565 at 19,593; [2002] NSWSC 16 at [132]; GE Capital Australia v Davis (2002) 180 FLR 250 at 268; Porter v OAMPS (2005) 215 ALR 327 at [81].

79.

The expression is construed broadly: Broken Hill Proprietary Company Ltd v Bell Resources Ltd (1984) 8 ACLR 609; Allen v Atalay (1993) 11 ACSR 753 at 757.

[page 341]

Chapter 9 INVESTOR CLAIMS for DEFECTIVE DISCLOSURE Introduction Statutory Claims for Loss or Damage Persons liable Time limits for commencing action Defences Apportionment of liability Power of courts to relieve Securities Class Actions Development of securities class actions in Australia Requirements for class actions Identification of class members Court’s power to order that proceeding not continue as class action Lead plaintiff Opt out procedures Settlement of class actions Other orders that may be made by the court Causation and Damages Proof of causation Quantification

9.1 9.3 9.6 9.22 9.24 9.25 9.26 9.27 9.28 9.29 9.33 9.34 9.35 9.36 9.37 9.38 9.39 9.39 9.52

INTRODUCTION 9.1 Chapter 8 explores the statutory proscriptions on various types of defective disclosure in connection with securities and other financial products. The purpose of this chapter is to consider in more detail the statutory bases upon which a person who owns or acquires a security or

other financial product in the primary or secondary market might have a claim for damages or other remedies arising out of that defective disclosure. [page 342] As Hayne J noted in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; 60 ACSR 292; [2007] HCA 1 at [135], the statutory remedies have now largely supplanted available general law remedies for defective disclosure such as rescission at general law, damages for fraudulent misrepresentation, and damages for negligent misstatement. This chapter focuses on the statutory remedies for defective disclosure arising under the investor protection provisions of the Corporations Act 2001 (Cth) (Corporations Act), the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (ACL). They are: remedies for breach of the specialist regimes for disclosure in, respectively, a disclosure document prepared under Corporations Act Ch 6D (for example, a prospectus or offer information statement); or a disclosure document or statement prepared under Corporations Act Pt 7.9 (for example, a Product Disclosure Statement (PDS));1 remedies for misleading or deceptive conduct in relation to financial products (including securities) or financial services under Corporations Act ss 1041H and 1041I; or in trade or commerce in relation to financial services under ASIC Act ss 12DA and 12GF; or in trade or commerce under ss 18 and 236 of the ACL;2 and remedies against persons making false or misleading statements, fraudulently inducing dealing, or engaging in dishonest conduct in relation to financial products (including securities), under the information offences in Corporations Act Pt 7.10. 9.2 Chapter 8 explained in broad terms some of the powers of the court to make orders arising out of defective disclosure, including under Pt 9.5 of the Corporations Act and Pt 2 Div 2 Subdiv G of the ASIC Act. The orders

that can be made include injunctions, non-punitive orders, and other orders (including orders to pay compensation to affected persons). This chapter focuses on the specific remedies contained in ss 729 (defective securities offers); 1022A (defective PDSs and related documents); 1041I, ASIC Act s 12GF or ACL s 236 (misleading or deceptive conduct); and s 1041I (contravention of the information offences). It begins (in 9.3–9.26) by explaining the specific remedies, the persons against whom they may be sought, and (where relevant) the availability of defences, the application of principles of proportionate liability, and the power of the courts to relieve a person from liability. Securities class actions, which are the primary form of private actions with respect to defective disclosure in relation to securities and financial products, are discussed in 9.27–9.37. Common questions of causation, and with the quantification of damages, are discussed in 9.39–9.54. [page 343]

STATUTORY CLAIMS FOR LOSS OR DAMAGE 9.3 The key liability provisions discussed in this chapter are in the following terms. Table 9.1: Liability provisions Corporations Act s 729(1) (fundraising)

A person who suffers loss or damage because an offer of securities under a disclosure document contravenes s 728(1) may recover the amount of the loss or damage from a person referred to in [the table in s 729] if the loss or damage is one that the table makes the person liable for. This is so even if the person did not commit, and was not involved in, the contravention.

Corporations Act s 1022B(2)(c) and In a situation to which [paragraph (d) (offer and sale of financial products) 1022B(1)(c) applies], if a person suffers loss or damage … because the disclosure document or statement the client was given or sent was defective … or because the consent was given, or was not withdrawn, as the case requires … the person may recover the amount of the loss or damage by action against the, or a, liable person (see subsections (3) to (5)), whether or not that person (or anyone else) has been convicted of an offence in respective of [the relevant conduct]. Corporations Act s 1041I(1) A person who suffers loss or damage by conduct of another person that was engaged in contravention of s 1041E, s 1041F, s 1041G or s 1041H may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention. ASIC Act s 12GF(1) A person who suffers loss or damage by conduct of another person that contravenes a provision of Subdiv C (ss 12CA–12CC) or Subdiv D (ss 12DA– 12DN) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. ACL s 236(1) If … a person (the claimant) suffers loss or damage because of the conduct of another person and … the conduct

contravened [ACL s 18], the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention. 9.4 Corporations Act ss 729 and 1041H, ASIC Act s 12GF and ACL s 236 are similar in drafting and approach to the former s 82 of the Trade Practices Act 1974 (Cth) (TPA) (since renamed the Competition and Consumer Act 2010 (Cth) (CCA)), and cases on s 82 are instructive in their interpretation. Section 1022B of the Corporations Act is slightly different in structure. It is an omnibus provision that allows for recovery in a variety of situations related to the issue, sale and purchase of financial products (other than securities and government bonds) issued in the course of a business of issuing financial products. Section 1022B(1)(a), (aa), (ab), (ac), (b) and (e) refers to situations where a person is required by the Act to provide a document or information and does not do so. Relevantly for our purposes, s 1022B also applies where a person gives another person a defective PDS or supplementary PDS. A PDS or supplementary PDS is defective if there is a misleading or deceptive statement in it, or there is an omission of material required by, respectively, s 1013C (other than material required by s 1013B or s 1013G) or s 1014E: see s 1022A(1)(a)– (c). The content requirements in ss 1013C and 1014E are discussed in Chapter 6 above. Specifically, s 1022B(1)(c) applies the section to situations (among others) in which a person: [page 344] (i)

gives another person (the client) a disclosure document or statement (other than an offer document of a kind referred to in section 1019E or a supplementary offer document of a kind referred to in section 1019J) that is defective in circumstances in which a disclosure document or statement is required by a provision of this Part to be given to the client; or

… (ii) is a regulated person and gives, or makes available to, another person (the client) a disclosure document or statement, being a Product Disclosure Statement or a Supplementary Product Disclosure Statement, that is defective, reckless as to whether

the client will or may rely on the information in it.

Section 1022B(1)(d) extends the application of s 1022B to situations where a person (such as an expert) has consented to the inclusion of a statement in a PDS or supplementary PDS, or does not take steps to withdraw that consent in relevant circumstances. This can give rise to a claim against the person who gave the consent by a person who can show that they suffered loss or damage ‘because the consent was given, or was not withdrawn, as the case requires’. Consent has been held, in this context, to be ‘used in an active, rather than passive, sense, which connotes a requirement of a specific, positive act and not mere acquiescence or silence’.3 9.5 There are two key differences between the liability rules created as part of the mandatory disclosure regimes covering fundraising and the issue and sale of financial products (Corporations Act ss 729 and 1022B respectively), and the general liability rules in Corporations Act Pt 7.10, ASIC Act Pt 2 Div 2 and the ACL. First, various defences are available under the mandatory disclosure regimes to claims for defective disclosure, that are not available in respect of action claims under the general rules. Second, the categories of persons who are liable under the mandatory disclosure regimes are set out in the Corporations Act, while the general rules fix liability on the person engaging in the contravening conduct and any person ‘involved in the contravention’.

Persons liable 9.6 Corporations Act ss 729 and 1022B specify the categories of persons who are, or may be, liable to investors for defective disclosure in, respectively, a takeover document, a fundraising document and a PDS or supplementary PDS. Liability can attach even where the person did not commit, and was not involved in, the contravention. In contrast, the general rules in s 1041H, ASIC Act s 12GF and ACL s 236 impose liability on the person who engages in the contravening conduct, and any person ‘involved in the contravention’.

Persons liable under s 729

9.7 Civil liability under s 729 for a contravention of s 728 can attach to various classes of persons associated with the offer. Their liability does not depend on their involvement in the contravention as a matter of fact, but rather on whether they come within one of the named classes in s 729. This is made clear by s 729(1), which [page 345] provides that a person can be liable ‘even if the person did not commit, and was not involved in, the contravention’. In a typical securities offer, many of the persons named in the table in s 729 will be bodies corporate. There is no equivalent of Corporations Act s 769B (which deals with, among other things, the attribution of conduct, knowledge, intention and belief to a body corporate) in Ch 6D of the Corporations Act. Therefore, in seeking to attribute these things to a body corporate in establishing a contravention by a body corporate of s 728(1), it will be necessary to rely on general law principles. A person referred to in the table in s 729(1) is liable for the loss or damage described in that table. The table provides as follows: Table 9.2: People liable on disclosure document [operative]

These people …

1

the person making the offer

2

each director of the body making the offer if the offer is made by a body a person named in the disclosure document with their consent as a proposed director of the body whose securities are being offered an underwriter (but not a any contravention of subs 728(1) in

3

4

are liable for loss or damage caused by … any contravention of subs 728(1) in relation to the disclosure document any contravention of subs 728(1) in relation to the disclosure document any contravention of subs 728(1) in relation to the disclosure document

5

6

subunderwriter) to the issue or sale named in the disclosure document with their consent a person named in the disclosure document with their consent as having made a statement: (a) that is included in the disclosure document; or (b) on which a statement made in the disclosure document is based a person who contravenes, or is involved in the contravention of, s 728(1)

relation to the disclosure document the inclusion of the statement in the disclosure document that contravention

Note: Item 2 — director includes a shadow director (see section 9).

Person making the offer 9.8 The first category of person liable for loss or damage caused by a contravention of s 728(1) is the person making the offer. Section 700(3) says that, for the purposes of Ch 6D, ‘the person who offers securities is the person who has the capacity, or who agrees, to issue or transfer the securities if the offer is accepted’. [page 346] In the case of a primary offer of securities, this would generally be the issuer corporation. In the case of a secondary offer that is made by way of a disclosure document pursuant to s 707, this would generally be the vendor of the securities. However, the identity of the person making the offer is a question of fact, to be determined in each case by reference to the identity of the person with whom the offeree forms a contract by accepting the offer. Directors and proposed directors 9.9 If the offer is made by a body corporate, then item 2 of the table in s

729(1) makes each director of the body liable for any loss or damage caused by a contravention of s 728(1). ‘Director’ has its expanded meaning in s 9, and includes not only those people who are formally appointed as directors, but also de facto directors and shadow directors. Section 729 also imposes liability on any person named in the disclosure document with their consent as a proposed director of the body whose securities are being offered. Under s 720 the consent of any person named in this way must be obtained before the document can be lodged, and the offeror must keep copies of the consent under s 735(1). If the person’s consent is publicly withdrawn during the offer period, this can be a defence to liability under s 733(3): see 8.29. Persons named with their consent in the disclosure document 9.10 An underwriter (but not a sub-underwriter) to the issue or sale named in the disclosure document with their consent is also liable under s 729. Section 729 also provides that a person named in the disclosure document with their consent as having made a statement that is included in the disclosure document, or on which a statement made in the disclosure document is based, is liable for any loss or damage caused by the inclusion of the statement in the disclosure document. Those falling into this category would include experts and advisers who have provided material (such as experts’ reports, financial statements, engineering and other technical reports, valuations and so on) for inclusion in the document. Note that liability does not extend under this section to those merely named with their consent as performing a function in a professional, advisory or other capacity in connection with the offer. So a person named with their consent as having acted as adviser to the offeror will not be liable under s 729 unless the prospectus also contains either a statement made by them, or a statement said to be based on a statement made by them. Section 716 says that a disclosure document may only include a statement by a person, or a statement said in the document to be based on a statement by a person, if the person has consented to the statement being included in the document in the form and context in which it is included,

the document states that the person has given this consent, and the person has not withdrawn the consent before lodgment. A copy of the consent must be kept, under s 735.4 [page 347] Others who contravene s 728(1) 9.11 Item 6 in the table includes ‘a person who contravenes subsection 728(1)’. As item 1 in the table makes the offeror liable, this must refer to a person other than the offeror who is primarily liable for a contravention of s 728(1). The scope of item 6, in light of s 700(3), remains to be determined. If the purpose of s 700(3) is to provide that only the person named in that section makes the offer, then there can be no other person who contravenes s 728(1). However, if s 700(3) does not define the offeror exhaustively, then by operation of Corporations Act s 52 it may be that a person who ‘caused or authorised’ the offer is also treated as contravening s 728(1). Those involved in a contravention of s 728(1) 9.12 Section 729 extends civil liability to any person involved in a contravention of s 728(1). Involvement is explained at 9.19 below.

Persons liable under s 1022B 9.13 Civil liability for (among other things) giving a defective PDS or supplementary PDS arises under s 1022B. Of particular importance for our purposes are s 1022B(1)(c)(i) and (ii), which set out circumstances in which a person who suffers loss or damage might recover in respect of defective disclosure in this context. In these circumstances, s 1022B(2) says that if a person suffers loss or damage because the disclosure document was defective, the person may recover the amount of the loss or damage ‘by action against the, or a, liable person (see subss (3)–(5)), whether or not that person (or anyone else) has been convicted of an offence in respect of the matter’. In the ordinary course, a person can recover against ‘the person by

whom, or on whose behalf, the disclosure document or statement was prepared’ (s 1022B(3)(b)(i)) and against ‘each other person involved in the preparation of the disclosure document or statement who, directly or indirectly, caused the disclosure document or statement to be defective or contributed to it being defective’ (s 1022B(3)(b)(ii)). However, this is not the case if the defect in a disclosure document or statement was the result of an unauthorised alteration to it: s 1022B(5).

Engaging in conduct 9.14 Section 1041I of the Corporations Act, ASIC Act s 12GF and ACL s 236 all impose liability on a person who engages in ‘conduct’. The concept of engaging in conduct embodied in the provisions has a meaning defined in Corporations Act s 9, ASIC Act s 12BA(2) and ACL s 2(2) respectively. For the purposes of Corporations Act s 1041I, a person engages in conduct if they do an act or omit to perform an act. For the purposes of ASIC Act s 12GF and ACL s 236 the reference to engaging in conduct is a reference to doing or refusing to do any act, including making, or giving effect to, a provision of, an agreement; arriving [page 348] at, or giving effect to a provision of, an understanding; or requiring the giving of, or giving, a covenant. Companies and individuals 9.15 Where conduct is engaged in by a body corporate, frequently it will be the case that it has been engaged in by both the individual doing the act (such as a director) and the body, making them both primarily liable: see, for example, Wilkinson v Feldworth (1998) 29 ACSR 642. In Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; 66 ACSR 688; [2008] FCAFC 120, a director of a listed company had authorised the transmission to the Australian Securities Exchange (ASX) of an announcement about the company’s product which was published by the ASX. The question arose whether the director himself

had contravened s 1041H. Jacobson and Gordon JJ concluded (at 702) that the director made the representations in contravention of s 1041H. In so doing they observed that the High Court has followed the House of Lords in holding that the status of a person as an employee or director of a company does not divest him or her of personal liability for wrongful acts committed in that capacity; and that the same applies under s 52 of the TPA and other statutory analogues.5 Second, the question in each case is whether all of the elements of the contravention are made out against the individual or whether he or she merely acted as a corporate organ, binding the company but not the person individually.6 Third, as these authorities make clear, it is a question of fact in each case whether all the elements of the contravention are made out.7 Their Honours concluded (at 703) on the basis of these principles that the director was personally liable for the contravention by having authorised the company secretary to send the announcement to the ASX, and accordingly that he was personally liable for any contravention of s 1041H. Imputed primary liability — acts imputed to bodies corporate 9.16 Given that a body corporate is an abstraction and acts only through its human representatives, when can a corporation or other body corporate be said to have ‘engaged in conduct’? This question is answered by Corporations Act s 769B and ASIC Act s 12GH. If a director, employee or agent acting within the scope of actual or apparent authority from the body corporate engages in conduct on behalf of the body corporate, the conduct is deemed to have been engaged in also by the body corporate: Corporations Act s 769B(1)(a) and ASIC Act s 12GH(2)(a). [page 349] The same result ensues where any other person acts on behalf of a body corporate at the direction or with the consent or agreement (whether express or implied) of a director, employee or agent of the body corporate. But that is so only where the giving of the direction, consent or agreement was within the scope of the actual or apparent authority of the director,

employee or agent: Corporations Act s 769B(1)(b) and ASIC Act s 12GH(2)(b). Section s 769B(1) of the Corporations Act and ASIC Act s 12GF(2) do not operate to make a body corporate liable without proof of its state of mind when a state of mind is an element of the particular contravention.8 Imputed primary liability — acts imputed to employers and principals 9.17 The Corporations Act and the ASIC Act also set out the circumstances in which the acts or omissions of an employee or agent can be imputed to their employer or principal where that employer or principal is not a body corporate. Where they apply, the effect of the provision is that the principal is also taken to have engaged in the relevant conduct for the purposes of the liability provision. If an employee or agent acting within the scope of actual or apparent authority from the principal (other than a body corporate) engages in conduct on behalf of the principal, the conduct is deemed to have been engaged in also by the employer or principal: Corporations Act s 769B(5) (a) and ASIC Act s 12GF(4)(a). The same result ensues where any other person acts on behalf of the principal at the direction or with the consent or agreement (whether express or implied) of an employee or agent of the principal. But that is so only where the giving of the direction, consent or agreement was within the scope of the actual or apparent authority of the employee or agent: Corporations Act s 769B(5)(b) and ASIC Act s 12GF(4)(b). Passing on or endorsing defective disclosure 9.18 Is a person who passes on or endorses a defective statement liable on that statement? The answer depends on the person’s conduct in passing on or endorsing the statement. In some circumstances their conduct may mean they are treated as having made the statement themselves. In other circumstances they may be treated as having been involved in making the statement. In still others they may be considered to be uninvolved. A person who adopts a statement will be liable.9 However, if the circumstances are such as to make it apparent that a person passing on the statement is not its author and that person expressly or impliedly disclaims

any belief in its truth or falsity, the mere passing on of the statement for what it is worth is unlikely to be held to be conduct that is misleading or deceptive.10 The line between passing on information [page 350] for what it is worth and assuming responsibility for its contents is a fine one, and there are cases in which, for example, estate agents have been held responsible for passing on information received from their principals.11 In the absence of an express or implied disclaimer, there is a danger that the person passing on the statement will be treated as having impliedly adopted it. In deciding whether a person has adopted a statement, the conduct and statements of the person passing on the statement must be considered as a whole, taking into account disclaimers and other circumstances showing the true character of the conduct and statements themselves.12

‘Involved in a contravention’ 9.19 In each of the provisions discussed in this chapter, liability extends to a person ‘involved in the contravention’.13 ‘Person involved’ is defined for the purposes of the Corporations Act and the ASIC Act, in Corporations Act s 79, which reflects the earlier TPA s 75B. Case law interpreting and applying the expression in the trade practices context has been expressly adopted as relevant to the interpretation of s 79 of the Corporations Act.14 Section 79 of the Corporations Act provides that a person is involved in a contravention if, and only if, the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention.

Paragraph (a) mirrors the language in s 11.2 of the Commonwealth Criminal Code and, in turn, its antecedent general law concepts of

accessorial liability as they applied to people who were principals in the second degree or accessories before the fact. The meaning of ‘aid, abet, counsel or procure’ in the context of the criminal law is discussed in Chapter 8. Paragraph (d) also draws on concepts of criminal law, to do with conspiracy: see Pt 2.4 of the Criminal Code. Conspiracy between an officer and his or her company is possible, but not where the officer is the embodiment of or directing mind and will of the company.15 Paragraph (c) is the widest of the concepts used in s 79. In Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 at [92], Brereton J says that even this requires: [page 351] (a) knowledge of the essential facts which constitute the contravention which, in the case of provisions such as those in issue here, requires knowledge that the relevant representation is being made and is misleading, and (b) some intentional participation or assistance in the contravening conduct.16

Knowledge 9.20 Each of s 79(a) and (c) requires a level of knowledge, absent which a conclusion that a person is involved in conduct that is misleading or deceptive, or likely to mislead or deceive, cannot be sustained. It is now well established that liability (including civil liability) as a person ‘involved in a contravention’ under s 79(a) or (c) requires proof of the mental elements indicated by Yorke v Lucas (1985) 158 CLR 661, even in cases where evidence of particular knowledge or intention is not required to establish the direct or primary contraventions.17 In Yorke v Lucas (at 669– 70), Mason ACJ, Wilson, Deane and Dawson JJ said that para (c) of the relevant section: … extends the definition of a person involved to a person who has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention. There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention.

Knowledge must be actual; it may in some circumstances be inferred.18 A ‘combination of suspicious circumstances and the failure to make appropriate inquiry when confronted with the obvious, makes it possible

to infer knowledge of the relevant essential matters’.19 In Forge v Australian Securities and Investments Commission (2004) 52 ACSR 1; [2004] NSWCA 448 at [202], the Court of Appeal referred with approval to the conclusion drawn by Santow J in Re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 189 ALR 365; [2002] NSWSC 268, that to be ‘involved’ (within the meaning of Corporations Act s 79) in a contravention of the Corporations Act, it was necessary that a person know of ‘the actual events, though only the essential ones, which constitute that offence’. His Honour, referring to Giorgianni v R (1985) 156 CLR 473 at 507–8 said that ‘[k]nowledge may be inferred from the fact of exposure to the obvious, though that [did] not obviate the need for actual knowledge of the essential facts constituting the contravention’. In Adler, above (at [357]) Santow J said: In Yorke v Lucas … the High Court held that where it is sought to make a person liable as an accessory to a contravention it is necessary to establish that the person had intentionally participated in the contravention. To establish intentional participation, the court held that it must be proven that the person has knowledge

[page 352] of the essential matters that make up the offence or breach (in that case of s 52(1) of the Trade Practices Act). At 670, the majority comprising Mason ACJ, Wilson, Deane and Dawson JJ, observed that the words require: ‘… a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention’. The majority went on to say: ‘There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention’.

The knowledge requirement is explained by Finkelstein J in Compaq Computer Australia Ltd v Merry (1998) 157 ALR 1 at 4–5. His Honour says that accessorial liability under TPA s 75B requires intentional participation; to establish intentional participation: … it must be proved that the person has knowledge of the essential matters that make up a contravention of s 52(1) … In this regard ‘knowledge’ means actual and not constructive knowledge. For example, it would not be sufficient merely to show that the person charged with accessorial liability had shut his eyes to the obvious if that is intended to be a substitute for actual knowledge … Of course, where there is a combination of suspicious circumstances and a failure to make an inquiry it may be possible to infer knowledge of the relevant essential matters. (Citations omitted.).

What is an ‘essential matter’ making up the contravention depends on the context in which Corporations Act s 79 or its equivalent is applied. In the context of misleading or deceptive conduct, one of the essential matters of which the person must have knowledge (in order to form the necessary intent) is the thing that makes the statement misleading or deceptive. In Yorke v Lucas, damages were claimed from Mr Lucas for involvement in a contravention of TPA s 52. The contravention came from false representations as to the average weekly turnover of a business. The claim against Mr Lucas failed, however, because it was found that he was not aware and had no reason to suspect that the turnover information which he relayed to the purchaser of the business was incorrect. The fact that the information was incorrect was an essential matter making up the contravention, of which he did not have knowledge. Yorke v Lucas is discussed by Giles JA in Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504; [2003] NSWCA 131 at [332]; his Honour says: So far as Lucas may have been involved through aiding, abetting, counselling or procuring the contravention, it was held that this used an existing concept drawn from the criminal law and that there had to be intentional participation in the contravention; to form the requisite intent a person ‘must have knowledge of the essential matters which go to make up the offence whether or not he knows that those matters amount to a crime’: at CLR 667; ALR 306. While Lucas was aware of the representations, he ‘had no knowledge of their falsity and could not for that reason be said to have intentionally participated in the contravention’: at CLR 668; ALR 307. So far as Lucas may have been involved through being knowingly concerned in or party to the contravention, a person could not be knowingly concerned in a contravention ‘unless he has knowledge of the essential

[page 353] facts constituting the contravention’: at CLR 670; ALR 309, which Lucas did not, and the same requirement of knowledge of the essential facts extended to being party to the contravention so that the party had to be ‘an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention’: at CLR 670; ALR 309.

In other contexts, the ‘essential matters’ in respect of which the person’s knowledge must be established will be different. For example, in Adler v Australian Securities and Investments Commission, above, the Court of Appeal was concerned with (among other things) whether the defendant

had been involved in various contraventions by others of the Corporations Act, including contraventions by various group companies of ss 208 (the related party transactions provision) and 260D (the financial assistance provision), and a contravention by Williams of his duties to those companies under s 182. The defendant’s contravention of s 209(2) depended on showing that he ‘knew the material facts and circumstances constituting the contraventions of the Act, relevantly the facts whereby there was the giving of a financial benefit otherwise than on arm’s length terms’: at 572. That is, the court looked at whether he knew about the transactions and the terms on which they occurred, which clearly he did. There was no need to show that he knew that the transactions amounted to a financial benefit or that the terms were not reasonable arm’s length terms. This is described elsewhere in the judgment as ‘the distinction between knowledge of the essential facts which satisfied the statutory description of the contravention, and knowledge that the known facts satisfied that part of the description’: at 587. The defendant’s contravention of s 260D depended on establishing that he had knowledge of the giving of financial assistance. It is not necessary to show that he knew of facts showing it was materially prejudicial to the interests of the company that the assistance be given. Giles JA holds that ‘it was not necessary that ASIC prove that the defendant was “fully aware of all the matters earlier recounted which demonstrate the presence of material prejudice”’: at 590. The defendant’s involvement in Williams’ contravention depended on establishing that he knew the essential facts constituting those contraventions: at 626. In relation to future matters, the onus will be on the applicant to show the respondent had actual knowledge that the representation was made; that it was misleading; and that the corporation had no reasonable grounds for making it.20 Intentional participation or assistance 9.21 In addition to requiring knowledge of the essential elements of the contravention, the test also requires some intentional participation or assistance in the contravention. As Brereton J says in Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWCS 1052 at [92], ‘the mere circumstance that a person is a director of

a company that engages in contravening conduct is insufficient to establish that he or she is a person involved in it’. [page 354] In Ashbury v Reid [1961] WAR 49 at 51, Virtue J said that: … the question which a court should ask itself in determining whether an act or omission on the part of the individual comes within the terms of [the aiding and abetting provision] is whether on the facts it can reasonably be said that the act or omission shown to have been done or neglected to be done by the defendant does in truth implicate or involve him in the offence whether it does show a practical connection between him and the offence.

To be involved in a contravention consisting of misleading and deceptive conduct ‘it is necessary not only that the person concerned should know that a party proposed to engage in a contravention but he should in some positive way, be associated therewith’.21 It is not enough to show that, in the absence of a duty to step in, a person merely stood by while another person engaged in conduct that was misleading or deceptive. The person must not only have actual knowledge of the misleading conduct but in addition should, in some positive way, be associated with the primary contravention through the commission of positive acts. The mere fact of awareness of impending misconduct does not, of itself, raise a case of involvement in that misconduct in the absence of a duty to do something positive.22

Time limits for commencing action 9.22 Civil action under each of the liability provisions may be begun at any time within six years after the day on which the cause of action arose: see Corporations Act ss 670B(2), 729(3) and 1041I and ASIC Act s 12GF(2). Loss or damage being the gist of the statutory cause of action, it arises when the contravention under the particular proscriptive section is followed (as contemplated by s 1041I(1)) by the suffering of loss or damage.23 The cause of action accrues when the first loss or damage is sustained. New loss or damage does not provide a new commencing date.24 The loss or damage which starts time running out must be a reality

and not a mere likelihood. For example, where plaintiffs claim that misleading or deceptive conduct caused them to incur a contingent liability, such as under a guarantee or indemnity, loss is not suffered for the present purpose until the contingency is fulfilled.25 Where the loss or damage results from the acquisition of securities that were not worth what was represented, the application of the limitation period is difficult. On one view, the damage is incurred and the time runs from the time of acquisition. On the other, the time only runs from the date when the person harmed could have ascertained that more than a negligible part of the loss is sustained.26 [page 355]

Concealed fraud 9.23 At common law the running of time for an action in which fraud is an essential ingredient does not commence until the fraud has been discovered or could with reasonable diligence have been discovered.27 State limitation of actions statutes incorporate this doctrine, but in some cases in a restricted form. Since the limitation period for an action under Corporations Act s 1041I and ASIC Act s 12GF is not affected by those statutes, the common law doctrine of concealed fraud could still apply to a cause of action under those sections based on fraud.

Defences 9.24 Various defences are available to civil liability under Corporations Act s 729, explained in Chapter 8 above. They are: due diligence defence (s 731, for prospectuses); lack of knowledge defence (s 732(1) and (2) for offer information statements and profile statements); reasonable reliance (s 733(1)); withdrawal of consent (s 733(3)); and unawareness of new matter (s 733(4)).

Where s 1022B(1)(c) applies, it is a defence to liability under s 1022B(2) if ‘the person took reasonable steps to ensure that the disclosure document or statement would not be defective’: s 1022B(7). The defence is discussed at 8.34 above. There are no such defences to liability for misleading or deceptive conduct under Corporations Act s 1041I, ASIC Act s 12DF or ACL s 18, beyond general defences for publishers.

Apportionment of liability 9.25 In some cases a person’s loss may be caused by a number of factors, including their own failure to take reasonable care. In others, the loss may have been caused by the acts or omissions of more than one person. The various statutory remedies available to investors in respect of different types of defect disclosure provide for the apportionment of loss in certain cases. The damages recoverable by a person in respect of economic loss or damage to property caused by misleading or deceptive conduct may be reduced, to the extent a court thinks just and equitable, where the loss or damage was partially attributable to the person’s own failure to take reasonable care: Corporations Act s 1041I(1B), ASIC Act s 12GF(1B) and CCA s 137B. The provision does not apply where the defendant acted intentionally or fraudulently. There is no equivalent provision in the state application laws, so a person claiming under the ACL applying as state law does not face reduction of damages in this way. In the case of multiple wrongdoers, changes to the Corporations Act and the ASIC Act made in 2004 introduced a regime of proportionate liability for claims [page 356] for damages for economic loss or damage to property made caused by misleading or deceptive conduct engaged in in contravention of Corporations Act s 1041H or ASIC Act s 12DA. The proportionate

liability arrangements are set out in Pt 7.10 Div 2A of the Corporations Act and Pt 2 Div 2 Subdiv GA of the ASIC Act; similar arrangements apply under Pt VIA of the CCA. The purpose of these provisions is: … to give effect to a legislative policy that, in respect of certain claims such as those for economic loss or property damage, a defendant should be liable only to the extent of his or her responsibility. The court has the task of apportioning that responsibility where the defendant can show that he or she is a ‘concurrent wrongdoer’, which is to say that there are others whose acts or omissions can be said to have caused the damage the plaintiff claims, whether jointly with the defendant’s acts or independently of them.28

Where there are concurrent wrongdoers, the liability of each is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the wrongdoer’s responsibility for the damage or loss. However, the limitation does not apply where the concurrent wrongdoer intended to cause, or fraudulently caused, the economic loss or damage to property that is the subject of the claim. In Selig v Wealthsure Pty Ltd (2015) 320 ALR 47; 105 ACSR 552; [2015] HCA 18, the High Court held that the proportionate liability regime in Pt 7.10 Div 2A applies only to claims of misleading and deceptive conduct under s 1041H of the Corporations Act and not to other statutory claims, including claims under s 1041E of the Corporations Act in respect of the same disclosure failure.

Power of courts to relieve 9.26 Section 1318 gives the court power to relieve certain persons from liability in any civil proceedings for ‘negligence, default, breach of trust or breach of duty’ if the defendant demonstrates to the court that he or she has acted honestly and that, having regard to all the circumstances of the case, including those connected with his or her appointment, the defendant ought fairly to be excused for the negligence, default or breach. The court may under this section relieve the defendant either wholly or partly from his or her liability on such terms as the court thinks fit. The persons to whom the section applies include officers, employees, auditors and experts: s 1318(4). Section 1318 applies to relieve directors and officers against liability deriving from their office under the general law, and also for

contraventions of the Corporations Act.29 Prior to the commencement of the Financial Services Reform Act 2001 (Cth), it was unclear whether it was open to a court to relieve a person from liability under s 1041I, on the basis that they had acted honestly and ought fairly to be excused, under the general power contained in s 1318 of the Corporations Act. [page 357] Section 1041I now provides that s 1317S (which provides for relief from liability in respect of civil penalty proceedings) applies in relation to liability under s 1041I(1) as if ss 1041E–1041H were civil penalty provisions, and the proceedings under s 1041I were ‘eligible proceedings’ for the purposes of s 1317S. The effect of this is that a court can relieve a person either wholly or partly from civil liability under s 1041I where it appears to the court that the person has, or may have, contravened the relevant provision but that the person has acted honestly and that, having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention. The discretion to be exercised according to the section is wide.30 The ability of a court to relieve an expert from liability for defects in an expert’s report included in a prospectus was considered by Gyles J in Reiffel v ACN 075 839 266 Ltd (2003) 132 FCR 437; 45 ACSR 67; [2003] FCA 194 at 102. His Honour noted that, in exercising their power under provisions such as ss 1317S and 1318 to relieve directors and officers from liability for breach of duty, it has been said that it is difficult to exercise in favour of the person who has received a benefit.31 On this approach, experts and others who receive a fee for their involvement would never be able to rely on the provision. His Honour concluded it is not appropriate to extrapolate from the position of directors to those of professional advisers. However, his Honour concluded that there are considerations in favour of being slow to utilise the section in relation to an independent expert’s report in a prospectus, as ‘acceptance of responsibility by an expert for the opinion expressed is an important aspect of the protection for investors’. Nonetheless, cases can be conceived where it may be appropriate to relieve an expert from liability, although this is

unlikely to include circumstances where there was a conventional professional assignment, undertaken for reward, under circumstances where the expert expressly consented to the use of the report in the context.

SECURITIES CLASS ACTIONS 9.27 We now deal with securities class actions, which are the primary form of private securities action in Australia, as in the United States.32 We consider the background [page 358] to the development of securities class actions in Australia (9.28); the structure of the class action regime including requirements for a class action (9.29–9.32); issues as to the identification of class members (9.33); the court’s power to order that a proceeding not continue as a class action (9.34); opt out procedures (9.36); the requirements for approval of settlements of class actions (9.37); and issues as to causation and quantification of loss, including proof of reliance and the ‘fraud on the market’ theory (9.39–9.54).

Development of securities class actions in Australia 9.28 A number of features of the Australian legal system have encouraged the development of class actions as a means of private enforcement of the Corporations Act and the ASIC Act. First, Australian law imposes a wide prohibition on misleading and deceptive conduct, which allows a defendant to be held liable for a misleading or deceptive statement, even if that statement was made without negligence and without wrongful intent: Corporations Act s 1041H; ASIC Act s 12DA; see 8.37ff. Second, Australia has a statutory regime prohibiting misleading and deceptive conduct in respect of public offer documents, subject to a due diligence defence, and takeover documents: see 8.15ff. Third, Australia has

a statutory continuous disclosure regime, which underpins requirements for continuous disclosure under the ASX Listing Rules (ASX LR): see Chapter 7. An entity that has failed to comply with the continuous disclosure requirements can be held liable to shareholders who have traded in ignorance of information that ought to have been disclosed to the market at the relevant time. Fourth, by contrast with the position in the United States, it is virtually impossible to strike out a proceeding in Australia prior to discovery. A securities class action has the potential to allow compensation to groups of security holders in circumstances where the amount of the individual security holder’s claim would not support proceedings. It is common for securities class actions to be funded by litigation funders, under arrangements that typically provide for a litigation funder to pay all costs and expenses incurred in the conduct of a class action and to provide any security for costs ordered by a court on terms that the funder is reimbursed for costs and expenses from any award of money compensation in the proceedings and is also paid a percentage of recovery from the amount of compensation or any settlement in the class action. The fact that a class action is funded by a litigation funder does not give rise to an abuse of process and is not contrary to public policy, even if the funder seeks out relevant claimants, has a degree of control over the conduct and settlement of the proceedings, or promotes the proceedings in order to make a profit.33 However, there is real potential for [page 359] conflict between the interests of participants in a class action, their legal advisers and any litigation funder: for example, as to the strategies to be adopted in the action; whether a particular settlement offer should be accepted, particularly if it involves non-financial benefits to class members; whether a class member should be permitted to withdraw from the proceedings or settle with a defendant without contributing to the costs of the proceedings or any percentage payable to the funder on success in the proceedings; or if adverse information becomes known to the legal advisers acting for the class representative in the proceedings which might cause a

funder to cease funding the proceedings.34 The risk of conflict of interests is exacerbated if some members of a class are continuing security holders in the company that is the target of the claim and the class action will potentially involve a wealth transfer from current security holders to other class members who are former security holders in the company.35 Absent an applicable exception, a tripartite arrangement between members of a class, a solicitor conducting a class action and a litigation funder may constitute a managed investment scheme requiring registration under Ch 5C of the Corporations Act.36 However, reg 5C.11.01 of the Corporations Regulations excludes schemes for participating in, conducting and funding class actions from the definition of ‘managed investment scheme’ and from the requirement for registration as such a scheme, and reg 7.6.01 exempts litigation funders from the requirement to obtain an Australian financial services licence for the provision of services in relation to a litigation funding scheme or arrangement. Those exceptions require litigation funders to have adequate processes in place to manage conflicts of interest. A securities class action can involve, for example, allegations of contravention of the continuous disclosure provisions under Corporations Act s 674 or the prohibition on misleading and deceptive conduct under Corporations Act s 1041H and ASIC Act s 12DA, or prospectus liability under Corporations Act s 728.

Requirements for class actions 9.29 Part IVA of the Federal Court of Australia Act 1976 (Cth), Pt 4A of the Supreme Court Act 1986 (Vic) and Pt 10 of the Civil Procedure Act 2005 (NSW) permit class actions.37 The class action procedures were introduced following the Australian Law Reform Commission Report, Grouped Proceedings in the Federal Court, 1988, [page 360] which recommended the introduction of procedures for ‘grouped

proceedings’, although the procedures which were introduced depart in some respects from the recommendations of that report. The report identified the objectives of grouped proceedings (at [13]) as including reducing the cost of court proceedings, enhancing access to legal remedies, promoting efficiency in the use of court resources, ensuring consistency in the determination of common issues and making the law more effective, and noted (at [69]) that: An effective grouping procedure is needed as a way of reducing the cost of enforcing legal remedies in cases of multiple wrongdoing. Such a procedure would enable people who suffer loss or damage in common with others as a result of a wrongful act or omission by the same respondent to enforce their legal rights in the courts in a cost effective manner.

A class action may be brought where: 1.

at least seven persons have claims against the same person or persons;

2.

the claims arise out of the same, similar or related circumstances; and

3.

the claims of all those persons give rise to at least one substantial common issue of law or fact.38

Several cases have permitted the conversion of subsisting proceedings that were not commenced as representative proceedings to representative proceedings under Pt IVA of the Federal Court Act.39 However, there is authority that the court does not have power to make such an order or may decline to do so in the exercise of discretion, if doing so would reconstitute proceedings that were ordered not to continue as a class action with a differently named plaintiff who was not previously a member of the class and different class members.40

Claim against the same person or persons 9.30 The requirement that the plaintiffs have claims against the same person or persons requires that all class members have claims against at least one defendant, although those claims need not be identical or likely ultimately to succeed. Several earlier decisions suggested that all group members must plead a claim against each and every defendant.41 That view was questioned in Bray v F Hoffman-La Roche Ltd (2003) 130 FCR

317; 200 ALR 607; [2003] FCAFC 153, where the majority in the Full Court expressed the view that the applicant must have a claim against all respondents but that other represented parties need not have a claim against each [page 361] defendant: at 344–6 per Carr J; at 373–4 per Finkelstein J. This question appears to have been resolved, for the purposes of proceedings under Pt IVA of the Federal Court Act, by the decision of the Full Court of the Federal Court of Australia in Cash Converters International Ltd v Gray (2014) 223 FCR 139; [2014] FCAFC 111, where the court held that the statutory requirement under s 33C(1)(a) of the Federal Court Act was met if seven or more persons have a claim against the same defendant; that it was then open to the plaintiff to join other defendants against whom some members have claims and others did not, provided the usual requirements for joinder were satisfied; and that s 33C(1)(a) of the Federal Court Act therefore did not require that each group member have a claim against each defendant. The class action procedure in the Supreme Court of New South Wales expressly provides that representative proceedings may be taken against several defendants even if not all group members have a claim against all defendants, excluding the contrary view expressed in earlier decisions.42 It is, in any case, sufficient to satisfy this requirement if one claim against all the defendants (for example, for a declaration that their conduct was misleading) is maintainable by all class members, even if other claims are not available to all class members.43 It is not necessary to satisfy this requirement that each group member would succeed in obtaining judgment against each defendant.44

Claims arise out of the same, similar or related circumstances 9.31 The requirement that the claims arise out of the same, similar, or related circumstances requires that some relationship exists between the relevant circumstances, but not that they are identical.45 In one Australian class action, a class of 11,300 members, relying on alleged

misrepresentations in over 77 documents produced over a five-year period, still had the necessary quality of ‘relatedness’.46

Substantial common issue of law or fact 9.32 The requirement that the class action involve a ‘substantial common issue of law or fact’ requires that the relevant issue be real or of substance, not that it be large or significant or that it be such as to resolve wholly or to a significant degree the claims of the group.47 Whether a substantial common issue is established is to be assessed by reference to the claims made in the pleadings.48 Common questions need not be common for all group members and subgroups may be created and subgroup representatives appointed where such questions arise in respect of some [page 362] group members only. The court will seek to determine as many common questions of law and fact as practicable at the hearing of the group proceedings, so as to minimise the issues remaining for individual determination after the group proceedings are completed.49

Identification of class members 9.33 The application commencing a class action must: (1) describe or otherwise identify the group members; (2) specify the nature of the claims made on behalf of those members and the relief claimed; and (3) specify the questions of law or fact which are common to the claims of the group members.50 These requirements facilitate an assessment of whether the requirements for a class action noted above are satisfied, and an application commencing a class action may be struck out unless ‘the description is such as to enable a person, with the assistance of a legal adviser if necessary, to ascertain whether he or she is a group member’.51 It appears that the definition of the class cannot permit potential members to join it after the commencement of proceedings.52 However, that limitation can potentially be avoided by the commencement of further proceedings that may be then heard together with the initial proceedings.

The definition of the class in securities class actions typically refers to persons who acquired an interest in securities in the relevant entity between specified dates and suffered loss or damage as a result of the matters pleaded in the statement of claim, and may also include a criterion that those persons have signed a retainer agreement with a particular firm of solicitors or a funding agreement with a particular litigation funder.53 In Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394; [2005] FCA 1483, the Federal Court held that a definition of a class that limited that class to persons who had retained a particular firm of solicitors, was impermissible on the basis that a requirement that group members ‘opt in’ to the proceedings by retaining that firm was inconsistent with the structure of Pt IVA of the Federal Court of Australia Act. However, in Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd, above, Jacobson J (with whom French and Lindgren JJ agreed) held (at [123]) that the mere fact that the group did not include the entirety of a class of persons with claims against a defendant did not mean the relevant proceedings were inappropriate for the purposes of s 33N of the Federal Court of Australia Act: see 9.34. French J similarly held that the court’s powers under s 33N were not available to introduce [page 363] a ‘quasi legislative rule effectively excluding from representative proceedings groups defined by reference to accession to an agreement with a litigation funder’. That view was followed by the Supreme Court of Victoria in Matthews v SPI Electricity Pty Ltd (No 13) [2013] VSC 17 at [40]–[46]. The class action procedure in the Supreme Court of New South Wales provides that representative proceedings may be brought on behalf of a limited group of identified persons, consistent with the view taken by the Full Court of the Federal Court of Australia in Multiplex Funds Management Ltd v Dawson Nominees Pty Ltd, above.54 The ability to define a class in this way assists the position of a litigation funder, since it allows it to require the entry into funding agreements as a condition of participation in the particular class action.55

Court’s power to order that proceeding not continue as class action 9.34 Under United States law, the plaintiff must prove that a class action is desirable in order to obtain certification of the class. There is no similar threshold requirement in Australia. However, the court may order that a proceeding may continue or not continue under Pt IVA of the Federal Court of Australia Act and corresponding state legislation if, at any stage of the proceeding, it appears likely that there are fewer than seven group members56 or the cost of identifying the group members and distributing the award to them would be excessive having regard to the likely total of the relevant amounts.57 The court may also order that a proceeding should not continue as a class action if: the costs that would be incurred if the action continues as a class action is likely to exceed the costs if each class member conducted separate proceedings; the class action procedure is not an efficient or effective means of dealing with the claims of group members; the relief sought can be obtained by proceedings other than a class action; or it is otherwise inappropriate that the claims be pursued by a class action.58 In determining whether proceedings would provide an efficient means of dealing with claims of group members, the court will consider findings which may be made in the applicant’s case and the extent to which those findings are likely to [page 364] resolve other claims.59 The court may strike out a class action on the basis that it is ‘otherwise inappropriate’ if the relevant pleading is unsatisfactory.60 The court may make an order under this section although the proceeding satisfies the requirements of s 33C of the Federal Court of

Australia Act.61 However, it appears this section does not allow the court to order that a particular proceeding should not continue under Pt IVA (for example, in relation to a closed class) because another form of class action (such as an open class) would have been preferable.62 The court has a discretion whether to make an order under this section if one of the relevant conditions is established.63 An order made under s 33L, s 33M or s 33N of the Federal Court of Australia Act that the proceedings not continue under Pt IVA does not prevent the proceedings continuing as proceedings brought by the representative party on his or her own behalf.64

Lead plaintiff 9.35 The Private Securities Litigation Reform Act 1995 (US) authorises the court to appoint the party with the largest financial interest in the relief sought by the class as ‘lead plaintiff’. There is no corresponding Australian provision.

Opt out procedures 9.36 The procedure for class actions in the Federal Court of Australia, the Victorian Supreme Court and the Supreme Court of New South Wales allows an opt out procedure for class members to indicate that they do not wish to be part of the proceedings.65 Notice must be given to class members of the right to opt out, the date by which that right must be exercised and the consequences of not exercising that right;66 however, a class member may also opt out before that notice is given. The number of persons who opt out of a class action, in response to an opt out notice, will have a practical impact on any settlement of the proceedings, since a settlement will be less costly, or a fixed settlement amount will allow greater returns to individual participants, if numerous class members opt out, but the potential risk of further proceedings for a defendant is increased by a lower level of participation in a settlement. [page 365]

The court must approve the form and content of an opt out notice and that notice need not be given by personal notification unless the court determines it is reasonably practical and not unduly expensive to do so.67 In Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277 at [9], Flick J noted that an opt out notice must be accurate and ‘expressed in as plain and simple language as is consistent with the information sought to be communicated’ and that a misleading or inaccurate notice may affect the decision to be made by a group member. A party which makes misleading public statements concerning the proceedings after such notice has been given may be required to give or pay the costs of giving a remedial notice.68 An opt out notice under s 33X of the Federal Court of Australia Act can be combined with notification to group members of a proposed settlement under s 33X(4) of the Federal Court of Australia Act where settlement is reached prior to completion of the opt out process.69 The opt out notice and notice of settlement will not necessarily indicate a figure, or range of figures, that a group member is likely to receive under the settlement, where that may not be practicable in some forms of settlement.70 A judgment given in class action proceedings must identify the class members affected and will bind all such members as to the common questions determined unless they opt out of the proceedings.71 However, the determination of common questions adverse to the named plaintiff and class members, who are not strictly party to the proceedings, will generally not give rise to an Anshun72 estoppel or, under abuse of process principles, prevent a class member raising other issues that are individual to them in other proceedings, including in defence of other proceedings brought by a party to a class action.73

Settlement of class actions 9.37 A class action in the Federal Court of Australia, the Victorian Supreme Court or the Supreme Court of New South Wales may not be settled or discontinued without the approval of the court.74 If the court gives such approval, it may make orders in relation to the distribution of any money paid under the settlement. Unless the court is satisfied that it is appropriate to do so, it must not determine an application for

[page 366] approval of a settlement unless notice of the settlement has been given to all group members.75 Australian courts have drawn on the factors identified in United States case law in relation to the settlement of class actions in determining whether to approve a settlement, including the amounts offered to each group member; the complexity of the proceedings and their prospects of success; the likelihood of group members obtaining judgment for an amount significantly in excess of the settlement offer; the terms of any advice obtained from counsel and from any independent expert in respect of the issues in the proceedings; the likely cost and duration of the proceedings if continued to judgment; the defendants’ ability to meet a larger judgment; and group members’ attitude to the settlement.76 These factors are a ‘useful guide’ in considering applications for approval of a settlement of a class action,77 although they are not determinative; the ultimate question is whether a settlement is ‘fair’ and ‘reasonable’; and a settlement should qualify for approval so long as it falls within a range of fair and reasonable outcomes, taking all relevant circumstances into account.78 The court will consider whether any settlement or discontinuance of representative proceedings is undertaken in the interests of group members as a whole and not only the interests of the plaintiff and the defendant.79 The court has a significant role to play in protecting the interests of class members in respect of the settlement of a class action.80 Matters relevant to the court’s approval of a settlement include not only whether the total amount of the settlement is fair and reasonable, but also whether the distribution of the settlement sum between class members is fair and reasonable.81 [page 367] In Australian Securities and Investments Commission v Richards, above (at [7]–[8]), the Full Court of the Federal Court observed that:

Justice will be satisfied where a settlement is ‘fair and reasonable having regard to the claims made by group members who will be bound by it’. The role of the court is important and onerous … It is protective. It assumes a role akin to that of a guardian, not unlike the role a court assumes when approving infant compromises … the court’s role is to protect those group members who are not represented by [solicitors for the plaintiff and other represented group members] and whose interests may be prejudiced by their absence …. [citations omitted]

The court may more readily conclude that a settlement is fair and reasonable if the terms of settlement are agreed in arm’s length negotiations; the settlement is reached at a point when the plaintiff’s solicitors and counsel had sufficient information to assess the merits of the class action; those conducting the class action are experienced in class action litigation; class members will receive significant sums; no class member opposes the settlement; and the settlement avoids the risk of failure on the cost of lengthy litigation, where appeals are likely and the legal issues are complex.82 The court may decline to approve the amount of legal fees claimed by a plaintiff’s solicitor in approving a settlement, even if the terms of that settlement are otherwise acceptable, or require further review of such fees.83 Where funded group members are contractually obliged to pay a percentage of the recovery to a litigation funder, but unfunded group members are not, the court may order that a corresponding amount be deducted from the recovery received by unfunded group members, so that they do not achieve a better result than funded group members, and the majority of the cases suggest that amount should be redistributed between group members on a pro rata basis rather than paid to the litigation funder.84 In Australian Securities and Investments Commission v Richards [2013] FCAFC 89, the court declined to approve a settlement which included an uplift in the recovery of group members who had self-funded the class action, of an amount said to reflect a litigation funder’s fee, while leaving open the possibility that such an uplift might be approved in an appropriate case. An application for approval of settlements of four overlapping class actions was declined by the Federal Court of Australia in Kelly v Willmott Forests Ltd (No 4) (2016) 112 ACSR 584; [2016] FCA 323. The requirement for court approval of a settlement of a class action does not apply to a group member settling his or her individual claim without

the involvement of the representative applicant.85 However, the court may make an order that no offers of settlement be made without its leave, or at least without notification to the [page 368] applicant of the terms of the proposed offer, since individual settlements may have an adverse impact on the feasibility of a class action.86

Other orders that may be made by the court 9.38 The court also has power to make other orders where it is ‘appropriate or necessary to ensure that justice is done in the proceeding’.87 That section confers a wide power88 but does not allow the court to remodel the procedures or constraints expressed in or implied by other provisions of Pt IVA of the Federal Court of Australia Act and corresponding state legislation.89 In Earglow Pty Ltd v Newcrest Mining Ltd (2015) 106 ACSR 49; [2015] FCA 328 at [33], Beach J noted that the section allowed an order only where it was ‘appropriate or necessary to ensure that justice is done in the proceeding’, rather than where it was perceived to be convenient or useful. His Honour declined to make an order under that section requiring that the claims of two institutional shareholders be determined in addition to the plaintiff’s claim and common issues at the first stage of the trial, on the basis that it had not been shown that justice could not be achieved by dealing only with the plaintiff’s individual claim and the common issues at that stage. In Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs & mgrs apptd) (in liq) (2015) 325 ALR 539; 108 ACSR 1; [2015] FCA 811, the Federal Court held that the section could permit an order that a litigation funder’s costs, expenses and remuneration be approved in advance, permitting recovery against group members irrespective of whether they had entered a funding agreement with a litigation funder, but held that it was not appropriate or necessary to make such an order in that case to ensure that justice was done, where the order was sought at a preliminary stage of the proceedings, would not be beneficial or in the best interests of group

members as a whole, and primarily benefited the named plaintiff and the funder. The court may make orders under this section closing the class that will participate in a proposed settlement in order to bring finality to proceedings, with the effect that group members will be bound by a settlement and not able to claim compensation from a defendant in respect of the issues determined by the proceedings, even if they do not receive compensation by reason of a failure to register or provide necessary information.90 The concept of class closure was described by Forrest J in Matthews v SPI Electricity Pty Ltd [2013] VSC 17 at [23] as having effect that: … a court may require group members to identify themselves by a certain point in time as having an interest in any judgment or proposed settlement. Failing a

[page 369] declaration of such interest (normally achieved by registering with a court or firm of solicitors by a certain date), any subsisting entitlement to damages of the group members relating to the claim may be extinguished.

Such an order could be made, even at a relatively early stage of proceedings, where disproportionate costs would otherwise be incurred in the conduct of the proceedings.91 In Money Max Pty Ltd (Trustee) v QBE Insurance Group Ltd [2016] FCAFC 148, the Full Court of the Federal Court of Australia held that this section allows the court to approve the conduct of a class action on a ‘common fund’ basis, allowing the funders of an open class action to recover funding charges from all class members.

CAUSATION AND DAMAGES Proof of causation Market-based causation theories

9.39 In order to establish a claim for damages under the misleading and deceptive conduct provisions92 or for continuous disclosure, the plaintiff must establish that it has suffered loss by conduct of another person in contravention of the relevant sections. That can be established by proof of individual reliance by security holders. Reliance can also be inferred in the relevant circumstances, rather than proved by direct evidence of security holders.93 Alternatively, a plaintiff could advance a ‘market-based’ or indirect causation case, arguing that the fact that the other investors constituting the market were misled gave rise to its loss. 9.40 By way of background, United States courts have long adopted the ‘fraud on the market’ theory, which avoids the need for members of a class to prove individual reliance on misleading representations, if a number of requirements are satisfied, by creating a rebuttable presumption that class members relied on the alleged misleading representations in dealing with their securities, even if they were not personally aware of the representations at the time of the transactions. That approach at least partly relies on the efficient market hypothesis, as described in Peil v Speiser 806 F 2d 1154 (2d Cir 1986) at 1160–1 as follows: The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the

[page 370] available material information regarding the company and its business … Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatement … The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stocks in such a case is no less significant than in a case of direct reliance on misrepresentations.

In Basic Inc v Levinson 485 US 224 at 241–2; 108 S Ct 978 (1988), the United States Supreme Court held that the fraud on the market theory could apply where market prices had been affected by company comments relating to merger negotiations. The court there referred to the efficient capital market hypothesis, although it noted that it did not have to determine its validity but only whether a rebuttable presumption of reliance could properly be applied, supported in part by that theory.94 The

court noted that misleading statements could therefore defraud purchasers of securities on market during the time in which the deception persisted, even if a purchaser did not directly rely on the misstatements, since the presence of the misstatements in the market would affect the price at which the securities were purchased. 9.41 The efficient capital market hypothesis95 has since come under challenge from empirical evidence and behavioural finance theory.96 The status of the fraud on [page 371] the market theory, following that challenge, was reconsidered by the United States Supreme Court in Halliburton v Erica P John Fund Inc 134 S Ct 2398 (2014). Halliburton there argued that the concept of market efficiency on which Basic was based was inconsistent with more recent evidence and that Basic should be overruled, or alternatively that a plaintiff should be required to prove that a defendant’s misrepresentation affected the stock price in order to obtain a presumption of reliance, or the defendant should be permitted to rebut the presumption of reliance with evidence of lack of price impact prior to certification of the class. The majority of the Supreme Court held that the presumption in Basic should not be overruled, and noted that that presumption rested on the modest premise that ‘market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices’ and treated market efficiency as a question of degree and a matter for proof: at 2410. The majority also rejected an argument that the fact that investors traded based on their belief that the market price did not reflect the intrinsic value of shares was inconsistent with a presumption of reliance on the market price, and observed that such an investor impliedly relied on the fact that a stock’s market price would eventually reflect relevant information, so as to profit from the transaction. The minority (Thomas J, Scalia and Alito JJ agreeing) (at 2421) noted the lesser acceptance of the efficient market hypothesis and evidence that welldeveloped markets do not uniformly incorporate information into market

prices either rapidly or accurately and would have overruled the Basic presumption.97 9.42 The United States courts require proof of several matters to give rise to the application of the fraud on the market theory, including that a defendant made material misrepresentations to the public; the relevant securities were traded in an efficient market, where the stock price fully reflects all publicly available information; the relevant misrepresentations would induce a reasonable investor to misjudge the value of the securities; and the plaintiff traded the securities between the date the misrepresentations were made and the date the true position was revealed.98 In United States law, the presumption of reliance under the fraud on the market theory is rebuttable by evidence which severs the link between an alleged misrepresentation and the price paid or received by the plaintiff, or the plaintiff’s decision to trade at the market price, including evidence that the relevant non-disclosures did not affect the market price of securities; the plaintiff would have purchased the securities at the same price had they known the information that was not disclosed to the market; or the plaintiff knew the information that was not disclosed to the market.99 The presumption may also be displaced by showing that information correcting any [page 372] misrepresentation was credibly disclosed to the market and incorporated into the market price.100 This is the necessary corollary of the fraud on the market theory since, if a market is sufficiently efficient to support the application of that theory in the first place, then it is also sufficiently efficient to incorporate any publicly available corrective information into the securities’ price, and the plaintiff will not have paid too much to purchase the securities or sold them at a discount as a result of a misrepresentation if corrective information was publicly available at the time of that purchase or sale.101 9.43 United States case law has also considered whether the fraud on the market theory can also establish a rebuttable presumption that the

defendant’s misrepresentation caused the plaintiffs’ loss. The United States Supreme Court has held that an inflated purchase price alone does not proximately cause economic loss, noting that a decline in a security’s price may reflect changed economic circumstances, changed investor expectations, new factual conditions or other events, rather than disclosure of previously concealed information.102 9.44 Australian courts have recognised the possibility that an argument analogous to the fraud on the market presumption under United States law could be put as a means of establishing causation in securities class actions.103 That presumption has not been applied by any Australian court, and it arguably should not be, where it was initially adopted in United States law to assist a plaintiff to obtain certification of the class action; there is no corresponding certification requirement in Australian class action procedures; and no reason to adopt that presumption out of the context in which it originated.104 Questions of causation are typically addressed in Australian securities class actions by wider principles of causation, including indirect causation, to which we now turn. 9.45 The question of causation under a particular statute is determined by reference to its subject, scope and purpose, although a common sense approach will generally be taken, subject to the relevant statutory provision, and the ‘but for’ test of causation may exclude causation but is not otherwise determinative.105 Earlier [page 373] authorities suggested that an indirect causation case will not be available where the relevant security holder’s investment decision is part of the causal chain, without proof of his or her individual reliance on the misrepresentation.106 The availability of an indirect or ‘market-based’ causation case was left open by Finkelstein J in approving a settlement of a class action in P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4), above (at [15]), where his Honour observed that: … the principal focus of their [the applicants’] action will be on the market-based causation theory. Under this theory, causation may be made out if it can be demonstrated

that the contraventions caused the market to inflate the price of the securities. The decision of the New South Wales Court of Appeal in Ingot Capital Investments Pty Ltd v Macquarie Equity Markets Ltd [above] suggests that it may not be possible in Australia to rely on the market-based causation theory. That case posits that it is necessary to prove reliance in cases where it is alleged that a contravention of the continuous disclosure provisions of the Corporations Act induce a plaintiff to enter into a particular transaction.

In De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) (2011) 281 ALR 454; 84 ACSR 527; [2011] FCA 645 at [63], Stone J followed Ingot Capital Investments Pty Ltd v Macquarie Equity Markets Ltd, above, observing that proof of reliance is necessary in a case where a plaintiff makes a positive decision to enter into a transaction alleged to have been induced by a misleading representation; that decision was affirmed by the Full Court of the Federal Court in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) [2012] FCAFC 28. 9.46 Several subsequent decisions left open the possibility of claims relying on market-based causation in securities class actions, both in respect of breach of the continuous disclosure provisions and in respect of prospectus liability. In Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 104 ACSR 195; [2015] FCA 149, Perram J expressed the view, obiter, that shareholders could establish causation, in respect of a company’s breach of its continuous disclosure obligations or corresponding misleading conduct by non-disclosure, without proving direct reliance on the relevant non-disclosure, and that reliance was a sufficient, but not necessary, basis for establishing causation in claims for compensation brought under ss 1317HA and 1325 of the Corporations Act arising from a failure of disclosure. His Honour noted (at [219]) the possibility that causation may be established so that C may recover loss arising from conduct where A misleads B who misleads C; that nondisclosure to the market may have the result that ‘A misleads the market (ie many B’s) which then bid up the price which then caused loss to C’; and that ‘it is artificial to speak of reliance’ in such a non-disclosure case. His Honour also observed (at [220]) that: I would accept that a party who acquires shares on a stock exchange can recover compensation for price inflation arising from a failure to disclose material

[page 374]

required by s 674 to be disclosed, so long as they are not themselves aware of the nondisclosed material.

9.47 In Caason Investments Pty Ltd v Cao (2015) 108 ACSR 576; [2015] FCAFC 94, the Full Court of the Federal Court held that a marketbased causation claim under s 729 of the Corporations Act, in respect of the issue of an allegedly misleading disclosure document, was sufficiently arguable that it should not be struck out. The majority proceeded on the basis that the trial judge had struck out the claim on the basis that marketbased causation was not reasonably arguable, and did not accept that view. Edelman J considered that the trial judge had not in fact proceeded on that basis, but also held that a market-based causation claim was reasonably arguable. His Honour described the nature of such a claim (at [154]) as follows: The concept of market based causation involves a causal relationship albeit one without reliance by the plaintiff investor on a disclosure document. The plea is that a misleading statement or omission in a disclosure document causes the market price for the securities to be inflated so that the investor purchases securities at a price which is greater than the investor would otherwise have paid. The investor then suffers loss including when the release of the omitted information or the correction of the misleading statements causes the market price of the securities to fall. None of these causal links requires the investor to rely on the disclosure document.

His Honour also observed that s 729 of the Corporations Act permitted a claim for compensation in respect of an omission from a disclosure document, where reliance would not be a necessary element; that marketbased causation claims had not been expressly rejected in any case and had gone to trial in several cases; and (at [187]) that it was at least arguable that a claim for loss under s 729(1) of the Corporations Act could rely on market-based causation. 9.48 The application of indirect causation principles to proof of loss in respect of misleading and deceptive conduct affecting securities prices was also considered in Re HIH Insurance Ltd (in liq) [2016] NSWSC 482, for the first time in a substantive judgment, although not in the context of a securities class action. That case concerned an appeal by several shareholders against a liquidator’s rejection of proofs of debt in a liquidation, by which they claimed that they suffered loss by acquiring shares in HIH Insurance Ltd (HIH) at prices inflated by misrepresentations

made in HIH’s financial accounts for the 1999 and 2000 financial years. It was common ground that those relevant accounts were misleading, and the shareholders sought to establish causation by reference to the effect of the misleading information in those accounts upon the price of HIH shares on market, without contending that they had individually relied on those accounts. 9.49 Brereton J did not there accept a rebuttable presumption of reliance where shares traded on an efficient market, analogous to the fraud on the market theory in the United States. However, his Honour accepted that causation could be established by a form of indirect or market-based causation. His Honour (at [71]) distinguished Digi-Tech (Aust) Ltd v Brand above and Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd above as cases involving the alternatives of a transaction or no transaction, as distinct from the question in HIH which was [page 375] whether a transaction would take place at a different price in the absence of the contravening conduct, and read the case law as requiring, not that an individual plaintiff has relied on the contravening conduct, but that someone in the chain of causation has done so. His Honour also observed (at [73]) that, while the misleading conduct alleged in HIH had not directly misled the plaintiff shareholders, it had ‘deceived the market (constituted by investors, informed by analysts and advisors) in which the shares traded and in which the plaintiffs acquired their shares’ and that investors who acquired shares on the ASX may reasonably assume that the market reflects an informed appreciation of a company’s position and prospects, based on proper disclosure. Those propositions may be uncontroversial, although the fact of, and extent of, any impact on the market price of misleading information will necessarily be a question of fact. His Honour also observed (at [74]) that, at least on the assumption that the effect of the misleading conduct was that the shares traded at a higher price than would otherwise have been the case, then the inevitable consequence of the contravening conduct would be that purchasers would acquire the shares

at a higher price. Whether that assumption will be established in a particular case is also a question of fact, and may depend on whether the market in the relevant securities is informationally efficient and, even in an efficient market, on the extent to which trading (including, for example, by algorithmic and high frequency traders) takes place other than by reference to the fundamental value of the securities. His Honour also observed (at [77]) that a plaintiff could establish causation, absent direct reliance, if it ‘purchased shares at a price set by a market which was inflated by the contravening conduct’ and that ‘indirect causation’ was available, and direct reliance need not be established in that case, absent any suggestion that any of the plaintiffs knew the truth about, or were indifferent to, the contravening conduct, and nonetheless proceeded to acquire their shares. 9.50 Brereton J also held (at [123]) that causation could be established if a plaintiff showed, by expert evidence or inference, that misleading conduct had distorted the market price at which it acquired the securities. That decision is therefore distinct from the application of the fraud on the market theory in the United States, to the extent that it requires that a plaintiff establish causation, albeit without the need for direct reliance, by showing by evidence that the effect of misleading conduct was that the company’s shares were trading at a higher price than would otherwise have prevailed. His Honour found that, in that case, the misstatement of HIH’s financial results had misled the body of its investors by overstating its profitability, HIH’s shares had traded at an inflated price and investors who had purchased at that inflated price had suffered loss. We will address the question of quantification of loss below. 9.51 The range of evidence typically led to establish causation in securities class actions included direct evidence of the applicant to establish individual causation; potentially evidence of large institutional or wholesale investors, including fund managers, as to their assessment of the materiality of the information; evidence from brokers, analysts, investment bankers or capital market researchers; and evidence as to whether there was a statistically significant movement in the share price that [page 376]

can be attributed to disclosure of the information, which provides some evidence of objective materiality.107

Quantification 9.52 The ordinary, but not invariable, measure of damages in cases in which a person has been induced to subscribe for or buy securities in reliance on a misrepresentation is the difference between the price paid for the securities and the real value of the securities on allotment or purchase.108 in Re HIH Insurance Ltd (in liq), above, Brereton J held that damages recoverable by shareholders which had acquired shares at an inflated price, by reason of misleading information released to the market, could be quantified by reference to the difference between the price paid by the claimants and the price which would have been paid if the misleading conduct had not occurred. 9.53 In United States class actions, plaintiffs may rely on the ‘fraud on the market theory’ (see 9.40) to quantify their loss, treating the true value of the company’s securities as being the price to which they fell after the announcement of corrective information. This approach allows shareholders to recover damages if they purchased securities during the period a security’s price had been inflated by a misstatement or omission and continued to own the securities after that misstatement or omission was corrected. Shareholders who bought shares at an ‘inflated’ price but sold before the corrective information was disclosed would not have not suffered loss, and shareholders who purchased after a corrective disclosure would also not have suffered loss. 9.54 Event studies, involving linear regression analyses which seek to determine whether information affected the price of stock and the amount of any such effect, are typically used in both United States and Australian securities class actions in order to establish whether the non-disclosure of information had an inflationary impact and thereby quantify damages.109 However, an event study cannot establish that a change in price reflected a change in the fundamental value of the underlying securities and may also be unable to separate multiple factors leading to a price change.110 Some American commentators have also argued that stock prices will overreact

to adverse corporate information and then correct themselves, so a calculation of damages made on the date of an adverse announcement will overstate the plaintiffs’ damages.111 [page 377] This proposition was implicitly accepted by the United States Congress in enacting the Private Securities Litigation Reform Act 1995 (US) which now requires that damages in security fraud cases be assessed by reference to a 90-day period after the announcement of any adverse information.112 An alternative or additional approach is to use fundamental valuation techniques, such as discounted cash flow analysis, to quantify damages.113 ___________________________ 1.

There is also a specialist liability regime for conduct ‘that relates to a disclosure document or statement within the meaning of s 953A’: that is, to Financial Services Guides, Statements of Advice and other documents provided by AFS licensees to their clients under Pt 7.7 of the Act. This is discussed in Chapter 14 below.

2.

The ACL, which is contained in Sch 2 to the Competition and Consumer Act 2010 (Cth), replaced the misleading and deceptive conduct provisions formerly located in the TPA and relevant state fair trading legislation for conduct engaged in from 1 January 2011.

3.

Clarke v Great Southern Finance Pty Ltd (2010) 80 ACSR 219; [2010] VSC 473 at [27].

4.

While the fact that their consent to be named in the disclosure document is not required to be disclosed by s 716 or s 720, where a person is named as performing a function in a professional, advisory or other capacity, the disclosure of any payments or benefits received by them is required under s 711.

5.

Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59 at [40]; Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4) [2003] I AC 959 at [20] and [39]–[40] (a view already recognised by the High Court in Hamilton v Whitehead (1988) 166 CLR 121 at 128).

6.

Cleary v Australian Co-operative Foods Ltd (No 2) (1999) 32 ACSR 701 at [54], [56] and [57]; Pico Holdings Inc v Voss [2004] VSC 263 at [157]; Genocanna Nominees Pty Ltd v Thirsty Point Pty Ltd [2006] FCA 1268 at [297]–[305].

7.

See also Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 6) (2007) 63 ACSR 1; [2007] NSWSC 124 at [1056]–[1057].

8.

Trade Practices Commission v Tubemakers of Australia Ltd (1983) 47 ALR 719 at 740.

9.

Cf Wilkinson v Katies Fashions (Aust) Pty Ltd (1986) 67 ALR 137; Gardam v George Wills & Co Ltd (1988) 82 ALR 415 (both cases on s 53(a) of the TPA).

10.

Cf Yorke v Lucas (1985) 158 CLR 661 at 666; 61 ALR 307 at 309 per Mason ACJ, Wilson, Deane and

Dawson JJ; Gardam v George Wills & Co Ltd, above at 427 per French J; The Saints Gallery Pty Ltd v Plummer (1998) 80 ALR 525. 11.

Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 107 ALR 291; John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd (1993) ATPR ¶41-249.

12.

See, for example, Campbell v Backoffice Investments Pty Ltd (2009) 73 ACSR 1; [2009] HCA 25 at [130]; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60; Dartberg Pty Ltd (as t’ee for the Pollard Children Trust) v Wealthcare Financial Planning Pty Ltd (No 2) (2009) 74 ACSR 373; [2009] FCA 934 at [40].

13.

See generally, T G Bednall and P F Hanrahan, ‘Officers’ Liability for Mandatory Corporate Disclosure: Two Paths, Two Destinations?’ (2013) 31 C&SLJ 474; A Black, ‘Directors Statutory and General Law Accessory Liability for Corporate Wrongdoing’ (2013) 31 C&SLJ 511.

14.

See, for example, Wilkinson v Feldworth (1998) 29 ACSR 642 at 668–9.

15.

R v McDonnell [1966] 1 All ER 193.

16.

Referring to Giorgianni v R (1985) 156 CLR 473 at 494 and 501; Yorke v Lucas (1985) 158 CLR 661; Smithers v Beveridge (1994) 14 ACSR 197 at 201.

17.

Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59 at [17].

18.

Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267 at [108]–[112]; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192 at [390]; Australian Securities and Investments Commission v Somerville (2009) 74 ACSR 89; [2009] NSWSC 934 at [40].

19.

Pereira v DPP (1988) 63 ALJR I at 3, cited in Re HIH Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 at [359].

20.

Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1; [2004] FCAFC 175 at [15].

21.

Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 at 207–8.

22.

Australian Building & Construction Commr v Abbott (No 4) [2011] FCA 950 at [193].

23.

cf Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd (1987) 75 ALR 271 at 279.

24.

Jobbins v Capel Court Corp Ltd (1989) 91 ALR 314.

25.

Wardley Australia Ltd v Western Australia (1992) 109 ALR 247.

26.

See Reiffel v ACN 075 839 226 Ltd (2003) 132 FCR 437; 45 ACSR 67; [2003] FCA 194; Karedis Enterprises v Antoniou (1995) 59 FCR 35; Blacker v National Australia Bank Ltd [2001] ATPR ¶41-817; Murphy v Overton Investments (2001) 112 FCR 182; [2001] FCA 500. In Reiffel, the limitation period was held to run from the time of acquisition of the investment.

27.

Halsbury’s Laws of England, 4th ed, LexisNexis, vol 28, [679], [916].

28.

Hunt & Hunt Lawyers v Mitchell Morgan Nominees (2013) 296 ALR 3; [2013] HCA 10 at [16] (French CJ, Hayne and Kiefel JJ), concerning corresponding provisions in the Civil Liability Act 2002 (NSW).

29.

Deputy Commr of Taxation v Dick (2007) 64 ACSR 61; [2007] NSWCA 190 at [15]–[20] (Spigelman CJ); Hydrocool Pty Ltd v Hepburn (No 4) (2011) 83 ACSR 652; [2011] FCA 495 at [480].

30.

Daniels v Anderson (1995) 37 NSWLR 438 at 524–5; Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183; Circle Petroleum (Qld) v Greensdale (1998) 16 ACLC 1577; Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023.

31.

Re International Vending Machines Pty Ltd [1962] NSWR 1408 at 1424; Gamble v Hoffman (1997) 24 ACSR 369 at 387.

32.

For academic commentary as to the class action regime generally and its application to securities claims, see B Murphy and C Cameron, ‘Access to Justice and the Evolution of Class Action Litigation in Australia’ (2006) 30 Melb U L Rev 399; J Donnan, ‘Class Actions in Securities Fraud in Australia’ (2000) 18 C&SLJ 82; C Waters, ‘The New Class Conflict: The Efficacy of Class Actions as a Remedy for Minority Shareholders’ (2007) 25 C&SLJ 300; P Von Nessen, ‘Australian Shareholders Rejoice: Current Developments in Australian Corporate Litigation’ (2008) 31 Hastings Int’l and Comp L Rev 647; M Legg, ‘Shareholder Class Actions in Australia: The Perfect Storm’ (2008) 31 UNSWLJ 669; K Lindgren (ed), Investor Class Actions, Ross Parsons Centre of Commercial, Corporate and Taxation Law, Sydney, 2009; J Harris, ‘What Price Investor Protection? Class Actions vs Corporate Rescue’ (2009) 17 Insolv LJ 185; M Legg, Case Management and Complex Civil Litigation, Federation Press, Sydney, 2011, Ch 9; M Legg, ‘ASIC and the Shareholder Class Action’ in M Legg (ed), Regulation, Litigation and Enforcement, Thomson Reuters (Professional), Sydney, 2011, pp 151–68; M Legg, ‘Discovery and Particulars of Group Members in Class Actions’ (2012) 36 Australian Bar Review 119; M Legg, ‘Class Action Settlements in Australia – The Need for Greater Scrutiny’ (2014) 38 Melbourne U L Rev 590; C Croft, ‘On the Brink of Regulation: the Future of Litigation Funding in Class Actions’ (2014) 88 ALJ 698.

33.

Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386; 229 ALR 58; [2006] HCA 41 at [87]–[89] per Gummow, Hayne and Crennan JJ (Gleeson CJ and Kirby J agreeing, Callinan and Heydon JJ dissenting).

34.

J Coffee, ‘Class Action Accountability: Reconciling Exit, Voice and Loyalty in Representative Litigation’ (2000) 100 Columbia LR 370; M Legg, ‘Judge’s Role in Settlement of Representative Proceedings: Lessons from United States Class Actions’ (2004) 78 ALJ 58; V Waye, ‘Conflicts of Interests between Claimholders, Lawyers and Litigation Entrepreneurs’ (2007) 19 Bond LR 225.

35.

J Donnan, ‘Class Actions in Securities Fraud in Australia’, above, p 86.

36.

Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; 74 ACSR 447; [2009] FCAFC 147.

37.

The Federal Court of Australia, Supreme Court of Victoria and Supreme Court of New South Wales have each issued practice notes dealing with class actions: see Federal Court of Australia Practice Note CM17, Representative Proceedings Commenced under Pt IVA of the Federal Court of Australia Act 1976 (Cth); Supreme Court of Victoria Practice Note 10 of 2015, Conduct of Group Proceedings (Common Law Division), Practice Note 9 of 2010, Conduct of Group Proceedings; Supreme Court of New South Wales Practice Note SC Gen 17, Supreme Court Representative Proceedings.

38.

Federal Court of Australia Act 1976 (Cth) s 33C; Supreme Court Act 1986 (Vic) s 33C; Civil Procedure Act 2005 (NSW) s 157.

39.

Finance Sector Union of Australia v Commonwealth Bank of Australia (1999) 89 FCR 417; [1999] FCA 59; Sreika v Cardinal Financial Services Ltd [2000] FCA 1647; Watson v AWB Ltd [2007] FCA 1367, where Gyles J doubted the correctness of that proposition but followed it where he was not satisfied those decisions were clearly wrong; Wingecarribee Shire Council v Lehman Brothers Australia Ltd (No 3) [2010] FCA 747 at [6].

40.

Meaden v Bell Potter Securities Ltd (No 6) (2013) 233 FCR 81; [2013] FCA 1176.

41.

Philip Morris (Aust) Ltd v Nixon (2000) 170 ALR 487; [2000] FCA 229; King v GIO Australia Holdings Ltd (2000) 174 ALR 715; 100 FCR 209; [2000] FCA 617; V Morabito, ‘Class Actions against Multiple Respondents’ (2003) 30 FL Review 295.

42.

Civil Procedure Act 2005 (NSW) s 158(2); Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply Authority t/as Seqwater (No 5) [2015] NSWSC 1771 at [10].

43.

King v GIO Australia Holdings Ltd, above at [7]; Johnstone v HIH Insurance Ltd [2004] FCA 190.

44.

Guglielmin v Trescowthick (No 2) (2005) 220 ALR 515; [2005] FCA 138 at [31].

45.

Zhang De Yong v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384 at 404.

46.

Guglielmin v Trescowthick (No 2), above at [48]–[49].

47.

Wong v Silkfield Pty Ltd (1999) 199 CLR 255 at 266–7; [1999] HCA 48 at [28]; Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply Authority t/as Seqwater (No 5), above at [14].

48.

Bright v Femcare Ltd (2002) 195 ALR 574; [2002] FCAFC 243 at [133]–[134]; see also Jameson v Professional Investment Services Pty Ltd (2009) 72 NSWLR 281; 253 ALR 515; [2009] NSWCA 28; Brisbane Broncos Leagues Club v Alleasing Finance Australia Pty Ltd [2011] FCA 106.

49.

Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27 at [42]; Rodriguez & Sons Pty Ltd v Queensland Bulk Water Supply Authority t/as Seqwater (No 5), above at [15].

50.

Federal Court of Australia Act 1976 (Cth) s 33H; Supreme Court Act 1986 (Vic) s 33H; Civil Procedure Act 2005 (NSW) s 161.

51.

Bright v Femcare Ltd, above at [126]; Petrusevski v Bulldogs Rugby League Club Ltd [2003] FCA 61 at [19]–[20], [23], [25]; Johnstone v HIH Insurance Ltd, above.

52.

Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd [2007] FCAFC 200; (2007) 164 FCR 275 at [142].

53.

For commentary as to this issue, see P Cashman, ‘Class Actions on Behalf of Clients: Is this Permissible?’ (2006) 80 ALJ 738; V Morabito, ‘Class Actions Instituted only for the Benefit of Clients of the Class Representative’s Solicitors’ (2007) 29(1) Syd LR 5; M Legg, ‘Institutional Investors and Shareholder Class Actions: The Law and Economics of Participation’ (2007) 81 ALJ 478.

54.

Civil Procedure Act 2005 (NSW) s 166(2).

55.

For consideration of the position in the United Kingdom, see R Mulheron, ‘Third Party Funding and Class Actions Reform’ (2015) 131 LQR 291.

56.

Federal Court of Australia Act 1976 (Cth) s 33L; Supreme Court Act 1986 (Vic) s 33L; Civil Procedure Act 2005 (NSW) s 164.

57.

Federal Court of Australia Act 1976 (Cth) s 33M; Supreme Court Act 1986 (Vic) s 33M; Civil Procedure Act 2005 (NSW) s 165.

58.

Federal Court of Australia Act 1976 (Cth) s 33N; Supreme Court Act 1986 (Vic) s 33N; Civil Procedure Act 2005 (NSW) s 166. The class action procedure in the Supreme Court of New South Wales also allows the court to order that a proceeding not continue as a class action if the representative party is not able adequately to represent the interests of group members, for example, as a result of a conflict of interest: Civil Procedure Act 2005 (NSW) s 166(1)(d).

59.

Bright v Femcare Ltd, above at [128].

60.

Johnstone v HIH Insurance Ltd, above.

61.

Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd, above at [4]–[5], [93].

62.

Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd, above.

63.

Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (1998) 84 FCR 512;

[1998] FCA 819; Guglielmin v Trescowthick (No 2), above at [71]. 64.

Federal Court of Australia Act 1976 (Cth) s 33P; Supreme Court Act 1986 (Vic) s 33P; Civil Procedure Act 2005 (NSW) s 167.

65.

Federal Court of Australia Act 1976 (Cth) s 33J; Supreme Court Act 1986 (Vic) s 33J; Civil Procedure Act 2005 (NSW) s 162.

66.

Federal Court of Australia Act 1976 (Cth) s 33X; Supreme Court Act 1986 (Vic) s 33X; Civil Procedure Act 2005 (NSW) s 175; King v GIO Australia Holdings Ltd, above at [15]–[16].

67.

Federal Court of Australia Act 1976 (Cth) s 33Y; Supreme Court Act 1986 (Vic) s 33Y; Civil Procedure Act 2005 (NSW) s 176.

68.

Jarra Creek Central Packing Shed Pty Ltd v Amcor Ltd [2008] FCA 575.

69.

Harrison v Sandhurst Trustees Ltd [2011] FCA 541 at [26]; Inabu Pty Ltd v Leighton Holdings Ltd [2014] FCA 622 at [9].

70.

Inabu Pty Ltd v Leighton Holdings Ltd above at [12].

71.

Federal Court of Australia Act 1976 (Cth) s 33ZB; Supreme Court Act 1986 (Vic) s 33ZB; Civil Procedure Act 2005 (NSW) s 179; see also V Morabito, ‘Class Actions: The Right to Opt Out under Part IVA of the Federal Court of Australia Act 1976 (Cth)’ (1994) 19 MULR 615.

72.

An Anshun estoppel arises where a party is not permitted to raise a matter in subsequent proceedings if it ought reasonably to have raised the matter in earlier proceedings between the same parties: Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; Ekes v Commonwealth Bank of Australia (2014) 313 ALR 665; [2014] NSWCA 336.

73.

Timbercorp Finance Pty Ltd (in liq) v Collins [2015] VSC 461; aff’d [2016] VSCA 128.

74.

Federal Court of Australia Act 1976 (Cth) s 33V; Supreme Court Act 1986 (Vic) s 33V; Civil Procedure Act 2005 (NSW) s 173.

75.

Federal Court of Australia Act 1976 (Cth) s 33X(4); Supreme Court Act 1986 (Vic) s 33X(4); Civil Procedure Act 2005 (NSW) s 175(4).

76.

Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR 459; [2000] FCA 1925 at [19]; Verschuur v Vynotas Pty Ltd [2004] VSC 130; M Legg, ‘Judge’s Role in Settlement of Representative Proceedings: Lessons from United States Class Actions’, above; V Morabito, ‘An Australian Perspective on Class Action Settlements’ (2006) 69 MLR 347.

77.

Haslam v Money for Living (Aust) Pty Ltd (admin appt) [2007] FCA 897 at [19]–[20].

78.

Darwalla Mining Co Pty Ltd v F Hoffman-La Roche Ltd (No 2) (2006) 236 ALR 322; [2006] FCA 1388 at [34]–[41], [50].

79.

Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 142 ALR 177 at 184; 22 ACSR 539; Lopez v Star World Enterprises Pty Ltd [1999] FCA 104 at [15]; Williams v FAI Home Security Pty Ltd (No 4), above at [19]; Darwalla Milling Co Pty Ltd v F Hoffmann-La Roche Ltd (No 2), above at [31]; Taylor v Telstra Corporation Ltd [2007] FCA 2008 at [56]; Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19 at [10]; P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) [2010] FCA 1029; Oasis Fund Management Ltd & Royal Bank of Scotland NV [2012] NSWSC 532 at [38]; De Brett Seafood Pty Ltd v Qantas Airways Ltd (No 7) [2015] FCA 979 at [7]; Federal Court of Australia Practice Note CM17, Representative Proceedings Commenced under Pt IVA of the Federal Court of Australia Act 1976, [11.1]–[11.2]; M Legg, ‘Class Action Settlements in Australia — The Need for Greater Scrutiny’, above; D Klineberg, ‘Approval of Settlements of Representative Proceedings’ (2015) 2 Australian Alternative Dispute Resolution Law Bulletin 56.

80.

Wotton v State of Queensland [2009] FCA 758 at [40]; P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4), above at [4].

81.

Richards v Macquarie Bank Ltd (No 4) [2013] FCA 438; Australian Securities and Investments Commission v Richards [2013] FCAFC 89; Wepar Nominees Pty Ltd v Schofield (No 2) (2014) 99 ACSR 234; [2014] FCA 225 at [15].

82.

P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4), above; the last factor was also emphasised in Kirby v Centro Properties Ltd (No 6) [2012] FCA 650 at [4], [14].

83.

Medtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626; [2013] FCA 1163.

84.

Dorajay Pty Ltd v Aristocrat Leisure Ltd, above; P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) above at [27]; Medtech Engineering Pty Ltd v GPT Management Holdings Ltd (No 2) above at [55]– [61]; contrast Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 (permitting payment of that amount to the litigation funder).

85.

King v AG Australia Holdings Ltd, above at [40].

86.

King v AG Australia Holdings Ltd, above at [40]–[44]; King v AG Australia Holdings Ltd [2002] FCA 1560; Courtney v Medtel Pty Ltd (2002) 122 FCR 168; [2002] FCA 957 at [67]–[69].

87.

Federal Court of Australia Act 1976 (Cth) s 33ZF; Supreme Court Act 1986 (Vic) s 33ZF; Civil Procedure Act 2005 (NSW) s 183.

88.

McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1 at 4; Earglow Pty Ltd v Newcrest Mining Ltd (2015) 106 ACSR 49; [2015] FCA 328 at [33].

89.

Courtney v Medtel Pty Ltd, above at [52]; Earglow Pty Ltd v Newcrest Mining Ltd, above at [35].

90.

McMullin v ICI Australia Operations Pty Ltd (No 6), above; Williams v FAI Home Security Pty Ltd (No 5) [2001] FCA 399; Thomas v Powercor Australia Ltd [2011] VSC 614 at [34]–[36]; Matthews v SPI Electricity Pty Ltd (Ruling number 13), above; Inabu Pty Ltd v Leighton Holdings Ltd, above at [17]. The Supreme Court of Victoria also has a specific power to make a class closure order under s 33ZG of the Supreme Court Act 1986 (Vic): Matthews v SPI Electricity Pty Ltd (Ruling number 13), above at [14].

91.

Winterford v Pfizer Australia Pty Ltd [2012] FCA 1199 (declining to make such an order); Lam v Rolls Royce plc (No 3) [2015] NSWSC 83 (making such an order).

92.

A person who suffers loss as a result of a contravention of the financial services civil penalty provisions, including a contravention of the continuous disclosure obligation under Corporations Act s 674, can recover damages under s 1317HA of the Corporations Act: see 7.25. A person who suffers loss or damage by conduct of another person in contravention of the prohibition on misleading and deceptive conduct under Corporations Act s 1041H may recover damages under s 1041I: see 9.3–9.4. A person who suffers loss or damage by conduct that contravenes the prohibition on misleading or deceptive conduct under ASIC Act s 12DA may recover damages under ASIC Act s 12GF: see 9.3–9.4.

93.

Smith v Chadwick (1884) 9 App Cas 187 at 196; Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 at 236.

94.

Basic Inc v Levinson 485 US 224 at 242; 108 S Ct 978 (1988).

95.

The genesis of the efficient capital market hypothesis is in empirical evidence that stock prices follow a ‘random walk’, such that successive price changes are statistically independent and past price changes cannot be used to predict future price changes. The efficient capital market hypothesis provides an explanation for that empirical evidence, suggesting that the interaction of a large number of buyers and sellers of securities (even where there may be real differences as to the extent and

reliability of information held by particular traders) and the efforts of investors in analysing available information result in securities prices which fully reflect publicly available information about the securities, and react virtually instantaneously to new information about those securities. The assumptions underlying the efficient capital markets hypothesis include that: investors are rational, and accurately value a company’s securities having regard to available information; the costs of searching and processing information are low; any errors made by investors in valuing securities are random and cancel each other out; and, if securities would otherwise be mispriced, arbitrage trading moves the security prices to accord with fundamental value. For a selection of the voluminous academic literature, see C P Saari, ‘The Efficient Capital Market Hypothesis, Economic Theory and the Regulation of the Securities Industry’ (1977) 29 Stanford LR 1031; R Gilson and R Kraakman, ‘The Mechanisms of Market Efficiency’ (1981) 70 Va L Rev 549; W Wang, ‘Some Arguments that the Stock Market is Not Efficient’ (1986) 19 U C Davis LR 341; M Van de Voorde, ‘The Fraud on the Market Theory and the Efficient Market Hypothesis: Applying a Consistent Standard’ (1988) 14 J of Corporation Law 443; L Cunningham, ‘From Random Walks to Chaotic Crashes: The Linear Geneology of the Efficient Capital Market Hypothesis’ (1994) 62 George Washington LR 546 at 559– 60; T A Paredes, ‘Blinded by the Light: Information Overload and its Consequences for Securities Regulation’ (2003) 81 Washington University LQ 417; R J Gilson and R Kraakman, ‘The Mechanisms of Market Efficiency Twenty Years Later: The Hindsight Bias’ (2003) 28 J Corp L 715; E Raykovski, ‘Continuous Disclosure: Has Regulation Enhanced the Australian Securities Market?’ (2004) 30 Monash University LR 269 at 270–1; B Cornell and J Rutten, ‘Market Efficiency, Crashes and Securities Litigation’ (2006) 81 Tulane L Rev 443; G North, ‘Efficiency, Fairness, Irrationality: Incompatible or Complementary?’ (2009) 24 BFLR 311. 96.

As to behavioural finance theory, see A Schleifer, Inefficient Markets: An Introduction to Behavioural Finance, Oxford University Press, Oxford, 2000; D Langevoort, ‘Taming the Animal Spirits of the Stock Markets: A Behavioral Approach to Securities Regulation’ (2002) 97 NWU L Rev 135; L Stout, ‘The Mechanisms of Market Inefficiency: An Introduction to the New Finance’ (2003) 28 J Corp L 635; R Shiller, Irrational Exuberance, 2nd ed, Princeton University Press, 2005; L Ribstein, ‘Fraud on a Noisy Market’ (2006) 10 Lewis & Clark L Rev 137; G Walker, ‘Securities Regulations, Efficient Markets and Behavioural Finance: Reclaiming the Legal Genealogy’ (2006) 36 Hong Kong LJ 481.

97.

For commentary, see J Fisch, ‘The Trouble with Basic: Price Distortion after Halliburton’ (2013) 90 Wash U L Rev 895; M Legg, J Emmerig and G Westgarth, ‘US Supreme Court Revises Fraud on the Market Presumption: Ramifications for Australian Shareholder Class Actions’ (2015) 43 ABLR 448 at 450.

98.

Cammer v Bloom 711 F Supp 1264 at 1285–7 (DNJ 1989); Re Polymedica Corp Securities Litigation 432 F 3d 1 (1st Cir 2005); M Legg and R Schaffer, ‘Sons of Gwalia Ltd v Margaretic: Encouraging Shareholders’ Claims and the Fraud on the Market Theory’ (2007) 35 ABLR 390 at 395.

99.

Basic Inc v Levinson, above at 248–9; Peil v Speiser, above at 1161; Fine v American Solar King Corporation 919 F 2d 290 at 299 (5th Cir 1990); P Dawson Nominees Pty Ltd v Multiplex Ltd, above at [11].

100. Re Apple Computer Sec Litig 886 F 2d 1109 at 1114–15 (9th Cir 1989); Roots Partnership v Lands End Inc 965 F 2d 1411 (7th Cir 1992); M Kaufman, ‘At a Loss: The Supreme Court and Causation under the Federal Securities Laws’ (2005) 2 NYUJL & Bus 1 at 10. 101. N Carden, ‘Comments, Implications of the Private Securities Litigation Reform Act of 1995 for Judicial Presumptions of Market Efficiency’ (1998) 65 U Chi L Rev 879 at 894–5. 102. Dura Pharmaceuticals, Inc v Broudo 544 US 336; 125 S Ct 1627 (2005). 103. P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 242 ALR 111; 25 ACLC 1192; [2007] FCA 1061 at

[10]. 104. M Legg and R Schaffer, ‘Sons of Gwalia Ltd v Margaretic: Encouraging Shareholders’ Claims and the Fraud on the Market Theory’, above at 396. 105. Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; [1998] HCA 69 at [42]; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525; [1992] HCA 55; Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA 69 at [28], [49]; R Drinnan and J Campbell, ‘Causation in Securities Class Actions’ (2009) 32 UNSWLJ 928; J Beach, ‘Class Actions: Some Causation Questions’ (2011) 85 ALJ 579; G Craddock, ‘Causation in Securities Litigation’ (2012) 86 ALJ 813; M Legg, J Emmerig and G Westgarth, ‘US Supreme Court Revises Fraud on the Market Presumption: Ramifications for Australian Shareholder Class Actions’ above at 454; J Argent, ‘Requiring Proof of Individual Reliance to Establish Causation in Disclosure-based Shareholder Class Actions: The Role of Principle and Policy’ (2016) 34 C&SLJ 87. 106. Digi-Tech (Australia) Ltd v Brand (2004) 62 IPR 184; ATPR ¶46-248; [2004] NSWCA 58 at [158]– [159]; Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; 68 ACSR 595; [2008] NSWCA 206. 107. Earglow Pty Ltd v Newcrest Mining Ltd, above at [84]. 108. Potts v Miller (1940) 64 CLR 282 at 289 per Starke J; at 297 per Dixon J; at 307 per Williams J; Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 at 220; HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640. There are some cases in which this rule will not be the most appropriate measure of a plaintiff’s loss; for example, if a misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset, or the plaintiff has been locked into the property as a result of a fraud: Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254. 109. Earglow Pty Ltd v Newcrest Mining Ltd, above at [87]. 110. W Fisher, ‘Does the Efficient Market Theory Help Us to Do Justice in a Time of Madness?’ (2005) 54 Emory LJ 843. 111. B Lev and M de Villiers, ‘Stock Price Crashes and 10b-5 Damages: A Legal, Economic and Policy Analysis’ (1994) 47 Stan L Rev 7; N Carden, ‘Comment, Implications of the Private Securities Litigation Reform Act of 1995 for Judicial Presumptions of Market Efficiency’ (1998) 65 U Chi L Rev 879 at 894–5; J Oldham, ‘Taking “Efficient Markets” out of the Fraud on the Market Doctrine after the Private Securities Litigation Reform Act’ (2003) 97 NW U L Rev 995 at 1027. 112. The Private Securities Law Reform Act 1995 (US) s 101, 15 USC s 78u-4(e)(1) provides that damages in securities class actions may generally not exceed the difference between the purchase or sale price paid by a plaintiff and the mean trading price of the security during the 90-day period beginning on the date when information correcting the misstatement or omission that is the basis for the proceedings is disseminated to the market. 113. Litton Industries Inc v Lehman Bros Kuhn Loeb Inc 709 F Supp 438 at 447 (SDNY 1989), rev’d on other grounds: 967 F 2d 742 (2d Cir 1992); Viacom International v Icahn 946 F 2d 998 at 1000–1 (2d Cir 1991); B Cornell and J Rutten, ‘Market Efficiency, Crashes and Securities Litigation’ (2006) 81 Tulane L Rev 443.

[page 379]

Part 3 Markets

[page 381]

Chapter 10 MARKET INFRASTRUCTURE PROVIDERS Licensing of Financial Markets Introduction When a licence to operate a financial market is required Jurisdictional scope of licensing requirements Exemptions from licensing requirements Criteria for grant of Australian market licence Grant of licence to overseas market operators Obligations of Australian market licensees Content, legal effect and enforcement of operating rules and procedures of licensed markets Powers of the Minister and ASIC in relation to market licensees Conditions on a licence and variation, suspension and cancellation of licences Self-listing of Markets Licensing of Clearing and Settlement Facilities When a licence to operate a clearing and settlement facility is required Obligations of Australian clearing and settlement facility licensees Content, legal effect and enforcement of operating rules and procedures of licensed clearing and settlement facilities Powers of the Minister and ASIC in relation to clearing and settlement facilities Conditions on a licence and variation, suspension and cancellation of clearing and settlement facility licences Limits on Involvement with Licensees

10.1 10.1 10.6 10.11 10.12 10.13 10.14 10.15 10.18 10.19 10.20 10.21 10.22 10.22 10.28 10.31

10.32 10.33 10.36

Compensation Arrangements for Financial Markets Approved Compensation Arrangements under Div 3

10.37 10.38 [page 382]

Claims against the National Guarantee Fund When compensation is available from the National Guarantee Fund Application to the court if a claim is disallowed Provisions common to compensation arrangements under Div 3 and to the National Guarantee Fund Regulation of Derivative Transactions and Derivative Trade Repositories International developments Australian regulation of derivative transactions and derivative trade repositories

10.39 10.40 10.41 10.42 10.43 10.43 10.44

LICENSING OF FINANCIAL MARKETS Introduction 10.1 In this chapter we deal first with the requirements for licensing of financial markets and clearing and settlement (CS) facilities (see 10.29) under Pts 7.2 and 7.3 of the Corporations Act 2001 (Cth) (Corporations Act); second, with limits on voting power for prescribed licensees and the need for individuals involved in market and CS facilities to be fit and proper persons under Pt 7.4; third, with compensation regimes for financial markets under Pt 7.5; and, fourth, with the regulation of derivative transactions and derivative trade repositories. Chapter 11 deals with market integrity rules and market supervision, and Chapter 12 with the enforcement of the Australian Securities Exchange (ASX) Listing Rules. Before turning to the details of the licensing regime for market providers, we should say something further as to the role of organised markets. Capital markets are made up of primary (or initial issue) and secondary (or

dealing) markets.1 A secondary market, in the form of an organised exchange, allows trading in and price discovery for securities that were previously issued in the primary market, seeking to minimise the price impact of transactions and other transaction costs; and typically also provides associated clearing and settlement facilities, generally though a clearing house on a net basis and a mechanism for reporting of trades to promote market transparency.2 Regulatory issues in respect of organised markets include the extent of market integrity, efficiency and transparency; the quality of order handling and trade execution by market participants; the extent and timeliness of trade reporting; systemic risk arising from clearing and settlement failure; and the risk of fragmentation of liquidity between competing markets. As we will see below, [page 383] developments in technology, more complex trading strategies of market participants, mechanisms for direct market access by traders and the development of alternative trading venues give rise to significant challenges for markets regulation.

Purpose of licensing market providers 10.2 The licensing regime for market providers under Pt 7.2 of the Corporations Act is directed to protecting market users, and enhancing market integrity and stability in the financial system.3 Other mechanisms used to achieve these purposes include supervision by the Australian Securities and Investments Commission (ASIC) of market licensees’ compliance with their obligations, the regime for ministerial disallowance of changes to the operating rules for licensed markets, and obligations imposed directly on financial services licensees: see Chapter 11.4 ASIC has identified several objectives of the licensing of financial markets and noted the manner in which Pt 7.2 of the Corporations Act achieves those objectives as follows: Table 10.1: Objectives of licensing financial markets

Objective Market users should be able to use a market on an informed basis. Market users can be confident that the market operates fairly.

Market users should be confident about market participants, including their dealings with their clients, their compliance with the law and the market’s operating rules and their financial soundness.

How Pt 7.2 achieves that objective Part 7.2 promotes these objectives by requiring a market operator to: ensure that the market is fair, orderly and transparent; monitor the conduct of listed entities and participants in, or in relation to, the market and enforce compliance with market operating rules; and notify ASIC of suspected significant breaches of the law or the market’s operating rules.5 Part 7.2 promotes this objective by requiring a market operator to: ensure that the market is fair, orderly and transparent; monitor the conduct of participants in, or in relation to, its market and enforce compliance with the market’s operating rules; notify ASIC of disciplinary action against a participant, suspected significant breaches of the law or the market’s operating rules by a participant or a participant’s inability to meet its obligations as a financial services licensee; and have appropriate compensation arrangements in relation to clients’ money and other property held by market participants.6 [page 384]

Objective Objectives as to market supervision, market stability and clearing and settlement.

How Pt 7.2 achieves that objective Part 7.2 promotes this objective by requiring a market operator, among other things, to: ensure that the

market is fair, orderly and transparent; have adequate arrangements and resources to supervise the market and for handling conflicts of interest; have sufficient financial, technological, human and other resources to operate the market properly; and have adequate clearing and settlement arrangements.7

Developments in market regulation 10.3 From 1 August 2010, ASIC assumed responsibility for supervision of certain aspects of trading by market participants on licensed markets under the Corporations Amendment (Financial Market Supervision) Act 2010 (Cth). On 29 April 2011 ASIC introduced the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (see Chapter 11) and on 4 May 2011 Chi-X Australia Pty Ltd (Chi-X) was granted a licence to operate a market providing secondary market trading services in ASXquoted equity market products in competition with the ASX. The introduction of competing markets raises challenges for market regulation, since it may be more difficult to detect market manipulation (see Chapter 16) and trading by intermediaries on the knowledge of client trades (‘front running’: see 17.28) where trading occurs on more than one market.

Alternative trading systems and ‘dark’ trading venues 10.4 Technological developments have allowed increased opportunities for alternative trading systems, particularly crossing networks which allow matching of buy and sell orders rather than routing them to an organised exchange, and off-market trading as an alternative to trading securities on the primary regulated markets such as the ASX and Chi-X. ‘Dark’ trading venues8 have also developed as traders seek to avoid the risk that pre-trade publication of trading information by trading venues will allow other traders (and particularly high frequency traders) to trade against or in front of pre-trade transparent orders, despite the public benefit of such transparency in supporting price formation and best execution.9 These

developments may promote competition between trading venues and promote lower transaction costs, but they also raise challenges for transparency, price discovery and market liquidity. Alternative trading systems and dark trading venues involve a risk of diversion of liquidity from the primary markets and a consequential increase [page 385] in the cost of trading for retail investors on those exchanges, a loss of transparency if trades on them are not made transparent, and risks of conflicts of interest if an intermediary that operates the venue also trades in it or allows trading preference to some participants over other participants in the venue.10 ASIC has considered the position in respect of dark venues in Australia in several reports11 and trading in dark trading venues is subject to the requirements specified in the ASIC Market Integrity Rules (Competition), which allow exceptions from pre-trade transparency for block trades of specified sizes and trades with meaningful price improvement over the price in the transparent markets, and also impose requirements as to posttrade reporting and disclosure by operators of crossings systems venues: see Chapter 11. The European Union has also extended regulation to alternative trading venues under its Markets in Financial Instruments Directive (MiFID), which are treated as ‘multilateral trading’ facilities and may be undertaken by an investment firm, subject to specified obligations. 12

Direct market access and high frequency trading 10.5 Other challenges to regulation of market providers and markets include the risk of trading disruptions or market misconduct arising from direct market access provided by market participants to clients,13 high frequency trading and algorithmic trading activities. IOSCO identified regulatory principles applicable to direct electronic market access in August 2009, including that there should be a binding contract between the intermediary and a customer which is given direct

market access; the intermediary should retain responsibility for all orders entered under its authority; the customer’s identity should be disclosed to market authorities on request to facilitate surveillance; pre-trade and posttrade information should be provided; and there should be systems for the management of risks to fair and orderly trading, position and credit limits and operational and technical capabilities to manage risks. These matters are addressed in ASIC’s Market Integrity Rules: see Chapter 11. [page 386] High frequency trading14 and algorithmic trading using computer-driven trading decisions are also now significant features of Australian and international equity markets. Such trading may promote liquidity and price discovery, but has risks including the risk of withdrawal of high frequency traders in volatile market conditions, operational failure and the possibility that high-frequency trades involve poor quality liquidity or increase volatility.15 ASIC has considered the impact of high frequency trading in the Australian markets in several reports16 and has noted that the level of high frequency trading in Australia’s equity markets had remained steady, at about 27% of total turnover, although high frequency trading has also grown substantially in the futures market. ASIC has also recognised concerns as to the possibility of predatory trading,17 market noise including excessive order entry and cancellation, and high frequency trading which may contribute to price volatility and impose costs on other market users, although it also noted that some research indicates that such trading may create better prices and contribute to price formation and expressed the view that such trading is not a dominant driver of transaction costs.18 ASIC has also taken several steps to address risks of market volatility and misconduct which may arise from (although not only from) high frequency and algorithmic trading, including introducing extreme price movement rules for the ASX and Chi-X in November 2012, suspicious activity reporting rules in January 2013, [page 387]

enhanced data reporting rules in October 2013 and additional rules as to automated order processing systems in May 2014. The European Union has also extended its Markets in Financial Instruments Directive (MiFID) to high frequency traders.

When a licence to operate a financial market is required Scope of licensing requirement 10.6 In this section we deal with the licensing requirements for financial markets under ss 791A and 791B of the Corporations Act and the associated concepts of ‘financial market’, ‘facility’, ‘through which’, ‘offer’ and ‘invitation’. A person may only operate, or hold out that it operates, a financial market in the jurisdiction if it has an Australian market licence that authorises it to operate the market in the jurisdiction, or is exempt from the operation of Pt 7.2: s 791A. A contravention of s 791A is a strict liability offence. A person is prohibited from holding out that it has an Australian market licence, or that the operation of a financial market by that person in the jurisdiction is authorised by such a licence, or that a financial market is exempt from the operation of Pt 7.2, or that the person is a participant in a licensed market, if that is not the case: s 791B.

What is a financial market? 10.7 The term ‘financial market’ is defined as a ‘facility through which offers’ to acquire or dispose of financial products are regularly made or accepted; or ‘offers or invitations’ are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in the making of offers to acquire or dispose of financial products or the acceptance of such offers: s 767A(1).

What is a facility?

10.8 The term ‘facility’ is not separately defined. An integrated infrastructure on which the relevant offers or invitations are made would constitute such a facility.19 An integrated facility may constitute a financial market even if its component parts do not do so when considered in isolation, and factors which may indicate that a number of component parts constitute a single facility include that those component parts are owned or controlled by the same entity or are part of the same corporate group, or that those component parts together enable the making or acceptance of offers or invitations and no component part is a regulated market.20 In order to fall within the definition of ‘financial market’, a facility must be one ‘through which’ the relevant offers or invitations are made or accepted. It is not intended that general communication services be regulated as financial markets.21 ASIC has expressed the view that the phrase ‘through which’ should be construed narrowly and that a facility is only a financial market if the offers or invitations are [page 388] made or accepted by means of that facility, in the sense that the offers or invitations are actually made on that facility.22

Examples 10.9 Whether conduct amounts to operating a financial market will require a determination of whether the elements specified in s 767A(1) (see 10.7) are present. For example, ASIC Regulatory Guide (RG) 172 gives an example of an internet portal which hosts advertisements of licensed advisers, brokers, fund managers and market operators, where the internet portal contains a prominent disclaimer indicating that its operator does not endorse services or markets which may be accessed through the site, that portal is clearly separated from linked websites, and the operator of the portal does not exercise control over the content of material on it other than to remove material which it considers may be illegal or defamatory. ASIC expresses the view that such an internet portal operator is not

operating a financial market, since offers or invitations are not made through the facility operated by that operator, but rather on the financial markets that may be accessed through that portal.23 Conversely, ASIC expresses the view that, if a person operates an internet site where licensed dealers indicate their willingness to deal in financial products or provide firm prices for financial products, and that site permits investors to submit price inquiries concerning financial products listed on that site which are then forwarded to those dealers, or permits investors viewing it to indicate interest in a dealer’s firm price posted on the site which is then notified to the dealer, that person would be operating a financial market (being a facility through which offers or invitations are made) even if the relevant contracts were negotiated directly between the investor and dealer.24

Other licensing requirements 10.10 The holder of an Australian market licence must also obtain an Australian CS facility licence before it can operate a CS facility: see 10.22ff. A market licensee does not require any additional licence to provide financial services that are incidental to its market operation activities: s 911A(2)(d). However, a market licensee would also be required to hold an Australian financial services licence (AFS licence) if it provided financial services which could not be characterised as incidental to its market operation activities: see 13.2ff. An Australian CS facility licence could be included in the same document as an Australian market licence: s 795D.

Jurisdictional scope of licensing requirements 10.11 Section 791A prohibits the operation of a financial market ‘in this jurisdiction’ unless the operator has the relevant licence or the market is exempt. A financial market is taken to be operated ‘in this jurisdiction’ if it is operated by a body corporate that is registered under Ch 2A: s 791D(1); and see 11.2. A financial market conducted by a body corporate which is registered in Australia is therefore

[page 389] taken to operate in the jurisdiction, even if its activities are offshore. The purpose of this extension is to prevent Australia’s reputation as a global financial centre being compromised by operators of markets which incorporate in Australia to operate elsewhere.25 That provision does not limit the circumstances in which a financial market is operated in the jurisdiction for the purposes of Ch 7: s 791D(2). ASIC has expressed the view that a financial market will also be operated in Australia if it is located in Australia, in that it has a trading floor in Australia or all or a significant part of the market infrastructure is located in Australia; or the market has one or more participants26 in Australia and is targeted at Australian investors.27

Exemptions from licensing requirements 10.12 A person’s making or accepting offers or invitations to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only, does not constitute ‘operating’ a financial market for the purposes of Ch 7, unless the regulations specify circumstances in which such conduct constitutes operating a financial market and the person’s conduct occurs in those circumstances: s 767A(2) (a). This provision is intended to exclude offers or invitations made or accepted in circumstances involving direct negotiation between parties each of whom accepts the credit risk of the other, and will exclude transactions which are typically undertaken on the ‘over the counter’ market.28 A person conducting treasury operations between related bodies corporate; a licensed auctioneer conducting an auction of forfeited shares; and any other conduct of a kind prescribed by regulations does not constitute ‘operating’ a financial market for the purposes of Ch 7: s 767A(2)(b)–(d). The Minister may also exempt a particular financial market or type of financial market from the requirement to hold an Australian market licence under Pt 7.2, and that exemption may be subject to conditions: s 791C. This exemption provision will be used in limited circumstances; for example, in relation to a facility where there is no policy reason to regulate the market.29

Criteria for grant of Australian market licence 10.13 A body corporate may apply for an Australian market licence by lodging an application with ASIC that includes information required by the regulations; is accompanied by any documents required by the regulations; and complies with the requirements of s 881B relating to compensation arrangements (see 10.38): [page 390] s 795A(1). The information and documents required as part of an application for an Australian market licence are specified in Corporations Regulations 2001 (Cth) regs 7.2.11–7.2.12. Section 795B(1) provides that the Minister may grant an Australian market licence if he or she is satisfied of certain matters, including that: the applicant will comply with the obligations that will apply if the licence is granted (see s 792A and 10.15); the applicant has adequate arrangements for operating the market and monitoring compliance with the market’s operating rules; the applicant has adequate clearing and settlement arrangements for transactions effected through the market, if the Minister considers that it should have such arrangements; neither s 881D(2) nor s 882A(2) (relating to compensation arrangements) requires the Minister to reject the application (see 10.38); no unacceptable control situation is likely to result if the application is granted; and no disqualified individual appears to be involved in the applicant (see 10.36). The Minister is also required to have regard to specified matters in deciding whether to grant an Australian market licence under s 795B: s 798A(1). Those matters are: the structure or proposed structure of the market;

the nature of the activities conducted or proposed to be conducted on the market; the size or proposed size of the market; the nature of the financial products dealt with or proposed to be dealt with on the market; the participants or proposed participants in the market, and whether those participants will be providing financial services to other persons, will acquire or dispose of financial products as retail clients or as wholesale clients, and will also be participants in any other financial market; the technology used or proposed to be used in the operation of the market; whether it would be in the public interest to grant the licence; and any relevant advice received from ASIC. Matters relevant to the public interest may include, for example, any increase in competition, product innovation or other benefit to market participants, and any adverse impact on liquidity as a result of fragmentation of the existing markets, which might arise from granting the application. The Minister may also have regard to any other matter that he or she considers relevant: s 798A(2). We have referred above to the approval of Chi-X Australia as a competing market for secondary trading of ASX-listed products: see 10.1.

Grant of licence to overseas market operators 10.14 Alternative criteria are specified for the grant of a licence to an entity that operates a financial market in a foreign country in which its principal place of [page 391] business is located and seeks to operate the same market in Australia. In that case, the Minister must be satisfied of the matters specified in s 795B(2). The purpose of those requirements is to ‘facilitate competition

and avoid duplicated regulation, while paying due regard to investor protection and market integrity’.30 An overseas market operator licensed under s 795B(2) is subject to a number of obligations imposed under s 792A (see 10.15) and to reporting requirements under s 792B: see 10.17. However, the provisions relating to the content of operating rules and procedures, the disallowance of changes to the operating rules under s 793E(3) (see 10.18) and compensation arrangements under Pt 7.5 (see 10.38) do not apply to an overseas market which obtains an Australian market licence under s 795B(2). The Minister may suspend or cancel an Australian market licence issued to such an operator if it ceases to be authorised to operate in the jurisdiction of its principal place of business or the Minister decides that the overseas regime is no longer equivalent to the Australian regime: s 797B(d).

Obligations of Australian market licensees 10.15 Section 792A sets out a number of obligations of market licensees. We deal with these obligations in this section.

‘Fair, orderly and transparent market’ 10.16 A market licensee must, to the extent that it is reasonably practicable to do so, do all things necessary to ensure that the market is a fair, orderly and transparent market: s 792A(a). The Explanatory Memorandum to the Financial Services Reform Bill notes that all words in the phrase ‘fair, orderly and transparent’ should be considered together, and recognises that tensions between the three objectives may need to be resolved sensibly; for example, transparency may on occasions be in conflict with liquidity, while liquidity is necessary for an orderly market.31 The notion of a fair and orderly market is also found in s 11A of the Securities Exchange Act 1934 (US), and United States authority indicates that a ‘fair’ market is free from manipulative and deceptive practices and affords no undue advantage to any participant, and an ‘orderly’ market is characterised by regular, reliable operations with price continuity and depth, in which price movements are accompanied by appropriate volume and unreasonable price variations between sales are avoided.32 This requirement involves two core concepts, one relating to market

participants being placed in an equal position such that there is a level playing field, and the second being ‘the notion of reliable market operations displaying price continuity and depth in which unreasonable price variations between sales are avoided’.33 It appears that the words ‘to the extent that it is reasonably practicable to do so’ in s 792A(a) qualify the words ‘all things necessary’, so that a market licensee must do everything reasonably practicable to ensure that the market is fair, orderly and [page 392] transparent.34 A market licensee must also comply with the conditions on its licence: s 792A(b).

Other requirements for market licensees 10.17 A market licensee must have adequate arrangements for operating the market, including arrangements for dealing with conflicts and monitoring and enforcing compliance with the market’s operating rules: s 792A(c)35. A market licensee must also have sufficient resources (including financial, technological and human resources) to operate the market properly and for the required supervisory arrangements to be provided: s 792A(d). In an addendum to RG 172, ASIC outlines its expectation that a market licensee will maintain adequate systems of control to ensure that the market it operates is fair, orderly and transparent. The addendum specifies appropriate testing arrangements for trading systems involving connectivity testing, conformance testing, regression testing, functional testing and testing the environment for stakeholders.36 Adequate disaster recovery plans for each system are required and licensees are to ensure that disruption or outage of services is minimised.37 ASIC also expresses the view that market licensees should have sufficient system capacity to accommodate reasonably foreseeable volumes of trading activity and should have adequate physical and electronic security arrangements in place38 and that these arrangements should be reviewed and monitored.39 That Regulatory Guide also emphasises the importance of communication

of material changes to system management plans by a market licensee to stakeholders and ASIC.40 A market licensee must also: ensure that there are approved compensation arrangements in relation to the market, if such arrangements are required under s 881A (see 10.38): s 792A(e); take reasonable steps to ensure that information about compensation arrangements that are in place under Pt 7.5 is available to the public free of charge: s 792I;41 if the licensee, or a holding company of it, is a widely held market body (within the meaning of Pt 7.4 Div 1), take all reasonable steps to ensure that [page 393] an unacceptable control situation, within the meaning of that Division, does not exist in relation to that body: s 792A(h); and see 10.36; take all reasonable steps to ensure that no disqualified individual becomes, or remains, involved in the licensee: s 792A(i); and see 10.36; notify ASIC of certain matters under ss 792B and 792C; provide assistance to ASIC under s 792D; allow ASIC reasonable access to the market’s facilities under s 792E; give an annual report and other information to ASIC under s 792F; and disclose specified matters in relation to its clearing and settlement arrangements under s 792G.

Content, legal effect and enforcement of operating rules and procedures of licensed markets 10.18 The operating rules of a licensed market must deal with the

matters prescribed by regulations, which may also prescribe matters in respect of which a licensed market must have written procedures: s 793A(1)–(2). The term ‘operating rules’ is defined, in relation to a financial market, as rules, including any listing rules, made by the operator of the market or contained in its constitution that deal with the activities or conduct of the market or persons in relation to the market: s 761A. The operating rules of a licensed market must deal with the matters specified in reg 7.2.07. Licensed markets must also have written procedures in respect of the matters set out in reg 7.2.08. Those requirements do not apply to an overseas market licensed under s 795B(2), which is also authorised to operate the market in the foreign country in which its principal place of business is located: s 793A(3). However, ASIC may give written notice to an overseas licensee specifying matters in respect of which it must have written procedures: s 793A(4). The operating rules (other than listing rules) of a licensed market have effect as a contract under seal between the licensee and each participant in the market, and between a participant and each other participant, under which each of those persons agrees to observe the operating rules to the extent they apply to the person and to engage in conduct that the person is required by those rules to engage in: s 793B and see the discussion of this section in 11.24. The ASIC Market Integrity Rules (see Chapter 11) prevail in the case of any inconsistency between those rules and the operating rules of a financial market (other than in the case of a market operated by an overseas provider licensed under s 795B: see 10.14): s 793B(2)–(3). Where a person who is under an obligation to comply with or enforce the operating rules of a licensed market fails to do so, the court may make an order giving directions about compliance with, or enforcement of, the operating rules, on the application of ASIC, the market licensee, the operator of a CS facility with which the licensee has clearing and settlement arrangements or a person aggrieved by the failure: s 793C; see also s 1101B and the discussion of these sections in Chapters 11 and 12. The Minister may disallow all or a specified part of a change to the operating rules (except in the case of an overseas market granted an Australian market licence under s 795B(2)) having regard to the

consistency of the change with the licensee’s obligations under Pt 7.2: s 793E. The Minister is required to have regard to specified [page 394] matters in deciding whether to disallow a change to the operating rules of a licensed market under s 793E: s 798A(1) and see 10.13.

Powers of the Minister and ASIC in relation to market licensees 10.19 If the Minister considers that a market licensee is not complying with its obligations under Ch 7, the Minister may give it a written direction to do specified things which the Minister believes will promote compliance by the licensee with those obligations: s 794A(1). The licensee must comply with that direction: s 794A(2). If the licensee fails to comply with that direction, ASIC may apply to the court for, and the court may make, an order that the licensee comply with the direction: s 794A(3). The power to give directions under this section allows the Minister the means promptly to remedy any perceived non-compliance with a market licensee’s operating rules, without the need for a court application unless a licensee fails to comply with the relevant direction. This section could be used, for example, to direct a licensee to amend its operating rules if the Minister considered that rules adopting a particular structure did not comply with the licensee’s obligations as market licensee, or to adopt particular surveillance procedures necessary to comply with the licensee’s obligations under s 792A: see 10.15. ASIC also has the power to give directions to market licensees in the circumstances specified in s 794D. If ASIC considers that it is necessary, or in the public interest, to protect people dealing in a financial product or class of financial products by giving a direction to the market licensee to suspend dealings in that product or class of products, or giving some other direction in relation to those dealings, ASIC may give written advice to the licensee of that opinion and the reasons for it: s 794D(1).42 If the licensee

does not then take action to end such dealings, in the case of a proposed direction to suspend dealings in the financial products, or such other action as in ASIC’s view is adequate to address the situation raised in the advice in any other case, ASIC may give the licensee a written direction with a statement setting out its reasons for making the direction: s 794D(2). That direction has effect for the period specified in it, which may be up to 21 days, during which the licensee must comply with the direction and not allow any dealings to take place contrary to it: s 794D(3). A licensee’s failure to comply with that obligation is an offence. If the licensee fails to comply with the direction, ASIC may also apply to the court for an order that the licensee comply with that direction: s 794D(4). After receiving ASIC’s advice of an opinion formed under s 794D(1), a licensee may request ASIC to refer the matter to the Minister and the Minister may, if he or she considers it appropriate, require ASIC not to make, or to revoke, a direction: s 794D(6). If ASIC gives a direction to a market licensee under s 794D, it may also give a direction to the operator of a CS facility with which the licensee has clearing and settlement arrangements or transactions effected through the market, prohibiting the operator of that CS facility from acting in a manner inconsistent with the direction, [page 395] or requiring the operator of that CS facility to do all it is reasonably capable of doing to give effect to that direction: s 794E.

Conditions on a licence and variation, suspension and cancellation of licences 10.20 We deal with the imposition of conditions on an Australian market licence under s 796A and the suspension or cancellation of market licences under ss 797B–797C in this section. The Minister may impose conditions, or additional conditions, on an Australian market licence, or vary or revoke conditions imposed on a

licence, by written notice to the licensee: s 796A(1). Except in the case of conditions imposed when a licence is granted, the Minister may only impose conditions or additional conditions, or vary conditions on the licence, on his or her own initiative if he or she considers it appropriate to do so having regard to the licensee’s obligations as a market licensee under Ch 7 and any change in market operations or the conditions in which the market is operating, and after giving the licensee a written notice of the proposed action and an opportunity to make a submission before that variation takes effect: s 796A(3). The Minister must ensure that each Australian market licence is subject to specified conditions: s 796A(4). The Minister may suspend an Australian market licence for a specified period, or cancel it, in the circumstances specified in ss 797B–797C. An Australian market licence cannot be varied, suspended or cancelled other than in accordance with those provisions: s 797G.

SELF-LISTING OF MARKETS 10.21 Section 798C permits a market licensee and its related entities to be included in its own official list. For example, shares in the ASX are included in the ASX’s official list and quoted for trading on the ASX. The financial products of such an entity may be traded on the market operated by that licensee, if the licensee and its related entity have entered into such arrangements as ASIC requires for dealing with possible conflicts of interest that might arise from its financial products being able to be traded on the market, and for the purposes of ensuring the integrity of trading in its financial products: s 798C(2). The licensee and its related entity must comply with such arrangements, and failure to do so is an offence: s 798C(3). While the market licensee or its related entity is included in its official list, the listing rules of that market must provide for ASIC to make decisions and take action (or require the licensee to take action on ASIC’s behalf) in relation to the admission of that entity to the market’s official list, its removal from that list, and allowing, stopping or suspending trading of its financial products on the market: s 798C(4). If an overseas market is granted an Australian market licence under s 795B(2), the law of the country in which that market licensee’s principal place of business is

located applies for all purposes connected with its inclusion in the market’s official list: s 798C(7). Sections 798D–798E permit ASIC to modify certain provisions of the Corporations Act in their application to a market licensee or its related entity whose financial products are able to be traded on the market or to exempt those entities [page 396] from compliance with those provisions. The regulations may also provide the rules and procedures which will apply in the case of conflicts or potential conflicts between the commercial interests of the licensee and the need for it to ensure that the market operates in a fair, orderly and transparent way under s 792A(a): s 798E(1). In particular, the regulations may permit ASIC, instead of the licensee, to make decisions and take action under the market’s operating rules, or require the licensee to take action under the market’s operating rules, in relation to such a conflict or potential conflict: s 798E(2).

LICENSING OF CLEARING AND SETTLEMENT FACILITIES When a licence to operate a clearing and settlement facility is required 10.22 The provisions for licensing of CS facilities, and Pt 7.11 Div 4 dealing with transfer of financial products effected through a prescribed CS facility, permit more than one CS facility to handle the clearing and settlement of transactions executed on a financial market. The structure of the regime for licensing of CS facilities closely corresponds to the market licensing regime in Pt 7.2.

What is a clearing and settlement facility?

10.23 A CS facility is a facility that provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other that arise from entry into the transactions and are of a kind prescribed by regulations: s 768A(1). A note to s 768A gives examples that a facility which provides a regular mechanism for stockbrokers to pay for the shares they buy and be paid for the shares they sell, and for records of those transactions to be processed to facilitate registration of the new ownership of the shares, would be a CS facility; and a facility that provides a regular mechanism for registering trade in derivatives on a futures market and that enables the calculation of payments that market participants owe by way of margins would also be a CS facility. Regulation 7.1.09 in turn prescribes, for the purposes of s 768A, obligations arising from: a contract to transfer securities; interests in a registered scheme; interests in a managed investment scheme that is not a registered scheme, with certain exclusions (see s 764A(1)(ba)); derivatives; and debentures, stocks or bonds issued or proposed to be issued by a government. Conduct which is excluded from the concept of operating a CS facility for the purposes of Pt 7.2 is specified in s 768A(2).

Scope of licensing requirement 10.24 A person must only operate, or hold out that it operates, a CS facility in the jurisdiction if it has an Australian CS facility licence that authorises it to operate the facility in the jurisdiction, or the facility is exempt from the operation of Pt 7.3: s 820A.43 This section reflects a policy judgment that CS facilities require [page 397] the regulation that is available under a licensing regime. The purposes of regulating CS facilities are to maintain financial system stability; reduce systemic risk; ensure clearing and settlement facilities are provided in a fair and effective way; and protect investors dealing in financial products and users of CS facilities.44 A contravention of s 820A is a strict liability offence. A person must also not hold out that it has an Australian CS facility licence, or that the operation of a CS facility by the person in the

jurisdiction is authorised by an Australian CS facility licence, or that a CS facility is exempt from the operation of Pt 7.3, if that is not the case: s 820B.

When is a clearing and settlement facility operated in the jurisdiction? 10.25 A CS facility is taken to be operated in the jurisdiction if it is operated by a body corporate that is registered under Ch 2A: s 820D(1). That provision has the result that a body corporate registered in Australia will be required to be licensed in Australia if it operates a CS facility overseas. That provision does not limit the circumstances in which a CS facility is operated in the jurisdiction for the purposes of Ch 7: s 820D(2). The Explanatory Memorandum to the Financial Services Reform Bill notes, without further explanation, that ‘[i]t is expected that mere accessibility by one or a few persons in Australia to a CS facility based overseas would not be enough to constitute operating in Australia’.45 The Minister may exempt a particular CS facility or type of CS facility from the operation of Pt 7.3, and may do so on conditions: s 820C. ASIC RG 211: Clearing and Settlement Facilities: Australian and Overseas Operators notes that the Minister’s exemption power under this section is intended to be used when there is no policy reason for regulating particular arrangements as a licensed CS facility, and that ASIC would normally only advise the Minister to exempt a particular CS facility or type of CS facility if regulatory outcomes for CS facilities were not relevant to the facility or could be achieved without regulation or if the cost of regulation would significantly outweigh the benefits of the relevant regulatory outcomes.46

Application for clearing and settlement facility licence 10.26 A body corporate may apply for an Australian CS facility licence by lodging an application with ASIC that includes the information that is required by the regulations and is accompanied by any documents required by the regulations: s 824A(1). The information and documents required as part of an application for an Australian CS facility licence are specified in regs 7.3.10 and 7.3.11. ASIC must, within a reasonable time, give the application to the Minister with advice about it: s 824A(2).

The Minister may grant an Australian CS facility licence if he or she is satisfied, among other things, that: the applicant will comply with the obligations that will apply if the licence is granted; the applicant has adequate operating rules and procedures for the facility to ensure, so far as is reasonably practicable, that systemic risk is reduced and the facility is operated in a fair and effective way; the applicant [page 398] has adequate arrangements for supervising the facility, including arrangements for handling conflicts between the commercial interests of the licensee and the need for it to reduce systemic risk and ensure that the facility’s services are provided in a fair and effective way and for enforcing compliance with the facility’s operating rules: s 824B(1). The Minister is also required to have regard to specified matters in deciding whether to grant an Australian CS facility licence under s 824B: s 827A(1)–(2). The Minister may also have regard to any other matter that he or she considers relevant: s 827A(2).

Grant of licence to overseas clearing and settlement facilities 10.27 Alternative criteria are specified for granting a licence to an overseas CS facility to operate the same facility in Australia. In order to grant such a licence, the Minister must be satisfied of the matters specified in s 824B(2). The purpose of this section is to ‘facilitate competition and avoid duplicated regulation, while paying due regard to such issues as systemic risk and the provision of services in a fair and effective way’.47 An overseas CS facility which is issued an Australian CS facility licence under s 824B(2) is subject to, among other things, the requirements specified in ss 821B(3), 821F and 822D(3). If an overseas CS facility which has been licensed as an Australian CS facility under s 824B(2) ceases to be authorised to operate a CS facility in the jurisdiction of its principal place of business, or the Minister decides that the overseas regime is no longer equivalent, then the Minister may suspend or cancel its Australian CS facility licence: s 826B(d).

Obligations of Australian clearing and settlement facility licensees 10.28 Section 821A sets out a number of obligations of a CS facility licensee. We deal with these obligations in this section.

Reduction of systemic risk 10.29 A CS facility licensee, must, to the extent that it is reasonably practicable to do so, comply with financial stability standards determined by the Reserve Bank under s 827D and do all other things necessary to reduce systemic risk, and all things necessary to ensure that the facility’s services are provided in a fair and effective way: s 821A(aa) and (a). The Explanatory Memorandum to the Financial Services Reform Bill notes that it is not the legislative intention, in using the phrase ‘reduce systemic risk’, to prohibit the expansion of services which a CS facility may provide or limit the size of its CS business, but the provision imposes an obligation to do all that is reasonably practicable to reduce the systemic risk inherent in the service it provides at any time, and address systemic risk if it changes its business.48

Other obligations of clearing and settlement facility licensees 10.30 A CS facility licensee must also: comply with conditions on the licence: s 821A(b); [page 399] have adequate arrangements for supervising the facility, including arrangements for handling conflicts between the commercial interests of the licensee and the need for it to ensure that the facility’s services are provided in a fair and effective way and for enforcing compliance with the facility’s operating rules: s 821A(c). These arrangements may involve a self-regulatory structure or the appointment of an independent person or related entity. This requirement is not intended to require a CS facility to take the same

role in monitoring participants’ conduct as an exchange, but requires a mechanism by which participants’ compliance with the operating rules and procedures of the CS facility is monitored and enforced;49 have sufficient resources (including financial, technological and human resources) to operate the facility properly and for the required supervisory arrangements to be provided: s 821A(d). Additional requirements apply if the CS facility licence was granted to an overseas CS facility under s 824B(2): s 821A(e)–(f); if the licensee, or its holding company, is a widely held market body (within the meaning of Pt 7.4 Div 1), take all reasonable steps to ensure that an unacceptable control situation (within the meaning of that Division) does not exist in relation to that body, and to ensure that no disqualified individual becomes or remains involved in the licensee: s 821A(g)–(h); and see 10.36; notify ASIC of certain matters under s 821B and notify the Reserve Bank of certain matters under s 821BA; provide assistance to ASIC and the Reserve Bank under s 821C; allow reasonable access to the facility under s 821D; and give ASIC an annual report and other information under s 821E.

Content, legal effect and enforcement of operating rules and procedures of licensed clearing and settlement facilities 10.31 The operating rules of a licensed CS facility must deal with the matters prescribed by regulations, which may also prescribe matters in respect of which a licensed CS facility must have written procedures: s 822A(1)–(2). The term ‘operating rules’ is defined in s 761A, in relation to a CS facility, as rules made by the operator of the facility or contained in its constitution that deal with the activities or conduct of the facility or of persons in relation to the facility. The operating rules of a licensed CS facility must deal with matters including: the means by which obligations of parties to transactions relating to financial products will be met through that facility; matters relating to risk in that facility; access to the facility, including criteria for determining persons who are eligible to participate in

that facility and ongoing requirements for participants; procedures to be followed by participants to address risks that are relevant to the facility; requirements to facilitate monitoring of compliance by participants with the facility’s operating rules; and the handling [page 400] of defaults: reg 7.3.05. A licensed CS facility must also have written procedures in respect of the matters set out in reg 7.3.06. The operating rules of a licensed CS facility have effect as a contract under seal between the licensee and each issuer of financial products in respect of which the facility provides its services; between the licensee and each participant in the facility; between each issuer of financial products in respect of which the facility provides its services and each participant in the facility; and between a participant in the facility and each other participant in the facility, under which each of those persons agrees to observe the operating rules to the extent that they apply to the person and to engage in conduct that that person is required by the operating rules to engage in: s 822B. The court may also make orders about compliance with, or enforcement of, the operating rules of a CS facility, if a person who is under an obligation to comply with or enforce those rules fails to meet that obligation, on application by ASIC, the licensee, the operator of a financial market with which the facility has arrangements to provide services for transactions effected through the market, or a person aggrieved by the failure: s 822C; see also s 1101B and 13.61. The Minister may disallow changes to the operating rules of a licensed CS facility, other than an overseas CS facility granted an Australian CS facility licence under s 824B(2): s 822E. The Minister is required to have regard to specified matters in deciding whether to disallow a change to the operating rules of a CS facility under s 822E: s 827A(1). Sections 822D–822E ensure that ASIC is made aware of any change to the operating rules of a licensed CS facility market, and the Minister then has an opportunity to disallow that change, providing a negative control over the content of the operating rules.

Powers of the Minister and ASIC in relation to clearing and settlement facilities 10.32 If the Minister considers that a CS facility licensee is not complying with its obligations as a CS facility licensee under Ch 7, he or she may give it a written direction to do specified things that the Minister believes will promote compliance with those obligations: s 823A(1). The CS facility licensee must comply with that direction and, if it fails to do so, ASIC may apply to the court for an order that it comply with that direction: s 823A(2)–(3). If ASIC considers that it is necessary, or in the public interest, to protect people dealing in a financial product or class of financial product, or considers that a CS facility licensee has not done all things reasonably practicable to ensure that the facility’s services are provided in a fair and effective way, ASIC may give the licensee written advice that it intends to give the licensee a specified direction including reasons for that intention: s 823D(1). ASIC may give a direction to the CS facility licensee not to provide its services in relation to any transactions that relate to a specified financial product or class of financial product, or any other direction concerning dealings with transactions that relate to a specified financial product or class of financial product: s 823D(3). If, after receiving ASIC’s advice and reasons, the licensee does not take steps that in ASIC’s view are adequate to address the situation, and ASIC still considers that it is appropriate to give the direction to the [page 401] licensee, it may give the licensee that direction: s 823D(4). That direction has effect until the earlier of the end of the period specified in the direction, which may be up to 21 days, or its revocation by ASIC: s 823D(5). Failure to comply with the direction is an offence, and ASIC may apply to the court for, and the court may make, an order that the licensee comply with the direction: s 823D(5)–(6). A CS facility licensee may request ASIC to refer the matter to the Minister, after receiving ASIC’s advice under s 823D(1), and the Minister may require ASIC not to make, or to revoke,

the direction: s 823D(8). ASIC also has power to give a CS facility licensee a direction if it considers that licensee has not done all things reasonably necessary to reduce systemic risk in the provision of the facility’s services: s 823E.

Conditions on a licence and variation, suspension and cancellation of clearing and settlement facility licences 10.33 This section deals with the imposition of conditions on a CS facility licence under s 825A and the suspension or cancellation of market licences under ss 826B–826C.

Imposition of conditions on a clearing and settlement facility licence 10.34 The Minister may impose conditions, or additional conditions, on an Australian CS facility licence, or vary or revoke conditions imposed on a licence, by written notice to the licensee: s 825A(1). Except in the case of conditions imposed when a licence is granted, the Minister may only impose conditions or additional conditions, or vary conditions on the licence, on his or her own initiative if he or she considers it appropriate to do so having regard to the licensee’s obligations as a CS facility licensee under Ch 7 and any change in the facility’s operations or the conditions in which the facility is operating: s 825A(3). That subsection also requires that the Minister first give the licensee written notice of such an action and an opportunity to make a submission before it takes effect. The Minister must also ensure that each Australian CS facility licence is subject to conditions which specify the particular facility in which the licensee is authorised to operate and the class or classes of financial products in respect of which the facility can provide services: s 825A(4). The Minister is required to have regard to specified matters in deciding whether to impose, vary or revoke conditions on a CS facility licence under s 825A: s 827A(1).

Suspension or cancellation of clearing and settlement facility licence

10.35 The Minister may suspend a CS facility licence for a specified period, or cancel it in the circumstances and in accordance with the process specified in ss 826B–826C. The Minister is required to have regard to specified matters in deciding whether to suspend or cancel a CS facility licence under s 826C: s 827A(1)–(2). A CS facility licence cannot be varied, suspended or cancelled other than in accordance with those provisions: s 826G.

LIMITS ON INVOLVEMENT WITH LICENSEES 10.36 Part 7.4 of the Corporations Act imposes a 15% limit on shareholdings in prescribed markets or CS facilities, with the Minister having power to approve a [page 402] percentage limit higher than 15%. The structure of the ownership limitations is similar to those included in the Financial Sector (Shareholdings) Act 1998 (Cth). Part 7.4 also imposes a ‘fit and proper person’ requirement for persons involved in the management or control of a market or CS facility, which will apply to persons who control 15% of the voting shares (including shares held by associates) in a market licensee or CS facility, and to directors, secretaries and executive officers of such a licensee. Part 7.4 Div 1 imposes the relevant limit and applies in relation to a body corporate that has an Australian market licence or Australian CS facility licence, or is the holding company of a body corporate that has such a licence, and is specified in reg 7.4.01. A person, or two or more persons under an arrangement, are prohibited from acquiring shares in such a body corporate, if the acquisition would have the result that an ‘unacceptable control situation’50 would come into existence in relation to a ‘widely held market body’51 or there would be an increase in the voting power of the person in that body if such an unacceptable control situation already existed: s 850C. The court may make such orders as it considers appropriate, for the purpose of ensuring that an unacceptable control

situation ceases to exist, on the application of the Minister, ASIC, the relevant widely held market body, or a person who has any voting power in that body: s 850D.52 The relevant widely held market body is taken, for the purposes of the court’s power to grant an injunction in s 1324, to be a person whose interests are affected by conduct which amounts or would amount to a contravention of the relevant control limits: s 850E. The Minister may approve an application for a person to have voting power of more than 15% in a particular widely held market body, other than the ASX, if he or she is satisfied that it is in the national interest to do so, and that approval may be for a particular period or subject to conditions: ss 851B–851D. The Minister may also revoke that approval if he or she is satisfied that it is in the national interest to do so, or an unacceptable control situation exists in relation to the relevant widely held market body and in relation to the person to whom that approval has been given, or there has been a contravention of a condition on the approval: s 851F. The Minister also has power to give a person whose voting power in a widely held market body would increase, as a result of a scheme or part of a scheme carried out for the sole or dominant purpose of avoiding the application of these provisions, a written direction to cease having that voting power within a specified time: s 852B. Part 7.4 Div 2 applies a ‘fit and proper’ person test to directors, secretaries or executive officers of a market licensee or CS facility licensee; applicants for such a licence; a holding company of such a licensee or applicant; and an individual [page 403] who has more than 15% of the total voting power in the licensee or applicant for the licence, or in a holding company of the licensee or applicant: s 853B. ASIC may declare that such a person is ‘disqualified’ for the purposes of Pt 7.4 Div 2, if it is satisfied that, because the individual is unfit to be involved in the licensee or applicant for the licence, there is a risk that the licensee or applicant for the licence would breach its obligations under Ch 7 if the declaration is not made: s 853C(2). ASIC must take into account the individual’s reputation, character and integrity,

rather than his or her competence, experience, knowledge or other such attributes, in deciding whether an individual is unfit to be involved in the licensee or applicant: s 853C(3). Before declaring that a person is disqualified under s 853C, ASIC must give that person written notice of the proposed declaration, stating the grounds on which ASIC proposes to make it, and allow that person the opportunity to show cause why that declaration should not be made at a hearing: s 853D. A person is also disqualified for the purposes of Pt 7.4 Div 2 if he or she is disqualified from managing a corporation under s 206B,53 or is on the register of persons who have been disqualified from managing corporations, kept by ASIC under s 1274AA:54 s 853A. A disqualified individual must not become involved in a market licensee or CS licensee and, if he or she is already involved in such a market licensee or CS licensee, must take all reasonable steps to ensure that he or she ceases to be involved in that licensee: s 853F.

COMPENSATION ARRANGEMENTS FOR FINANCIAL MARKETS 10.37 Part 7.5 of the Corporations Act deals with compensation arrangements for financial markets. Part 7.5 Div 2 sets out when compensation arrangements are required. Division 3 provides for the approval of compensation arrangements. A licensed market must have compensation arrangements approved under Div 3 if: participants in that market provide financial services to retail clients (as defined in s 761G: see 13.30); those clients will or may give money or other property or authority over property to participants in that market in connection with the provision of those financial services; and the market is not a financial market to which Div 4 applies: s 881A. Such arrangements must provide for compensation for loss suffered by a retail client arising from fraud or defalcation of a financial services licensee in relation to a transaction on the market. Such arrangements need not

provide coverage for loss arising from insolvency of a market participant, or for loss suffered by wholesale clients, and do not extend to compensation for loss suffered in relation to a licensee’s business of dealing in financial products generally. Part 7.5 Div 4 deals with the National Guarantee Fund, which applies in relation to markets conducted by the ASX. [page 404] Part 7.5 is not directed to compensation arrangements in relation to CS facilities. Part 7.5 also does not apply to an overseas financial market that is licensed under s 795B(2): s 880A. The adequacy of compensation arrangements of an overseas market is considered in reaching a decision whether to grant a licence to that market: see 10.14.

APPROVED COMPENSATION ARRANGEMENTS UNDER DIV 3 10.38 Part 7.5 Div 3 provides for the approval of compensation arrangements and for the legal effect of compensation rules. That Part and the corresponding regulations should be treated as beneficial and remedial legislation and given a liberal interpretation.55 Before granting an Australian market licence, the Minister must be satisfied that, if s 881A requires that market to have compensation arrangements which are approved under Pt 7.5 Div 3, the proposed compensation arrangements of that market are adequate: ss 792A(e) and 882A(1). Compensation arrangements are ‘adequate’ if and only if the Minister is satisfied of certain matters specified in ss 885B–885I. Compensation arrangements approved under Div 3 have effect as a contract under seal between the operator of the market and each participant in the market, under which each of them agrees to observe those rules to the extent that they apply to the person and engage in conduct that that person is required by the rules to engage in: s 883A. If a person who is under an obligation to comply with or enforce such

compensation rules fails to meet that obligation, the court may make an order giving directions to that person or, if it is a body corporate, its directors, about compliance with or enforcement of the compensation rules: s 883B(2). An application for such an order may be made by ASIC, the operator of the market, the operator of a CS facility which provides CS arrangements for some or all transactions effected through the market, or a person aggrieved by the failure: s 883B(1). A person who is entitled to make a claim for compensation is taken to be a person aggrieved by a failure to comply with or enforce provisions of the compensation rules: s 883B(3). Section 885C specifies the kind of losses which must be covered by Div 3 compensation rules. The losses required to be covered under s 885C (Div 3 losses) are limited to losses in connection with effecting a transaction or proposed transaction covered by provisions of the operating rules of the relevant market, and do not extend to losses in the course of, or in connection with, the market participant’s business in dealing in financial products generally. The reference to loss ‘covered by provisions of the operating rules of the market relating to transactions effected through the market’ will also limit the scope of coverage to exclude, for example, loans made by a client or participant which do not relate to a transaction effected through the market, but would extend to amounts paid by the client to the participant in respect of such transactions, such as margin calls. Section 885D provides that certain losses are not Div 3 losses, for the purposes of the requirement for adequate compensation [page 405] arrangements under s 885B. It appears that, where s 885D applies, the client’s only recourse will be against the relevant market participant. In Re Securities Exchanges Guarantee Corporation Ltd (as Trustee for National Guarantee Fund) above, Ball J observed (at [43]) that these provisions assume that the specified losses are covered by the National Guarantee Fund although a market participant used or might have intended to use a market other than the ASX to effect a particular transaction, so that a contract guarantee claim could be allowed in respect of securities quoted

on the ASX where the transaction is conducted or executed on markets operated by Chi-X or off-market. Section 885E provides for the amount of compensation payable in respect of a Div 3 loss.

CLAIMS AGAINST THE NATIONAL GUARANTEE FUND 10.39 Part 7.5 Div 4 relates to the operation of the National Guarantee Fund, which guarantees the performance of reportable transactions in financial products quoted by the ASX and also provides compensation to investors for pecuniary and property loss suffered as a result of the insolvency of a member of the ASX. By contrast with compensation arrangements required to be maintained under Div 3, a claim on the National Guarantee Fund does not depend on proof of defalcation or fraud by a market participant. Claims may also be made against the National Guarantee Fund in relation to the performance of reportable transactions on the ASX; an unauthorised transfer or cancellation of securities; or the insolvency of a participant in the ASX.

When compensation is available from the National Guarantee Fund 10.40 Division 4 applies to a financial market that is operated by a body corporate which is a member of the Securities Exchanges Guarantee Corporation (SEGC), or is a subsidiary of such a member, other than a market which the regulations state is not covered by that Division: s 887A. The regulations specify the situations in which compensation may be claimed in respect of a loss that is connected with a market participant to which Div 4 applies; the form of compensation payable; the amount of compensation payable; whether compensation is to be paid in a lump sum or by instalments; and procedures for the making and determination of claims: ss 888A–888E; and see Corporations Regulations regs 7.5.24– 7.5.71. The regulations may also provide for the amount of compensation to which a claimant is entitled, including providing for the matters specified in s 888C. The regulations may also provide for compensation to

be paid in a lump sum or by instalment: s 888D. Claims are to be made and determined in accordance with the regulations and any relevant provisions of the SEGC’s operating rules and the regulations or the SEGC’s operating rules may also require a person making a claim to take specified actions: s 888E; and see Corporations Regulations regs 7.5.72–7.5.81. The SEGC must, after wholly or partly disallowing a claim, serve notice of that disallowance on the claimant or the claimant’s solicitor: reg 7.5.80. [page 406]

Application to the court if a claim is disallowed 10.41 If the SEGC disallows a claim, a claimant may bring proceedings in the court to establish the claim within three months of notice of disallowance of the claim: s 888H(1). A claimant may also bring proceedings to establish a claim, if the SEGC has neither allowed nor disallowed the claim within a reasonable period after it was made: s 888H(2). There is no requirement in s 888H that leave be sought from the court to bring such proceedings or that remedies against other persons be exhausted before such proceedings are commenced. If the court is satisfied that a claim should be allowed, it must make a declaration accordingly and direct the SEGC to allow the claim and deal with it in accordance with Pt 7.5 Div 4: s 888H(3).

Provisions common to compensation arrangements under Div 3 and to the National Guarantee Fund 10.42 Part 7.5 Div 5 deals with a number of matters that relate both to compensation arrangements established under Div 3 and to the National Guarantee Fund. The operator of the market (in the case of Div 3 arrangements) or the SEGC may require a person to deliver documents or copies of documents, including documents of or evidencing title to financial products, or to deliver a statement of evidence which will assist it in determining a claim for compensation, or for the purposes of exercising the subrogated rights

and remedies that the operator or the SEGC has in relation to a claim: s 892D. It appears that the requirement to make out a statement of evidence is not limited to the claimant, and may extend to third parties whose evidence may be relevant to the claim. A person who has responsibility for administration of a Div 3 arrangement may also give a market operator a written request to give it such assistance as it reasonably requires for the purpose of fulfilling its responsibilities under that arrangement: s 892E(1). Similarly, the SEGC may require its members, or a subsidiary of a member, to give such assistance as it reasonably requires for the purpose of dealing with a claim or assessing risks to the National Guarantee Fund: s 892E(2). If compensation in respect of the claim is paid under arrangements under Pt 7.5, the relevant market operator or the SEGC is subrogated, to the extent of that payment, to all the claimant’s rights and remedies in relation to the loss to which the claim relates: s 892F(1). That market operator or the SEGC may also recover the costs it incurred in determining the claim from the participant or participants who cause the loss: s 892F(2). A right of subrogation under s 892F will arise from the moment the claim is allowed by the market operator or the SEGC.56 [page 407]

REGULATION OF DERIVATIVE TRANSACTIONS AND DERIVATIVE TRADE REPOSITORIES International developments 10.43 Additional regulatory requirements have been applied to the overthe-counter (OTC) markets, both in Australia and internationally since the global financial crisis, reflecting an increased recognition of systemic risks resulting from trading in derivatives.57 At the international level, the Group of 20 (G20) Summit in 2009 committed to reporting of transaction information as to OTC derivatives to trade repositories that will maintain a database of those transactions;

clearing of standardised OTC derivatives through central counterparties; and execution of standardised OTC derivatives on exchanges or electronic trading platforms, where appropriate. The objectives of these reforms include enhancing transparency of transaction information available to regulators and the public, promoting financial stability and supporting the detection and prevention of market abuse.58 In particular, international regulation has recognised that settlement failures in the OTC markets create risks for counterparties to a defaulting party on an OTC transaction; that larger defaults can create systemic risk in the financial system; and a perception of increased settlement risks may lead investors to withdraw from OTC products in times of financial stress, as occurred in the global financial crisis. Regulatory requirements for settlement of specified OTC products through central clearing organisations are intended to reduce counterparty and systemic risk by netting exposures across multiple market participants, requiring collateralisation of residual exposures; facilitating enforcement of risk management requirements and potentially sharing losses resulting from the failure of a clearing member.59 The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (US) introduced, among other things, requirements that financial instruments in the nature of swaps or security-based swaps be settled through centralised clearing houses60 and the European Market Infrastructure Regulation also requires clearing of certain OTC derivatives and also imposes requirements as to confirmation of trades, collateral and reconciliation of derivative positions as to non-cleared derivatives and requires reporting of cleared and non-cleared trades to trade repositories.61 Trade [page 408] reporting and clearing regimes have also been introduced in other jurisdictions, including Canada, Hong Kong and Singapore.

Australian regulation of derivative transactions and derivative trade repositories

10.44 Part 7.5A of the Corporations Act similarly deals with regulation of derivative transactions and derivative trade repositories. This Part was introduced by the Corporations Legislation Amendment (Derivative Transactions) Act 2012 (Cth), which commenced on 3 January 2013, and gives effect to the G20’s agreement to introduce further regulation of OTC derivatives to which we referred above. Part 7.5A applies to derivatives, derivative transactions, facilities, persons, bodies and other matters located in Australia or outside Australia, unless otherwise stated: s 900A. The Explanatory Memorandum notes that ‘[t]he broad territorial reach of the provision is required to ensure that ASIC is able to coordinate its rulemaking with foreign jurisdictions to aid in consistency of regulatory approaches and to assist in ensuring that international capital markets remain open to cross-border participation’.62 10.45 Part 7.5A Div 2 deals with the making of derivative transaction rules, as defined in s 761A. The Minister may prescribe a class of derivatives and ASIC may then impose mandatory obligations as to reporting, clearing or execution for participants by derivative transaction rules in respect of that class of derivatives: ss 901A–901B. The objectives of trade reporting requirements include enhancing transparency and providing information as to the risks associated with OTC markets to regulators and market participants.63 ASIC must have regard to specified matters in deciding whether to make a derivative transaction rule, and ministerial consent is required for ASIC to make such a rule: ss 901H, 901K. Failure to comply with the relevant provisions of the derivative transaction rules will contravene a civil penalty provision: s 901E. However, failure to comply with the derivative transaction rules will not invalidate a transaction: s 901G. ASIC may also make emergency derivative transaction rules without consultation or ministerial consent in specified circumstances: s 901L. A ministerial determination, the Corporations (Derivatives) Determination 2013, specifies several classes of derivatives that may be made subject to trade reporting requirements as commodity (other than electricity), credit, equity, foreign exchange and interest rate derivatives. The ASIC Derivative Transaction Rules (Reporting) 2013, as amended by ASIC Derivative Rules (Reporting) Amendment 2015 (No 1), in turn apply to the specified classes of derivatives and require mandatory trade reporting by financial institutions

and intermediaries, but do not extend to reporting by end users of OTC derivatives.64 [page 409] 10.46 Part 7.5A Div 3 (s 902A) in turn deals with ASIC’s supervision of licensed derivative trade repositories. Part 7.5A Div 4 deals with the making of derivative trade repository rules. Part 7.5A Div 5 imposes other obligations upon derivative trade repository licensees, including to comply with conditions on the licence and to take all reasonable steps to ensure that no disqualified individual becomes or remains involved in the operator: s 904A. Section 904B imposes obligations in respect of trade data on derivative trade repositories and their officers and employees. A derivative trade repository licensee must notify ASIC of specified matters and must give access to ASIC to its facilities when a reasonable request is made (ss 904C–904E) and the Minister and ASIC may give directions to licensed derivative trade repositories under ss 904F and 904G. Part 7.5A Div 6 deals with licensing of derivative trade repositories. The structure of these requirements is substantially similar to that applicable to Australian market licence holders under Pt 7.2 and clearing and settlement facility licence holders under Pt 7.3, although there is no separate regime for licensing of overseas entities as derivative trade repositories. 10.47 A ministerial direction made on 2 September 2015, the Corporations (Derivatives) Amendment Determination 2015 (No 1), authorised ASIC to make rules for central clearing requirements for Australian dollar (AUD) and US dollar (USD), Euro, British Pound (GBP) and Japanese Yen (JPY) (together referred to as ‘G4’) interest rate derivatives. The Corporations Regulations were amended on 8 September 2015 to require central clearing for OTC interest rate derivatives in the specified currencies by a number of major domestic and foreign banks that act as dealers in the Australian OTC derivatives markets, although not by smaller financial institutions or end users. The ASIC Derivative Transactions Rules (Clearing) commenced from April 2016 and provide for a mandatory central clearing regime that applies to transactions in OTC interest rate derivatives in the specified currencies, which apply to

Australian and foreign financial institutions meeting the specified clearing threshold, subject to specified exemptions.65 The Australian Prudential Regulation Authority also issued a draft Prudential Standard in February 2016 dealing with margin requirements for non-centrally cleared OTC derivatives and indicating requirements as to documentation of trading relationships and policies and processes relating to risk minimisation. ___________________________ 1.

G Walker, ‘Financial Markets and Exchanges’ in M Blair et al, Financial Markets and Exchanges Law, Oxford University Press, Oxford, 2012, p 15.

2.

E Avgouleas, The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis, Oxford University Press, Oxford, 2005, p 24; Blair, Financial Markets and Exchanges Law, above pp 25, 81, 304, 582; J Austin, ‘Protecting Market Integrity in an Era of Fragmentation and Cross-Border Trading’ (2014–15) 46 Ottawa L Rev 25.

3.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.7].

4.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.8], [172.10], [172.12].

5.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.12].

6.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.12].

7.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.12].

8.

Dark trading venues allow orders to be matched as executed trades before they are disclosed to the market generally and include exchange markets such as ASX Centre Point, a facility for ‘hidden orders’ on the Chi–X order book, crossing systems operated by market participants and the matching of trades in market participant order flow including for block trades; see ASIC Report 452, Review of High Frequency Trading and Dark Liquidity, October 2015, [171].

9.

N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, 2014, pp 431, 433.

10.

I MacNeil, An Introduction to the Law on Financial Investment, 2nd ed, Hart Publishing, Oxford, 2012, pp 387, 390; RS Karmel, ‘IOSCO’s Response to the Financial Crisis’ (2012) 37 J Corp L 849; G Walker, ‘Financial Markets and Exchanges’ in Blair, Financial Markets and Exchanges Law, above pp 22, 58, 98; C Jordan, International Capital Markets, Law and Institutions, Oxford University Press, 2014, p 271; Austin, ‘Protecting Market Integrity in an Era of Fragmentation and Cross-Border Trading’, above.

11.

ASIC Report 331, Dark Liquidity and High Frequency Trading, March 2013; ASIC Consultation Paper 202, Dark Liquidity and High Frequency Trading: Proposals; ASIC Report 452, Review of High Frequency Trading and Dark Liquidity, October 2015.

12.

B Penn, ‘Multi-lateral Trading Facilities (MTFS)’ in Blair, Financial Markets and Exchanges Law, above p 206.

13.

The nature of direct market access services was summarised in Financial Conduct Authority v Da Vinci Invest Ltd [2015] EWHC 2401 (Ch) at [11] as involving investors being permitted to connect directly with a broker’s system by electronic means, allowing orders to be placed into the direct market access system, processed electronically subject to preset trading and risk limits and other controls

and resulting in an order being placed on the exchange or an alternative trading facility. 14.

IOSCO identified common characteristics of high frequency trading, in a definition adopted by ASIC in its 2013 review, ASIC Report 331, Dark Liquidity and High Frequency Trading, March 2013, as involving the use of sophisticated technological tools for pursuing different strategies, ranging from market-making to arbitrage; the use of algorithms along the whole investment chain, including analysis of market data, deployment of trading strategies, minimisation of trading costs and execution of trades; a high daily portfolio turnover and order-to-trade ratio; typically involving flat positions at the end of the trading day, so that little or no risk is carried overnight; typically employed by proprietary trading firms or proprietary trading desks, and sensitive to speed of trading. For academic commentary, see E Clark, ‘The Legal Tortoise and the High Frequency Trading Hare: The Challenge for the Regulators’ (2011) 25 A J of Corp L 274; I Poirer, ‘High Frequency Trading and the Flash Crash: Structural Weaknesses in the Securities Markets and Proposed Regulatory Responses’ (2012) 8 Hastings Bus LJ 445; TE Levens, ‘Too Fast, Too Frequent? High Frequency Trading and Securities Class Actions’ (2015) 82 U Chi L Rev 1511; F Pasquale, ‘Law’s Acceleration of Finance: Redefining the Problem of High-Frequency Trading’ (2015) 36 Cardozo L Rev 2085.

15.

Moloney, EU Securities and Financial Markets Regulation, above p 526.

16.

ASIC Report 331, Dark Liquidity and High Frequency Trading, March 2013; Consultation Paper 202, Dark Liquidity and High Frequency Trading: Proposals; ASIC Report 452, Review of High Frequency Trading and Dark Liquidity, October 2015.

17.

Predatory conduct can include ‘stuffing’, involving a volume of orders that creates market congestion slowing trading for other traders; ‘smoking’ by which limit orders are placed to attract other traders, and then reversed so as to execute against the other traders orders; ‘spoofing’, where orders are placed and cancelled to create a false appearance of market activity; ‘phantom’ orders which appear to be available but then disappear, inducing others to trade at prices that might not otherwise have existed or allowing the high frequency trader to infer others’ trading intentions; ‘liquidity detection’ which involves trades seeking to determine the direction of fundamental investors’ demand and trading ahead of that demand, creating execution costs to other traders; and ‘latency arbitrage’ which relies on speed of trading to detect price differences between trading venues; see ASIC Report 331 at [378]–[401].

18.

ASIC Report 452, Review of High Frequency Trading and Dark Liquidity, October 2015, [36], [93], [105].

19.

Carragreen Currency Corporation Pty Ltd v Corporate Affairs Commission (1986) 7 NSWLR 705; 11 ACLR 298 at 312–13.

20.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.18]–[172.19].

21.

Explanatory Memorandum to the Financial Services Reform Bill, [7.14].

22.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.20].

23.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.175].

24.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.175].

25.

Explanatory Memorandum to the Financial Services Reform Bill, [7.19].

26.

The term ‘participant’ is defined in s 761A as ‘a person who is allowed to directly participate in the market under the market’s operating rules’. In ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.95], ASIC indicates its view that a person directly participates in a market if he or she has unintermediated access to the market’s trading system or has direct legal

responsibility for an offer or invitation made through the market. 27.

ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.38]–[172.39]. Regulatory Guide 172 also indicates factors to which ASIC will have regard in determining whether a financial market is targeted at Australian investors.

28.

Explanatory Memorandum to the Financial Services Reform Bill, [7.15].

29.

Explanatory Memorandum to the Financial Services Reform Bill, [7.27]; see also ASIC Regulatory Guide 172 — Australian Market Licences: Australian Operators, [172.51]–[172.52].

30.

Explanatory Memorandum to the Financial Services Reform Bill, [7.100].

31.

Explanatory Memorandum to the Financial Services Reform Bill, [7.38].

32.

Transmarket Trading Pty Ltd v Sydney Futures Exchange Ltd (2010) 188 FCR 1; 78 ACSR 507; [2010] FCA 534 at [92].

33.

Transmarket Trading Pty Ltd v Sydney Futures Exchange Ltd, above at [95].

34.

ASIC RG 172: Australian Market Licences: Australian Operators, [172.84].

35.

This section was amended to take its present form by the Corporations Amendment (Financial Market Supervision) Act 2010 (Cth) in connection with the transfer of market supervision responsibilities from the ASX to ASIC: see Explanatory Memorandum to the Corporations Amendment (Financial Markets Supervision) Act 2010 (Cth), [1.6]–[1.9].

36.

ASIC RG 172: Australian Market Licences: Australian Operators, [172.187]–[172.198].

37.

ASIC RG 172: Australian Market Licences: Australian Operators, [172.199]–[172.204].

38.

ASIC RG 172: Australian Market Licences: Australian Operators, [172.205]–[172.206].

39.

ASIC RG 172: Australian Market Licences: Australian Operators, [172.209]–[172.211].

40.

ASIC RG 172: Australian Market Licences: Australian Operators, [172.212]–[172.220].

41.

This could occur by that information being made available on the market’s website: Explanatory Memorandum to the Financial Services Reform Bill, [7.65]. ASIC RG 172 sets out ASIC’s view of the scope of the information which a market licensee must make publicly available concerning the compensation arrangements that are in place under Pt 7.5: ASIC RG 172: Australian Market Licences: Australian Operators, [172.112].

42.

Golden Bounty Resources NL v National Companies and Securities Commission (1990) 3 WAR 199; 3 ACSR 134; 8 ACLC 1123.

43.

A CS facility licensee is not required to hold an additional licence to provide financial services that are incidental to its facility’s activities: s 911A(2)(d). However, the CS facility provider would need to hold an AFS licence in order to provide financial services which were not incidental to the facility’s activities.

44.

ASIC RG 211: Clearing and Settlement Facilities: Australian and Overseas Operators, [211.1].

45.

Explanatory Memorandum to the Financial Services Reform Bill, [8.33].

46.

ASIC RG 211: Clearing and Settlement Facilities: Australian and Overseas Operators, [211.79]–[211.82].

47.

Explanatory Memorandum to the Financial Services Reform Bill, [8.90].

48.

Explanatory Memorandum to the Financial Services Reform Bill, [8.43].

49.

Explanatory Memorandum to the Financial Services Reform Bill, [8.54].

50.

An ‘unacceptable control situation’ exists if a person’s voting power in a widely held market body is

more than 15%; or (in relation to a body other than the ASX), a higher percentage approved under Pt 7.4 Div 1 Subdiv B; or (in relation to the ASX) a higher percentage prescribed in the regulations: s 850B. 51.

The entities specified in reg 7.4.01 are referred to as ‘widely held market bodies’ for the purposes of Pt 7.4 Div 1.

52.

However, the court must not make an order under s 850D if that order would result in the acquisition of property from a person other than on just terms, and would be invalid because of s 51(xxxi) of the Constitution: s 852A.

53.

Section 206B refers to insolvent persons and persons who have been convicted of certain offences.

54.

The register under s 1274AA contains the names of persons whom a court or, in certain situations, ASIC has ordered not to manage a corporation.

55.

Re Securities Exchanges Guarantee Corporation Ltd (as Trustee for National Guarantee Fund) [2016] NSWSC 76 per Ball J at [30].

56.

Securities Exchanges Guarantee Corporation Ltd v Aird (2001) 161 FLR 420; 38 ACSR 185; [2001] NSWSC 379.

57.

DS Latysheva, ‘Taming the Hydra of Derivatives Regulation: Examining New Regulatory Approaches to OTC Derivatives in the United States and Europe’ (2012) 20 Cardozo J Intl & Comp L 465; Moloney, EU Securities and Financial Markets Regulation, above p 573.

58.

IOSCO, Principles for Financial Market Infrastructures, April 2009, p 9.

59.

MacNeil, An Introduction to the Law on Financial Investment, above pp 396, 398.

60.

BM Friedman (ed), Reforming US Financial Markets: Reflections Before and Beyond Dodd-Frank, MIT Press, Cambridge MA, 2011, pp xiii–xv; D Awrey, ‘Complexity, Innovation and the Regulation of Modern Financial Markets’ (2012) Harvard Business LR 235.

61.

G Walker and R Purvis (eds), Financial Services Law, 3rd ed, Oxford University Press, Oxford, 2014, p 746; P Mulbert, ‘Managing Risk in the Financial System’ in N Moloney et al, The Oxford Handbook of Financial Regulation, Oxford University Press, 2015, p 391.

62.

Revised Explanatory Memorandum to the Corporations Legislation Amendment (Derivative Transactions) Bill 2012, [1.96].

63.

Revised Explanatory Memorandum to the Corporations Legislation Amendment (Derivative Transactions) Bill 2012, [1.6].

64.

See generally ASIC Consultation Paper 205, Derivative Transaction Reporting, 28 March 2013; ASIC Consultation Paper 221, OTC Derivatives Reform: Proposed Amendments to the ASIC Derivative Transaction Rules (Reporting) 2013, July 2014; ASIC Regulatory Guide 251 — Derivative Transaction Reporting, February 2015. The application of the derivative trade reporting rules is modified, in respect of foreign authorised deposit-taking institutions, by ASIC Derivative Transaction Rules (Nexus Derivatives) Class Exemption 2015.

65.

See ASIC Consultation Paper 201, Derivative Trade Repositories, March 2013; ASIC Regulatory Guide 249 — Derivative Trade Repositories, April 2015; ASIC Consultation Paper 231, Mandatory Central Clearing of OTC Interest Rate Derivatives Transactions, May 2015.

[page 411]

Chapter 11 OVERVIEW of REGULATION of the SECURITIES MARKETS and the REGULATION of MARKET PARTICIPANTS Introduction Statutory Regime and the Role of ASIC Statutory regime (in broader detail) Market Integrity Rules — statutory requirements ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 ASIC Market Integrity Rules (ASX Market) 2010 ASIC Market Integrity Rules (Chi-X Australia Market) 2011 Enforceability of the Operating Rules Effect of s 793C on the reach of the operating rules Relevance of other provisions of the Corporations Act Interpretation of the expression ‘person aggrieved’? Ability of participants/members of Chi-X/ASX to enforce rules pursuant to the Corporations Act Cases illustrating the consequences of failure to comply with the operating rules Additional orders which can be made by the court under s 1101B Potential impact of the competition law statute, the common law, and administrative law rules on the activities of market operators Role of the Market Operators to Administer and Enforce Their Operating Rules

11.1 11.6 11.6 11.8 11.10 11.15 11.23 11.24 11.25 11.26 11.27 11.31 11.32 11.33 11.35

11.38



Corporate structure of the ASX and the rights of members

11.38

[page 412]

ASX Operating Rules: an overview Access to the ASX market ASX ongoing compliance requirements ASX’s power to sanction and discipline participants ASX’s power to suspend or terminate the role/actions of a market participant ASX disciplinary process Appeals and ancillary matters Resignation as an ASX participant Challenging the actions of the ASX Chi-X admission requirements Chi-X ongoing compliance requirements Chi-X disciplinary action Resigning as a participant of Chi-X Enforcement matters affecting both markets Role of the ASIC Markets Disciplinary Panel (MDP) Conclusion

11.40 11.41 11.43 11.44 11.45 11.47 11.49 11.50 11.51 11.52 11.53 11.54 11.55 11.56 11.57 11.58

INTRODUCTION 11.1 In the previous edition of this book, we noted that the Australian Government in August 2009 decided to change the administrative and legal arrangements for the regulation of securities markets in Australia, by switching much of the responsibility previously held by the Australian Securities Exchange (ASX) in dealing with these matters to the Australian Securities and Investments Commission (ASIC). At that time the government had under consideration by a specialist body, the Council of Financial Regulators (CFR), a review of a fundamental question which had yet to be ruled on, namely whether the ASX should continue to enjoy a

monopoly in the Australian market for the provision of listing facilities of company securities. In effect we noted that the ASX ‘continues to remain the sole market participant offering those services’. 11.2 The ASX Listing Rules, which have been in operation in one form or another for many years, still remain the only rules applying in this area. Now, as a result of a report by the CFR, ‘Review of Competition in Clearing Australian Cash Equities: Conclusions’, which was delivered to the federal government in June 2015, but not released until 30 March 2016, the federal government announced that the ASX monopoly over clearing share trading would end in mid-2017. The media release of the Treasurer on 30 March 2016 stated: ‘[t]he Turnbull Government is absolutely committed to open and competitive markets which are fundamental to a vibrant 21st century economy.’ The opening up of competition in the clearing of cash equities is in line with the government’s commitment to competition law reform. The media release also noted that the report of the CFR set out the expectations of how the ASX would conduct its operations as the sole provider (in the meantime), and the legislative changes that will be made to ‘allow regulators to enforce the expectations where necessary’. [page 413] In line with other competition law announcements that the government has made over in the first half of 2016, the Australian Competition and Consumer Commission (ACCC) is to be given power to arbitrate disputes about access to the ASX’s clearing and settlement services. Under this new approach the government also announced that the rules relating to ownership of shares in the ASX will be amended and restrictions removed to make the legislation consistent with other financial sector companies, such as banks and insurance companies. This flexibility will enable the ASX to raise capital and to compete more effectively internationally. The media release also recognised that the ASX has plans to introduce new technology to enable it to operate more effectively in international

markets. This interest by the ASX to invest in new technology is expected to be supported by the government. This will assist in creating an environment in the Australian financial services sector where it can be both internationally competitive and play a critical role in increasing the developing transition of the Australian economy. It will be sometime before this legislation is introduced. For the time being, at least, the constraints in the market place noted in previous editions of this book, and the features that surrounded the previous attempts to merge the ASX with other stock exchanges remain on foot. As noted in the previous edition of this book the only decision that the ACCC has to consider in relation to questions surrounding the exercise of the monopoly powers vested in the ASX to administer the relevant listing operations is the decision in Pont Data Australia v ASX Operations Ltd (1990) 21 FCR 385; 93 ALR 523. This was private litigation and resulted in no remedies being ordered against the ASX. Even though there potentially will be new competitors entering into the market place to provide listing and related facilities, remedies will remain available under the Competition and Consumer Act 2010 (Cth) (CCA), (previously known as the Trade Practices Act 1974 (Cth)), where there is an alleged misuse of the power that might be enjoyed either by the ASX or by new operators in the relevant market. The government has announced that it will implement most of the recommendations which the ACCC and the Harper Report (2014) have supported, including a rewrite of s 46 of the CCA which prohibits a misuse of market power. These positions were based on the strong belief that the relevant section did not enable the regulator (or civil litigants) to adequately challenge misuse of market power by monopolies and similar organisations. There have been no recent successful cases utilising s 46 in dealing with matters that relate to the potential operations of bodies such as the ASX. The cases noted in the previous edition, namely ACCC v Ticketek Pty Ltd [2011] FCA 1489, and the press release issued by the ACCC following that decision,1 remain interesting background information in the context of this significant area of competition law and its application to certain industries in Australia. In a future edition of this book it will be appropriate to assess the way in which the proposed new section dealing with misuse of market power, once enacted, may impact on

[page 414] challenges which may be brought by competitors of the ASX (assuming that it remains a major player in the market for the listing of securities in Australia) and related questions. The impact the ASX can have in ensuring that the Listing Rules are complied with by companies whose shares are listed is very critical. The effect of the dual regulatory framework of the Corporations Act 2001 (Cth) (Corporations Act) under which the official regulator, ASIC, works with the ASX, a partially self-regulatory body, is significant. While the previous arrangements under which the ASX had a more dominant role in regulating the market have been changed — with ASIC now the principal player — a number of interesting questions remain. These include consideration of the interaction between ASIC and the ASX should there be non-compliance with the ASX Listing Rules, or in situations where there is debate concerning the way in which the ASX is administering its obligations to regulate compliance with its Listing Rules. 11.3 Under the new arrangements, and subject to a new body commencing operations in relation to the listing of securities, the ASX, while no longer the sole market operator regulating the trading of securities, remains a dominant player. The company ASX Ltd (the ASX corporation) has its own shares listed on the exchange (ASX) that it administers. As noted earlier ASIC has now become the main regulatory authority with responsibility for supervising matters relating to the operation of the securities markets and for ensuring that adequate rules to regulate the market, and its integrity, are developed. While the ASX plays a significant role in regulation (as is discussed in more detail in 11.38–11.51), ASIC will still have the final regulatory oversight, subject of course to ministerial responsibility (currently the arrangements are for the Assistant Treasurer to be responsible for overseeing this obligation). In Chapter 12 we discuss other implications of the dominant role played by the ASX. 11.4 Currently there are only a small number of organisations which are licensed to operate in the relevant markets involved in the securities

industry. Chi-X, a newly licensed operator, has struggled somewhat to make an economic impact in the relevant market. It has recently been taken over by US interests but remains active in the marketplace, and can now be regarded as a significant player as market integrity rules (MIRs), which are issued and published by ASIC (see 11.23), have been published in relation to its operation. Chi-X is, as we have noted, a new ‘player’ — indeed only the second major player in the business of trading Australian securities — has come a significant way since 2011, when it began its operations with only eight tradeable stocks. It now offers a full suite of all 2100 ASX listed companies, and has operated its own warrants platform since November 2015. Chi-X on its website describes itself as having ‘a significant market presence, regularly recording over $1 billion of daily trading activity and a total market share of over 20%’. Chi-X describes itself in these words on its website: Chi-X Australia launched its platform offering an alternative trading venue for ASX-listed securities … [and] offer[s] products that [are] uniquely tradeable on Chi-X.

[page 415] Chi-X is driven to be an industry leader … generating innovative products and services for the benefit of financial markets and the global trading community.

Chi-X is quite different in its structure and operations to the ASX, which is a corporation with shares listed on the ASX. The discussion of member’s rights and challenges in relation to the way in which corporations should be organised and conducted, which arise from the operation of relevant corporations law, will not apply to Chi-X. But decisions on general rules of equity and general rights of law will still apply. It is unnecessary for our purposes to go into a detailed discussion of how Chi-X operates in the light of these significant differences. 11.5 In addition to Chi-X, there are a number of other currently licensed domestic financial markets operators.2 Set out in a table below is a short description of the respective operations and their locations. The

organisations concerned do not have a significant role to play in the broader securities markets but they are of course important participants in the market for those organisations that operate in the market. Table 11.1: Licensed financial markets operators Licensee Location Australian Securities Sydney Exchange Ltd (formerly known as the Sydney Futures Exchange Ltd)

Description of market Market in derivatives Wholesale and retail participation Operated by ASX following merger in 2006

BGC Partners (Australia) Pty Ltd

Currently licensed to operate a market in Australian Government bonds, semigovernment bonds, corporate bonds and debentures, and New Zealand Government bonds. BTA is a wholly owned subsidiary of Bloomberg LP, a privately owned entity formed in the United States. The markets that BTA operate in Australia form part of a global network of electronic trading systems offered by other Bloomberg group entities in a number of overseas jurisdictions.

Sydney

Bloomberg Tradebook Sydney Australia Pty Ltd

[page 416] Licensee FEX Global Pty Ltd

Location Sydney

Description of market Market in commodity, energy and environmental derivatives. Wholesale and retail participation.

IMB Ltd

Wollongong, NSW

Market in IMB Ltd ordinary shares restricted to members by guarantee

of IMB Ltd. Mercari Pty Ltd Sydney Market in interest rate derivatives, foreign exchange derivatives, commodity derivatives, energy derivatives and environmental derivatives. Wholesale participation. National Stock Newcastle/Sydney, Operated by NSX Group. Exchange of Australia NSW Second largest listing market in Ltd Australia. Market in securities, managed investments. Wholesale and retail participation. SIM Venture Securities Exchange Ltd (SIM VSE) (formerly known as Bendigo Stock Exchange Ltd)

Sydney

Operated by NSX Group. Market in securities, managed investments. SIM VSE’s primary aim is to develop a comprehensive licensed equity market place to service issuers, intermediaries and investors in the Cleantech sector. Wholesale and retail participation.

Sydney Stock Sydney Exchange Ltd (SSX) (formerly Asia Pacific Stock Exchange Ltd (APX))

Market in securities and managed investment products. Wholesale and retail participation. SSX provides opportunities for growth oriented companies to raise capital from domestic and international investors, especially from the Asia-Pacific region. SSX also offers Chinese market participants an alternative listing venue to the Shanghai and Shenzhen stock exchanges in China.

Yieldbroker Pty Ltd

Sydney

Provider of markets known as

‘dealer & client market’ and ‘interdealer market’, trading in a broad range of debt and debt derivatives. Pursuant to the rules, market licensees (which at the moment include the ASX and the licensed market operator Chi-X among the other smaller licensees noted in Table 11.1 above) have responsibility for the operation of their own markets, and for monitoring and enforcing compliance with their own relevant operating rules. This regime is further regulated by ASIC, which has issued Regulatory Guides for both the ASX and Chi-X markets.4 A main aim of this new regime is to ensure that all operators will be subject not only to their own operating rules (discussed at 11.24) but also to the Market Integrity Rules (MIRs) published by ASIC. These are discussed below. [page 417] In addition to the MIRs and the other documents that may be issued by the regulators from time to time, ss 793B and 793C of the Corporations Act provide a set of legally effective rules to ensure that the market operates properly. In the body of this chapter and Chapter 12 we shall discuss the effectiveness and importance of these two provisions. We also examine in broad terms the external regulation of securities exchanges and market participants, including the role of ASIC and the supporting statutory regime. However, we will primarily focus on internal regulation of the exchanges by the exchange operators themselves. Where relevant we will discuss areas where this shared system of regulation between ASIC on the one hand, and the interaction between the ASX and Chi-X on the other hand, may impact on the regulatory regime.

STATUTORY REGIME AND THE ROLE OF

ASIC Statutory regime (in broader detail) 11.6 Section 791A of the Corporations Act provides that a securities exchange can only be operated by a person holding an Australian market licence.5 Transitional provisions operate to ensure that exchanges incorporated and operating at the time of the commencement of the Financial Services Reform Act 2001 (Cth) remain approved exchanges for the purposes of the Corporations Act. All securities exchanges operating in Australia are companies limited by shares and registered under the Corporations Act.6 The definition of ‘financial market’ as set out in s 767A(1) is a facility through which: (a) offers to acquire or dispose of financial products are regularly made or accepted; or (b) offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in: (i)

the making of offers to acquire or dispose of financial products; or

(ii) the acceptance of such offers.

Offers to acquire or dispose of financial products on the person’s own behalf are exempt from the definition, as are treasury operations between related bodies corporate and conducting auctions in forfeited shares.7 The securities exchanges are governed by this definition. The power to grant an Australian market license to operate a financial market has been delegated by the Treasurer (who is the relevant Minister) to ASIC by an appropriate instrument on 22 April 2016. This is part of a delegation arrangement to [page 418] speed up the process for obtaining regulatory approvals relating to financial markets and clearing facility licensing, operating rules and compensation arrangements.8

A body corporate may apply to ASIC for the issue of an Australian market licence to operate a financial market.9 ASIC, and previously the Minister, before granting an Australian market licence, must be satisfied that the licensee fulfils the criteria set out in the Corporations Act for the granting of a licence under s 795B. Under s 795B(1)(h) of the Corporations Act, it is necessary to establish that no ‘disqualified individual’ appears to be involved in the applicant. The combined effect of ss 853A–853G of the Corporations Act is that ‘disqualified individuals’ are declared by ASIC as persons who are not fit and proper persons to be involved in the operation of a financial market. The definition of ‘involved in’ as contained in s 853B, covers persons who hold office-bearing positions or who hold more than 15% of the total voting power in the applicant company or in a holding company of the applicant. Under s 853C of the Corporations Act, ASIC may make such a declaration where there is a risk that the licensee or applicant will breach its obligations under Ch 7 if such a declaration is not made. Matters to be considered by ASIC in making such a declaration include the individual’s fame, character and integrity. In assessing an application for a market licence, ASIC must also be satisfied that adequate provision will be made in respect of the licensee’s operating rules.

Broad overview of ASIC’s functions 11.7 Under the new statutory arrangements ASIC enjoys the function of supervising the operation of licensed financial markets: see s 798F of the Corporations Act. ASIC may make MIRs dealing with the activities or conduct of licensed markets, persons in relation to licensed markets and persons in relation to financial products traded on licensed markets. In developing the relevant MIRs ASIC may include details of the relevant penalty that may apply should the relevant rules be ignored. The maximum penalty that may be included in the MIRs is not to exceed $1 million: see s 798G(2) of the Corporations Act. ASIC has so far prepared and gazetted a number of MIRs and from time to time we will refer to the relevant ASIC MIRs in relation to matters that are subject to relevant regulations. Section 798G(1) of the Corporations

Act provides that MIRs are legislative instruments for the purposes of the Legislative Instruments Act 2003 (Cth). Generally, ASIC must not make a MIR unless the Minister has given written consent to the making of the rule: s 798G(3). However, ASIC has power to make such a rule without the Minister’s consent, for example, in an ‘emergency’ situation, if it is of the opinion that it is necessary or in the public interest to do so to protect people dealing in a financial product or class of financial products: s 798G(4). The Minister may subsequently direct ASIC to amend or revoke that rule: s 798G(5). [page 419] Operators of licensed markets, participants in licensed markets and entities prescribed by regulation must comply with the MIRs: s 798H. A contravention of s 798H(1) amounts to a breach of the law and is a civil penalty provision as defined by s 1317E of the Corporations Act. Following a finding that s 798H(1) has been contravened, a court may in appropriate circumstances order a person to pay a pecuniary penalty to the Commonwealth in respect of the contravention of up to the penalty amount set out in the relevant MIR: s 1317G(1C)–(1D). The court may also order a person (other than an operator of a licensed market) to compensate another person (including a corporation), or a registered scheme, to cover the damage suffered by the person or scheme resulting from that contravention: s 1317HB. For the purposes of this section, the concept of ‘damage’ suffered by a person or scheme includes profits made by any person resulting from the contravention, and the concept of damage suffered by a registered scheme includes any diminution in the value of the property of the scheme: s 1317HB(3)–(4). The court may make orders in respect of such a contravention under s 1101B; or order that specified information be disclosed under s 1324B; and may also make orders under s 1325 in respect of such a contravention. ASIC may also issue an infringement notice under Div 7.2A.2 of the Corporations Regulations 2001 (Cth) (Corporations Regulations) or accept an enforceable undertaking under Div 7.2A.1 of the Corporations Regulations.

The function of the infringement notice regime in the context of this area of the law has yet to be in operation for a sufficiently long period to warrant a more detailed assessment. The use of infringement notices by ASIC, and by other regulators in appropriate circumstances has been a matter of some controversy. The ASIC Markets Disciplinary Panel (discussed at 11.47–11.48) has already issued a significant number of infringement notices in relation to different aspects of the operation of securities markets. We do not favour the use of infringement notices in the regulation of the securities industry. The Australian Law Reform Commission in 2003 had recommended against the introduction of the infringement notice regime to be used in the operation of general provisions of the Corporations Act.10 This recommendation was rejected by the then federal government and despite criticism of the regime, it remains in use: see also discussion at 11.57.

Market Integrity Rules — statutory requirements 11.8 Although the ASX and Chi-X have the power to create their own operating rules, there are statutory obligations with which they must comply. The definition of ‘Operating Rules’ of a financial market, or a proposed financial market, is contained in s 761A of the Corporations Act. The section provides:11 (a) … any rules (however described) made by the operator of the facility, or contained in the operator’s constitution, that deal with:

[page 420] (i)

the activities or conduct of the facility; or

(ii) the activities or conduct of persons in relation to the facility; but does not include any such rules that deal with matters in respect of which licensed CS [clearing and settlement] facilities must have written procedures under regulations made for the purposes of subsection 822A(2); or (b) of a financial market, or proposed financial market, means any rules (however described), including the market’s listing rules (if any), that are made by the operator of the market, or contained in the operator’s constitution, and that deal with:

(i)

the activities or conduct of the market; or

(ii) the activities or conduct of persons in relation to the market; but does not include: (iii) any such rules that deal with matters in respect of which licensed markets must have written procedures under regulations made for the purposes of subsection 793A(2); or (iv) compensation rules within the meaning of Part 7.5.

The content of the operating rules is prescribed in the Corporations Regulations: see s 793A of the Corporations Act (interpretation of rules relating to the enforcement of these rules are further discussed at 11.40). The regulations require a licensee’s operating rules to address such matters as access, participants’ conduct, disorderly trading conditions and the conditions under which particular products may be traded. Under s 795B(1)(c) of the Corporations Act, the Minister and now ASIC can grant a licence where the it is satisfied that: [t]he applicant has adequate operating rules, and procedures … to ensure, as far as is reasonably practicable, that the market will operate as mentioned in paragraph 792A(a).

11.9 A breach of the relevant law and ASIC intervention in the context of the regulation of markets, relying primarily on the operation of s 792A, is a matter of great interest. The terms of the section are worthy of careful consideration as they spell out in additional detail the regime of regulation that has been previously the subject of the sole jurisdiction of the company and the ASX. The section provides that a market licensee, to obtain a licence, must: (a) to the extent that it is reasonably practicable to do so, do all things necessary to ensure that the market is a fair, orderly and transparent market; and (b) comply with the conditions on the licence; and (c) have adequate arrangements (which may involve the appointment of an independent person or related entity) for operating the market, including arrangements for: (i)

handling conflicts between the commercial interests of the licensee and the need for the licensee to ensure that the market operates in the way mentioned in paragraph (a); and

(ii) monitoring and enforcing compliance with the market’s operating rules; and

[page 421]

(d) have sufficient resources (including financial, technological and human resources) to operate the market properly; and (e) if section 881A requires there to be compensation arrangements in relation to the market that are approved in accordance with Division 3 of Part 7.5 — ensure that there are such approved compensation arrangements in relation to the market; and (f)

if the licensee is a foreign body corporate — be registered under Division 2 of Part 5B.2; and

(g) if the licence was granted under subsection 795B(2) (overseas markets) — both: (i)

remain authorised to operate a financial market in the foreign country in which the licensee’s principal place of business is located; and

(ii) get the Minister’s approval under section 792H before that principal place of business becomes located in any other foreign country; and (h) if the licensee, or a holding company of the licensee, is a widely held market body (within the meaning of Division 1 of Part 7.4) — take all reasonable steps to ensure that an unacceptable control situation (within the meaning of that Division) does not exist in relation to the body; and (i)

take all reasonable steps to ensure that no disqualified individual becomes, or remains, involved in the licensee (see Division 2 of Part 7.4).

ASIC must be notified in writing before any amendments are to be made to the operating rules by the ASX or Chi-X.12 The role of ASIC in this area is one which will be closely watched by lawyers and others operating in the area. There appears to be a very close association between ASIC and the ASX in relation to its regulatory role and the operations of the ASX, and it is our understanding that ASIC consults with the ASX in relation to these matters in order to ensure that it is administering the relevant area of regulation in line with the expectations of the market. The power to disallow amendments to be made to the operating rules has now been delegated to ASIC. If ASIC does not disallow the amendment within 28 days of receipt of the notice, the amendment will automatically apply. In making a decision to disallow a licensee’s operating rules, ASIC must have regard to the consistency of the change in the operating rules with the licensee’s obligations under the Corporations Act.13 Prior to the recent delegation of powers to ASIC, the Minister when exercising the power to disallow changes to operating rules had a statutory obligation to have regard to ASIC’s advice in deciding whether to disallow the change. While the Minister and now ASIC will have a final say on the nature of

the rules that are developed by the ASX or Chi-X, as they have the power of approval and related powers, neither ASIC, nor the Minister, seems to have the relevant discretion [page 422] to deal with these matters in as broad a way as say the Securities and Exchange Commission does in the United States of America: see Securities Exchange Act 1934 (US) s 19(c).14

ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 11.10 In order to facilitate the introduction of Chi-X as a competing equity market to the ASX, and to resolve any issues arising from their common trading in ASX-listed products, ASIC has also promulgated the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011 (Cth) (Competition MIRs), released 29 April 2011.15 Taking effect from 31 October 2011, the Competition MIRs address competition issues previously identified in ASIC Consultation Paper 145: Australian Equity Market Structure: Proposals, November 2010. In particular these MIRs deal with mitigating ‘issues that arise as a result of multiple exchange markets and crossing systems’.16 More specifically, the Competition MIRs provide that: market participants will provide accurate, up-to-date pre-trade and post-trade information; the information sharing requirements between the operators are spelt out; the rules will achieve the best execution arrangements for clients; there are requirements that will ensure that ASIC’s information on monthly reporting and cross instances of operation is accurate; there are adequate reporting requirements to deal with crossing systems; there are rules prohibiting trading during a trading halt; and

the rules will minimise extreme price movements. The Competition MIRs apply to all trading in shares, interests in managed investment schemes (including exchange-traded funds), rights to acquire shares or interests in managed investment schemes under a rights issue, and CHESS Depository Interests (CDIs) admitted to quotation on the ASX.17 ASIC’s most recent issue of these rules, that is, ASIC Regulatory Guide (RG) 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, sets out ASIC’s current views as to the obligations of market operators and market participants under the Competition MIRs.18 [page 423]

Extreme price movements and best execution 11.11 Chapter 2 of the Competition MIRs deals with extreme price movements and provides for order entry controls for various types of orders in relation to the purchase of securities, and in respect of relationships involving the way in which those purchases, and the way in which they are dealt with, are regulated. A number of technical terms are used in the MIRs including terms providing for transparent cancellation policies. The Competition MIRs also require market operators to maintain execution risk controls that minimise the incidence of a single order executing at an anomalous price and provide a means for detecting and addressing any such transaction, including cancellation.19 Linked to the effective operation of this rule is Ch 3 of the Competition MIRs. This deals with ‘best execution’, and requires market participants to have policies and procedures in place to ensure that they deliver the best execution outcome for their clients. ASIC Consultation Paper 145: Australian Equity Markets Structure: Proposals (at [145.63]) also sets the availability of multiple trading venues. This means that a choice needs to be made as to the execution of client orders which should be made to

achieve the best result for the client, and set out a best execution proposal which will require market participants to use such practices as will best achieve execution of the orders. The ‘best execution’ requirement ‘promotes investor protection by ensuring market participants do not place their own interests ahead of those of their clients’ and ‘facilitates market efficiency by creating a regulatory incentive for market participants to direct client orders to the market that offers the best outcome’.20 11.12 A market participant must take reasonable steps when handling and executing an order in equity market products, to obtain the best outcome for the participant’s client: Competition MIRs r 3.1.1. That rule distinguishes between the concept of ‘best outcome’ for retail and wholesale clients. For retail clients, best outcome is defined as ‘best total consideration’, which would equate to best price, [page 424] absent material differences in transaction costs between licensed markets.21 For wholesale clients, a range of factors including price, speed and size may be taken into account, and a wholesale client may provide standing instructions opting out of the best execution rules, subject to periodic review; for example, where a high-frequency trader controls the timing of execution of its own trades.22 A market participant may not structure or charge commissions so as to discriminate between licensed markets unless the difference reflects differences in the market fees: r 3.1.3. Market participants who deal with client orders must establish, document and implement adequate policies and procedures to ensure they comply with their best execution obligations and the relevant policies and procedures, and must have arrangements to monitor their policies, procedures and implementation of the best execution obligation: rr 3.2.1– 3.2.2.23 Market participants must disclose specified matters to clients about their best execution arrangements: r 3.3.1. Market participants must demonstrate, on receipt of a reasonable request by a client, that the client’s order(s) have been executed in accordance with the market participant’s best execution policies and procedures: r 3.4.1(1). Market participants

must also keep information to allow them to demonstrate that each client order has been executed in accordance with those policies and procedures for seven years: r 3.4.2.

Pre-trade and post-trade transparency 11.13 Chapter 4 of the Competition MIRs deals with pre-trade transparency and Ch 5 with post-trade transparency. These rules are intended to reduce the risk that competing exchanges may cause pre-trade and post-trade information to fragment between markets and harm price formation if information is not brought together in an efficient and costeffective way; erode liquidity in pre-trade transparent markets; and outline options for achieving consolidated price information.24 ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets notes that pre-trade transparency refers to the availability of information on bids and offers before transactions occur, and is ‘generally regarded as central to both the fairness and efficiency of a market, and in particular to its liquidity and quality of price formation’.25 It also notes that pre-trade transparency ‘enables investors to identify trading opportunities, contributing to investor confidence that they will be able to execute a transaction’.26 Subject to specified exceptions, a market participant is prohibited from entering into a transaction in an equity market product unless the order is first pre-trade transparent on an order book of a licensed market: Competition MIR r 4.1.1. [page 425] A market operator who offer trading in equity market products are required to make pre-trade information available immediately after it receives it, to all persons with whom it has arrangements to make that information available, subject to specified exceptions: r 4.1.2. Exceptions to the requirement for pre-trade transparency are available in respect of crossing trades at or within the spread. Orders matched within the spread must be one or more ticks above or below the best price or at the midpoint of the best price. ASIC has reserved the ability to set minimum

transaction sizes for the application of this exception, but has not presently done so. Chapter 5 of the Competition MIRs deals with post-trade transparency. Market participants must report post-trade information to a market operator for transactions entered into by means of an off-order book under the exceptions to pre-trade transparency requirements: r 5.1.1. A market operator may defer publication of specified transactions, which reflects a policy that immediate disclosure of some executed trades, such as large principal transactions, can have negative market impacts: rr 5.1.1(2), 5.2.1.27

Other regulatory guidelines 11.14 Chapter 6 of the Competition MIRs imposes other obligations on market operators in respect of trading suspensions, information sharing, and material changes to operating rule procedures, among other technical matters. Chapter 7 of the Competition MIRs imposes obligations on market participants, including dealing with trading suspensions and a requirement for a single trade confirmation in respect of multiple markets. Transactions by market participants must also be entered into under the rules of a licensed market: r 7.1.1.

ASIC Market Integrity Rules (ASX Market) 2010 11.15 In addition to issuing the rules relating to this new competitive involvement, ASIC has also prepared and issued market integrity rules governing the operations of both the ASX and Chi-X, as well as some of the other licensed market operators: see the list of other licensed market operators at 11.5. The market integrity rules issued by ASIC relating to trading on both the ASX and the ASX 24 (Futures) Market broadly correspond to the former market rules of those markets.28 We consider very briefly the content of key market integrity rules applicable to the ASX below.

Regulation of participants and representatives 11.16 Chapter 2 of the ASIC Market Integrity Rules (ASX Market) 2010

(ASX MIRs) deals with participants and representatives.29 Part 2.1 sets out a series of [page 426] requirements relating to management of market participants.30 Part 2.2 of the ASX MIRs deals with professional indemnity insurance. Rule 2.3.1 deals with notifications to ASIC of the appointment, removal or resignation of responsible executives31 and requirements as to their skills, knowledge and experience. A responsible executive has specified responsibilities under rr 2.3.2 and 2.3.3. Part 2.4 deals with accreditation of retail client advisers and Pt 2.5 deals with designated trading representatives.

Client relationships 11.17 Part 3.1 of the ASX MIRs sets out certain steps which must be taken before a market participant accepts an order from a client to enter into a market transaction.32 Under these rules, the market participant before accepting an order, must give the client all the documents which a market participant is required to give to a new client or to a client in respect of the market transaction under the Corporations Act and any other document or information required by the market integrity rules and relevant procedures.

Principal trading 11.18 Part 3.2 of the ASX MIRs and s 991E of the Corporations Act deal with transactions in which a broker acts as principal in a transaction with the principal’s client. Principal trading can add liquidity to a market for financial products, and need not be inconsistent with a financial services licensee’s duties to the relevant client if appropriate disclosure is made by the financial services licensee and informed consent is given by the client. Principal trading may also facilitate client trading if the financial services licensee takes the other side of a trade initiated by the client.33 We discuss some of the general law issues below.

At general law, any fiduciary duty owed by a financial services licensee to the relevant client would require disclosure to the client where the principal is acting as principal in a transaction, and a failure to disclose that fact would entitle the client to rescind the transaction, even if the financial services licensee had bought or sold the financial products at market price and acted without any intention to defraud [page 427] its client: Armstrong v Jackson [1917] 2 KB 822 at 824 per McCardie J. However, a client would not be entitled to rescind a transaction if the client had assented to that licensee trading as principal, after the licensee had made full disclosure of the relevant circumstances: Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 385. Section 991E prohibits a financial services licensee (either personally or through an authorised representative) from entering into a financial product transaction on the principal’s behalf if that transaction relates to the financial product which will be traded on a licensed market, if that product is with a person who is not a financial services licensee or authorised representative (‘non-licensee’). An exception to this rule applies where the licensee or their authorised representative, has disclosed to the non-licensee that they will be acting on their own behalf, and the nonlicensee has consented (in accordance with any applicable regulations), to the licensee acting in the proposed dealing in that way: s 991E(1). Part 3.2 of the ASX MIRs in turn applies where a market participant enters into a market transaction34 with a client as principal, except where the client is a market participant or a participant or member of a recognised stock exchange (as defined in the market’s operating rules): r 3.2.1. Rule 3.2.2 provides that, before entering into a market transaction as principal with a client, the market participant must disclose (or have previously disclosed) that the participant is acting (or may act) in the transaction as principal, and has obtained the consent of the client in accordance with s 991E(1)(d). Rule 3.2.4 in turn provides that a market participant entering into a market transaction personally with a client may

not charge that client brokerage, commission or any other fee in respect of the market transaction, other than in specified circumstances.

Reporting to clients 11.19 Part 3.4 of the ASX MIRs deals with reporting to clients. Rule 3.4.1 requires market participants to give a confirmation to their client in respect of each market transaction entered into on a client’s instructions or on a client’s managed discretionary account. That confirmation must be sent to the client in writing or electronically or in another form permitted by ASIC immediately after the market participant enters into the market transaction. The relevant confirmation must include all information required to be included in a confirmation under s 1017F of the Corporations Act. A confirmation must include a statement that it is issued subject to the market integrity rules, directions, decisions and requirements of ASIC and the clearing rules and, where relevant, the settlement rules; the customs of the market; and the correction of errors and omissions, unless the market participant has obtained and retained an acknowledgment to that effect from the client: r 3.4.1(3)(b). The confirmation must also include other specified information. [page 428]

Other obligations 11.20 Part 3.5 of the ASX MIRs deals with market participants’ obligations in respect of client money and property, and should be read with Pt 7.8 Div 2 of the Corporations Act, which also deals with treatment of clients’ money. Part 3.6 deals with the situation where, as a result of a market participant’s relationship to a client, the market participant is in possession of information that is not generally available in relation to a financial product the subject of the dealing, if that information is likely to materially affect the price of the financial product. If the information was generally available, the market participant must not give any advice to any other client of a nature that would damage the interest of either of those clients: r 3.6.2. Part 3.6 has to be read in conjunction with the prohibition

of insider trading in Pt 7.10 Div 3 of the Corporations Act: for further detail see Chapter 17. Part 3.6 is directed to the offering of advice to clients of a broker, while the statutory prohibition on insider trading extends to the execution of dealings upon the client’s instructions, subject to the defence in s 1043K of the Corporations Act: see Chapter 17.

Trading 11.21 Chapter 5 of the ASX MIRs deals with trading. Rules 5.1.3–5.1.4 deal with the execution of orders35 and apply to the exclusion of s 991B(2) of the Corporations Act (client order precedence) and reg 7.8.18(3) (order of execution of instructions) in relation to transactions executed by market participants on the ASX: regs 7.8.17, 7.8.18(1). Rules 5.1.5–5.1.6 deal with fairness and priority in allocation by market participants36 and apply to the exclusion of the order of execution of instructions otherwise specified in reg 7.8.18(4) in relation to transactions executed by market participants on the ASX: reg 7.8.18(1). Part 5.6 deals with automated order processing.37 Part 5.7 deals with manipulative trading. A market participant is prohibited from making a bid or offer for, or dealing in, any products as principal, with the intention of creating a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product; or if that bid, offer or dealing has that effect or is likely to have that effect: r 5.7.1(a). A market participant is also prohibited from making a bid or offer for, or dealing in, any product on account of any other person, if the market participant intends to create a false or misleading appearance of active trading in any product or with respect to the market for, or the price of, any product; or the market participant is aware that the person intends to create such an appearance; or, taking into account the circumstances of the order, the market participant ‘ought reasonably suspect’ that the person has placed the order [page 429] with the intention of creating such an appearance: r 5.7.1(b). Rule 5.7.2

specifies a number of matters to which the market participant must have regard in considering the circumstances of a client’s order. This rule should be read in conjunction with s 1041B of the Corporations Act. In essence this particular set of rules forbids, in the first place, any acts or omissions having the element of market manipulation, including an act or omission which has or is likely to have the effect of creating or causing the creation of a false or misleading appearance of active trading in financial products on a financial market operated in the jurisdiction. It also prohibits the creation of false or misleading appearance with respect to the market for, or the price for, trading in financial products on a financial market operated in the jurisdiction, and with regard to the authorities as to that section and its predecessors: see 16.10–16.14. The obligations imposed by Pt 5.7 are expressly extended to orders which are the subject of automated order processing: r 5.7.3. Part 5.8 of the Corporations Act prohibits wash trades, pre-arranged trades and dual trading in futures transactions. A market participant is prohibited from effecting any futures transactions where the account in respect of which the market participant enters into the futures transaction is the same on both sides of that transaction: r 5.8.2. Part 5.8.2 is wider than s 1041B(2)(a) of the Corporations Act which also deals with wash trades. A market participant is also prohibited from giving or accepting a request or instructions that a futures market transaction will only be entered into between particular market participants. Furthermore the participant must not arrange a futures market transaction with another market participant to the exclusion of other market participants. The market participant must also ensure that arrangements are in place so that a relevant representative, responsible for placing orders for the market participant’s own account, does not have access to orders submitted by clients of the market participant before those client orders are transmitted to the derivatives trading platform for execution: rr 5.8.3–5.8.4. In addition, r 5.9.1 prohibits a market participant from doing, or failing to do, anything which results in a market for a product not being a fair and orderly market. The notion of a ‘fair, orderly and transparent’ market in this rule corresponds to the phrase used in s 792A of the Corporations Act: see Transmarket Trading Pty Ltd v Sydney Futures Exchange Ltd [2010] FCA 534; (2010) 188 FCR 1; 78 ACSR 507 at [88], [95]; and

10.16. Part 5.10 relates to dealings in cash market products not yet granted official quotation.

Takeovers 11.22 Chapter 6 of the ASX MIRs deals with takeovers. A market bid38 must be announced by a market participant acting on behalf of a bidder in relation to that bid: r 6.1.1. That announcement of a market bid must include specified information.39 Rule 6.1.2 deals with any increase to the offer price, extension to the offer period, withdrawal of the market bid or other variation to the market bid, and [page 430] requires a written announcement if a market participant ceases to act on behalf of the bidder. Part 6.2 deals with acquisition of cash market products during the bid period. Part 6.3 restricts trading by a market participant acting for a bidder or issuer.

ASIC Market Integrity Rules (Chi-X Australia Market) 2011 11.23 In its introduction to ASIC RG 224: Guidance on ASIC Market Integrity Rules for the Chi-X Market and APX markets, November 2015, ASIC has described that its approach in formulating those rules was influenced by the need to ‘model the rules, as far as possible, on the ASIC Market Integrity Rules (ASX)’ and that the ‘main consideration underlying this approach is that the same conduct in relation to the same or similar products should be treated in the same manner in [both sets of rules]’: at [224.7].40 In the authors’ view, while differences between the two sets of rules arose previously because of the different types of markets that were being operated, the differences are now far less significant. The ASX market, rich in experience (having been in operation for many years), deals in a range of securities including derivatives, cash market products, warrants and the

futures market. Chi-X, recently amended the way in which it operated to include the ability to deal in equity warrants. This in a sense has meant that the differences between the two are of less significance. In the explanatory statement to the ASIC MIRs relating to Chi-X, it is stated that the aim of the drafting was to: (a) contribute to a level playing field between ASX and Chi-X in respect of the requirements placed on participants of both markets; (b) minimise the opportunity for regulatory arbitrage by participants; (c) assist participants of both the ASX and Chi-X markets to comply with the new regulatory obligations; and (d) contribute to efficiency in supervision and enforcement of the Market Integrity Rules by ASIC because the same standards of conduct will be applied.41

It is our view that this statement is probably of less relevance today, as Chi-X develops more sophistication in its activities. However, it is also to be noted that Chi-X is continually updating its terms of operation to involve a more significant range of products than it is able to provide services for.

Enforceability of the Operating Rules 11.24 The question of how enforceable the relevant operating rules might be, is linked to the questions concerning the enforceability of other rules that apply in this regime. In Chapter 12 we discuss in some detail the enforceability of the listing rules and ancillary questions that are linked, to a certain extent, to our consideration of this particular question at this point. [page 431] It is important to ensure that the rules which operate in the markets today are as relevant and as effectively supervised as possible and ASIC is tasked with the responsibility to ensure that the MIRs are as relevant and up–to-date as possible. This role is to be linked to the fact that ASIC has a joint role, together with the ASX and Chi-X, to ensure that the relevant

operating rules continue to be kept up-to-date so that any questions relating to the regulation of the market is linked very closely to the ability of each organisation to effectively play its role in this area. In the case of the ASX Operating Rules, and especially in relation to the ASX’s role of monitoring the conduct of market participants and enforcing compliance (contained in section 5), one must also bear in mind the impact and importance of the ASX Enforcement and Appeals Rulebook. These rules provide the background which is similar to the constraints that existed prior to the transfer of major powers in this area to ASIC. In place now, to take over from the previous arrangements, is the Market Disciplinary Panel (MDP) and the matters for which it is given responsibility. This, together with the operations of ASIC, is again very important. Similarly, it is important to note that the Chi-X Operating Rules reflect the same approach, although perhaps not as sophisticated as the ASX regime. Before commenting on the subject of monitoring and disciplining of participants, it is important to note the legislative background against which these rules operate. As s 793C is a critical provision in this context, it should be read side-by-side with s 793B, which provides the guidelines to evaluating the legal effect of the ASX and Chi-X Operating Rules. Section 793B(1) provides that: … the operating rules (other than listing rules) of a licensed market have effect of a contract under seal: (a) between a licensee and each participant in the market; and (b) between a participant and each other participant; under which each of those persons agrees to observe the operating rules to the extent that they apply to the person and to engage in conduct that the person is required by the operating rules to engage in.

Section 793B(2) further provides that if there is an inconsistency between the operating rules and the MIRs, the latter will prevail to the extent of any inconsistency. While listing rules have a different ‘contractual’ effect as a result of s 793B(1), s 793C applies to both the operating and listing rules in equal force. It deals with the obligation of the relevant market operators to comply with their operating rules. It further provides that where a person who is under an obligation to comply with or enforce any of a licensed

market’s operating rules, and that person fails to meet that obligation, an application may be made to the relevant court (the Supreme Court or the Federal Court) seeking enforcement of the obligation in question. Such an application may be made by: (a) ASIC; or (b) the licensee; or (c) the operator of a clearing and settlement facility with which the licensee has clearing and settlement arrangements; or (d) a person aggrieved by the failure.

[page 432] If the application is successful, an order could be directed toward ‘(a) the person against whom the order is sought or (b) if that person is a body corporate — the directors of the body corporate; about compliance with or enforcement of the Operating Rules’ pursuant to Corporations Act s 793C(1) and (2). Section 793C of the Corporations Act uses similar language to predecessor legislation (Corporations Law s 777) to ensure that the relevant rules are enforced. In this chapter we discuss briefly the impact of certain leading cases relating to these questions although many of the issues raised will also be discussed in Chapter 12 of the book. The discussion in Chapter 12 concentrates on the impact of s 793C, with respect to the legal enforcement of the legal rules. In this chapter we are concentrating on the way in which the two operating organisations, ASX and Chi-X, are obliged to comply with the relevant rules set down by ASIC and by the legislation. While we noted in previous editions of this book that there may have been some doubt as to how far ASIC, or other relevant parties, could be forced to ensure that the operating rules were complied with in the context of s 793C, there should now be stronger support for the view that, not only is there power to ensure compliance through the usual court processes, but there are also administrative law remedies available. Previously, doubt had been cast as to whether these were available where

there is a failure on the part of the ASX (or perhaps the regulator) to seek enforcement of these rules (for example, through judicial review).

Effect of s 793C on the reach of the operating rules 11.25 Perhaps the first judicial decisions relevant to this question are the first instance and appeal decisions involving Hudson Securities Pty Ltd, In the primary decision of Santow J in Australian Stock Exchange Ltd v Hudson Securities Pty Ltd (1999) 33 ACSR 416,42 his Honour had to the consider the ASX’s powers of investigation under its then Business Rules. Santow J referred (at [82]) to the Laws of Australia, in which the applicability of judicial review in the area of the legislation was considered. Although there is no direct reference by his Honour to the UK decision in R v Panel on Takeovers and Mergers; Ex parte Datafin plc [1987] QB 815; 1 All ER 564, it can be inferred that a determination by the ASX or a similar tribunal could be reviewed if there was a public element present in the relationship between the contracting parties. The extent to which the court will enforce the operating rules in the context of disciplinary actions taken by the ASX was regarded in later cases as unclear.43 The better view now may be that the administrative law remedies will apply. Given that the operating rules operate as a contract, the question arises as to whether they impose an obligation on the operators in the relevant financial [page 433] market? When a committee or other governing body of an association is given power to discipline (participating) members of the association, the committee enjoys a discretion whether to exercise its powers. Like other discretions enjoyed by a committee or a board of directors or other governing body, there is a legal requirement that the committee should exercise its discretion in good faith and for the benefit of the members as a whole.

Relevance of other provisions of the Corporations Act 11.26 As the ASX Ltd (here we are referring to the organisation whose shares are listed on the ASX listing exchange) is a company incorporated under the Corporations Act, the law relating to the commencement of proceedings in the name of the company may be different and become more relevant: see also the discussion of the constitution of ASX Ltd at 11.38. If the ASX decides not to commence proceedings in the company’s name, there could be significant difficulty facing persons who wish to obtain an appropriate court order directing the commencement of proceedings. The ability of shareholders in a company to bring legal proceedings on behalf of the relevant company, where the board of directors refuse to do so, through a representative or derivative action has now been made easier as a result of amendments to the Corporations Act to set up a statutory derivative action regime: see ss 236 and 237 of the Corporations Act. While the earlier interpretation of the statutory provisions was rather less favourable to shareholders in general terms than perhaps was expected, more recently, courts both at the Supreme Court and Federal Court level, have been more generous in granting remedies in favour of shareholders. We discuss the impact of the relevant statutory derivative actions regime in Chapter 12 as well. As a matter of company law it is not apparent that the directors of a stock exchange are under any enforceable obligation to take proceedings against anybody. This is so whether the proceedings are internal domestic proceedings or court proceedings. There is general company law authority to the effect that where a body (such as the ASX or other company) decides that proceedings in the company’s name should not be commenced, a general meeting of shareholders can authorise proceedings to be brought for the benefit of the company as a corporate entity, at least where the abstention could not be considered to be for the benefit of the company: Marshall’s Valve Gear Co Ltd v Manning, Wardle & Co Ltd [1909] 1 Ch 267. But that does not establish that the ASX as a matter of company law is under an obligation to commence proceedings in every case. With the new administrative regime in place and ASIC now having a primary role in supervising markets, it is more likely that the ASX will in

fact become more proactive and co-operate with ASIC to ensure that its rules are enforced. There is further discussion of these important issues, which are perhaps more important in the context of the enforceability of the ASX Listing Rules than they are here: see 12.32. Earlier authorities suggested that a company whose shares were not listed with the relevant operator was not required to comply with the operating rules (the listing rules as well in that context). In Repco Ltd v Bartdon Pty Ltd [1981] VR 1; (1980) [page 434] 4 ACLR 787, the Victorian Full Court did not feel that it was under any obligation on the basis of decided cases, to impose on an unlisted company an obligation to observe ‘any rules, such as the ASX Listing Rules, that may be relevant’. But the court noted that the legislature had recognised that the public interest may require that the relevant business (that is, operating) rules and the listing rules or (the then) business rules be observed even where no contracting party seeks an order. Even if there is nothing in the legislation to oblige a stock exchange to enforce its relevant business rules, the legislation in s 795B will no doubt be influential in ensuring that the ASX (and Chi-X and other relevant organisations in the future) complies with the requirements of the legislation. Market licences will only be granted if the Minister (and now ASIC) is satisfied that the terms of s 795B are complied with. The terms of s 795B are comprehensive. In particular, for the purposes of this discussion, we note that the section requires that the application for a licence must show that: (c) the applicant has adequate operating rules, and procedures, (see Subdivision B of Division 3) to ensure, as far as is reasonably practicable, that the market will operate as mentioned in paragraph 792A(a); and (d) the applicant has adequate arrangements (which may involve the appointment of an independent person or related entity) for operating the market, including arrangements for: (i)

handling conflicts between the commercial interests of the licensee and the need for the licensee to ensure that the market operates in the way mentioned in paragraph 792A(a); and

(ii) monitoring and enforcing compliance with the market’s operating rules;

There are other obligations imposed on the applicant which it is unnecessary to discuss in detail but for completeness, we set out the balance of the provisions below.44 It has been suggested by some that this statutory provision still falls short of imposing an obligation on a market licensee to ensure compliance with its operating rules.45 It leaves open the possibility that the Minister, and in particular ASIC, may grant a licence to a body whose rules give the directors and/or committee a discretion as to whether to enforce its operating rules (or equivalent) in a particular case. [page 435] In the authors’ view, the better interpretation of s 793C is that where a person, organisation or body (such as the ASX or Chi X) is faced with the discretion as to whether to enforce compliance with its relevant rules, and there is a discretion vested in that organisation then the failure of that organisation to enforce the relevant rules might trigger intervention by ASIC in appropriate circumstances. More specifically, because it is a corporation, the directors of ASX may decide not to enforce a particular rule because they may feel that it is not in the best interests of the corporation. This is an insufficient basis, in the authors’ view, for ASX to rely on for its decision. While directors of ASX must act in the best interest of the corporation, they are also the holders of the licence under statutory conditions — conditions which require compliance with a set of rules enacted to allow the securities market to operate efficiently and fairly. It is arguable that the fact the Minister and ASIC, in carrying out the relevant delegated powers, are required to take into account the public interest in making certain decisions related to licences (s 798A(2)(g) of the Corporations Act), a decision not to enforce a rule which could be characterised as being for the benefit of the public would also be improper.

Interpretation of the expression ‘person aggrieved’?

11.27 While the question, ‘who is the “person aggrieved”?’ has been the most often litigated question in this context, the number of cases is nevertheless quite small. The interpretation of the expression ‘person aggrieved’ arises out of the operation of several pieces of legislation. An interesting case of non-securities industry background is the decision in Attorney-General (Gambia) v N’Jie [1961] AC 617; All ER 504. In that case the Privy Council noted (at 634): The words ‘person aggrieved’ are of wide import and should not be subjected to a restrictive interpretation. They do not include, of course, a mere busybody who is interfering in things which do not concern him: but they do include a person who has a genuine grievance because an order has been made which prejudicially affects his interests.

In addition, the Privy Council noted that the phrase was not confined to a person who had been a party to some proceedings and had a decision against him or her. This decision was cited and discussed by Finkelstein J in Brereton v Australian Securities and Investments Commission [2007] FCA 651. His Honour accepted the plaintiff’s submissions that he had standing, under s 601AH of the Corporations Act, to apply for the reinstatement of his former company under the legislation on two grounds: that he could potentially be described as a creditor of the company; and that he arguably had claims to make against the company. The decision in Tooheys Ltd v The Minister for Business & Consumer Affairs (1981) 36 ALR 64 at 79 (Tooheys Ltd) is also relevant in this context. In that case Ellicott J suggested that standing would be available even though an applicant has no legal interest at stake in the making of a decision, provided that the applicant could show ‘a grievance which will be suffered as a result of the decision complained of beyond that which he or she has as an ordinary member of the public’. It is interesting to note that a similar approach was adopted by Bowen CJ, Franki and Northrop JJ in Ricegrowers Co-operative Mills Ltd v Bannerman (1981) 38 ALR 535 at 540 [page 436] and Fisher, Lockhart and Wilcox JJ in Ogle v Strickland (1987) 71 ALR

41 at 42–3. In an interesting recent case, Clyde Group Inc v Minister for Primary Industries and Water (2007) 17 Tas R 85; [2007] TASSC 95, Blow J ruled that it unnecessary that a corporation which was seeking standing to institute proceedings under the Judicial Review Act 2000 (Tas) had been in existence at the time the decision, which triggered the claim, was made. In Australian Institute of Marine and Power Engineers v Secretary, Dept of Transport (1986) 13 FCR 124, Gummow J endorsed the approach of Ellicott J in Tooheys Ltd that whether an applicant has standing will depend on the nature of the decision under consideration and the extent that the applicant’s interest is affected beyond that of an ordinary member of public. His Honour found in favour of the applicant ruling (at 133): … there flows from the decision … a danger and peril to the interests of the applicant that is clear and imminent rather than remote, indirect of fanciful, and the applicant has an interest in the matter of an intensity and degree well above that of an ordinary member of the public.

The approach of Gummow J in this case was later followed by Bowen CJ, Beaumont and Gummow JJ in Broadbridge v Stammers (1987) 16 FCR 296 at 297.46 Both of these cases have been recently cited (at [81]) by Gageler J in Argos Pty Ltd v Minister for the Environment and Sustainable Development (2014) 254 CLR 394, as part of a long line of case authority, to reject the argument that a ‘person aggrieved’ is determined by the scope and purpose of the statute under which the decision is made. While the other judges of the High Court did not discuss these decisions, a majority of the High Court, specifically French CJ and Keane J, agreed with Gageler J on this point. Different approaches, some narrower, and some perhaps more significant, have been taken up by the courts in a number of cases. In Niord Pty Ltd v Adelaide Petroleum NL (1990) 54 SASR 87; 2 ACSR 347, it was held that a person who was not a registered shareholder in the company at the material time was not a person aggrieved for the purposes of the Securities Industry (SA) Code s 42. In the cases in which the meaning of the words ‘person aggrieved’ or similar words have been considered in the context of more traditional corporate law scenarios, there has again been a variety of approaches. We refer to the decision of Malcolm CJ, Ipp and Wallwork JJ in Quancorp v

MacDonald (1999) 32 ACSR 50 at 56–7: discussed on other matters as well at 12.28. In this case, the court held that the applicants, in order to establish a claim under the relevant provision (Corporations Law s 777) at the time, would need to establish that they were shareholders of the relevant company at the material time in order to accept the benefit of a remedy provided for by the court. [page 437] In contrast, Onley J took a slightly more rigorous approach in adopting a narrower interpretation in Robox Nominees Pty Ltd v Bell Resources Ltd (1986) 13 ACLR 475; 4 ACLC 164. The plaintiff held 200 shares in Bell Resources Ltd (Bell). Of these, 100 shares were held as trustee for another company which was a wholly-owned subsidiary of Broken Hill Proprietary Co Ltd. The plaintiff sought relief under the Securities Industry (WA) Code s 42, seeking a direction from the court to Bell that it comply with and observe stock exchange listing requirements. It was argued by the plaintiff that it was a person aggrieved by the alleged failure on the part of Bell to observe the listing requirements. The court held that the statute required more than a mere holding of shares in order to give a plaintiff standing to have the rules enforced. In any event, the court did not find that the listing requirements had been breached. Olney J felt that as none of the other shareholders in the company had come to the aid of the applicant (and neither had the Corporate Affairs Commission, which was served with a notice of application), this supported his decision. The Perth Stock Exchange did not intervene in the case. Olney J noted (at 477): [I]f anybody ought ordinarily to be regarded as the policeman of the observance of this statute, one would expect that either or both of the Commission and the stock exchange would fulfil that role. Both of those bodies are fully aware of all of the intricacies of the matter and have not chosen to put a view to this court. I take that into account, or I would had I been called upon to do so, in declining to exercise a discretion in favour of the application.

For a more recent decision in which the court took a narrow interpretation of the expression, see Perrin v Williams (2014) 284 FLR 390.

Interpretation of ‘person aggrieved’ under s 793C of the Corporations Act 11.28 Partly because of the limitations imposed on the interpretation of the expression ‘a person aggrieved’, the Corporations Law s 777 was amended in 1994 (and replaced by s 793C of the Corporations Act in 2001). Section 793C(5) of the Corporations Act now provides that, if a body corporate fails to comply with, or enforce, provisions of the operating rules of a licensed market, a person who holds financial products of the body corporate that are able to be traded on the market is taken to be a person aggrieved by the failure. That definition, however, is not exhaustive: see Corporations Act s 793C(6); and see also s 1101B, discussed below at 11.33 and at 12.12). It is suggested that the words as they appear, even without the extended definition, could refer to someone who, being competent to do so, had lodged a complaint in relation to a participant’s conduct and who is dissatisfied with a decision of the ASX to take no action. If that failure to take action could be improper in the sense described earlier, the complainant would appear to be a person aggrieved. It seems likely that to be a person aggrieved, the complainant would have had to be affected adversely by the conduct of the broker of whom or which he or she complained. Whether the court would entertain proceedings whose only interest was that of a member of the investing public seems doubtful. [page 438] 11.29 Perhaps the most interesting case in which the expression ‘person aggrieved’ is used for the purposes of s 793C is the Federal Court decision in Wenzel v Australian Stock Exchange Ltd (2002) 125 FCR 570; 44 ACSR 1. The appellants applied for membership of the Australian Stock Exchange on 19 April and 2 May 1996. This was before demutualisation. The application was made in the correct form as set out in the articles of association and these included the following provision (art 38(1) cl 13): [T]his application is for admission to the [ASX] upon the terms and under and subject in

all respects to the [ASX’s] memorandum and articles of association and rules which now are or hereafter may be for the time being in force.

While the applications were under consideration, amendments to the articles took effect and these substantially altered the requirements and benefits of membership. These amendments included a provision for a category of members called ‘post-entitlement members’ — those who did not hold membership prior to the demutualisation taking effect. As members of that category, the appellants were denied an allocation of shares pursuant to demutualisation and, by reason of subsequent amendment to the articles of association, they were also denied voting rights. Although the Full Federal Court noted that the appellants did not have any rights stated in the application for shares, the court made these observations (at 584): Existing members would have contractual rights to enforce performance [such as the granting of shares]. Secondly, at the time with which this case was concerned, s 777(1) of the Corporations Law empowered the Court to make an order directing compliance with the ‘business rules’ of the ASX. ‘Business rules’ would include Articles of Association insofar as they dealt with training and experience and other qualifications for membership and exclusion from membership: ss 761 and 769(2). Such an order could be made on the application of the Australian Securities Commission (as it was then known) or a ‘person aggrieved’, which would presumably include a disappointed applicant for membership.

These obiter comments suggest a departure from the traditional boundaries of contract, where the doctrine of privity would generally prevent an enforcement of rights before an agreement as to membership had been reached.47

Interpretation of the expression ‘person aggrieved’ by reference to s 1324 of the Corporations Act 11.30 Another area of interesting development in the context of giving the expression ‘person aggrieved’ a broader interpretation, has been triggered by the inclusion in the Corporations Act of s 1324. In that section, the legislature has vested in a wide range of potential plaintiffs an opportunity to challenge breaches of the Corporations Act and the interpretation of the words of that section may well be carried across into the securities industry’s legislation. In particular, the relevant expression ‘a

person whose interests have been, are or would be effected by [a breach of the Corporations [page 439] Act]’ allows the relevant applicant (which also includes ASIC) to bring proceedings for injunctive or other relief where there has been a breach of the statutory duty or other breaches of the Corporations Act which may amount to a statutory duty. The language of s 1324 is very interesting and therefore we set it out in full: Injunctions (1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute: (a) a contravention of this Act; or (b) attempting to contravene this Act; or (c) aiding, abetting, counselling or procuring a person to contravene this Act; or (d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or (e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or (f)

conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

The courts have provided a generous interpretation of the word ‘any person whose interests are … affected’. The first decision was that of Hampel J in Broken Hill Proprietary Co Ltd v Bell Resources Ltd (1984) 8 ACLR 609 (noted above). More recent decisions in which an even broader interpretation has been adopted are the decisions of Hayne J in Allen v Atalay (1993) 11 ACSR 753 and Mandie J in Vanmarc Holdings Pty Ltd v P W Jess & Associates Pty Ltd (2000) 34 ACSR 222. The broad interpretation of s 1324 can be contrasted with the narrow approach taken by Young J in Mesenberg v Cord Industrial Recruiters (1996) 39 NSWLR

128, also note the comments of Einfeld J in Airpeak Pty Ltd v Jetstream Aircraft (1997) 73 FCR 161; 144 ALR 448 and more recent comments of the Queensland Court of Appeal in McCracken v Phoenix Constructions (Qld) Pty Ltd (2012) 289 ALR 710; (2012) 272 FLR 104; [2012] QCA 129. The Queensland Court of Appeal’s decision and other decisions dealing with s 1324 is discussed in an interesting article by V Baumfield, ‘Injunctions and Damages under s 1324 of the Corporations Act: Will McCracken v Phoenix Constructions Revive the Narrow Approach?’ (2014) 32 C&SLJ 453. While this broader interpretation of who constitutes ‘a person aggrieved’ is one that the authors certainly endorse, it is also worth noting that in some areas of the law it may not be appropriate that similar phrases are construed widely. So, in Re Baysington Pty Ltd (1988) 6 ACLC 50, the court gave this expression a limited interpretation in order to preserve the utility of the Companies Code (WA) (WA Code) in pursuing prosecutions and obtaining documents under the WA Code s 12. In this case, Master Seaman QC said (at 420) that the plaintiff could not achieve standing as a ‘person aggrieved’ (under the WA Code s 537) [page 440] to appeal for the revocation of notices issued to him by the Commissioner for Corporate Affairs: … merely because he is served with a notice [under the relevant Code] and will be disadvantaged by having to carry out work in locating and producing the relevant documents.

It is clear that until we have a definitive High Court decision on this question there will be some doubts concerning the ‘width’ of this expression.

Ability of participants/members of Chi-X/ASX to enforce rules pursuant to the Corporations Act 11.31 As noted earlier, s 793C of the Corporations Act provides, in

effect, that if a person is under an obligation to comply with or enforce the relevant operating rules of the market in the context of the securities regime, the court may make an order issuing directions to that person (or if the person is a body corporate, then its directors) on what steps must be made to ensure compliance with, and/or enforcement of, the relevant operating rules. The court has a wide discretion under this provision and there have been some interesting cases which have discussed the power of the court to exercise this power and similar powers that existed earlier. As noted earlier, the ASX is a corporation. The market participants of the ASX may or may not be members of the corporation, and in that context markets participants who are members will have separate rights under the terms of the Corporations Act. These particular issues are discussed below and at 11.51. The participants in Chi-X are able to rely on s 793B of the Corporations Act, which provides a basis for each participant to be bound by the operating rules to each other and to Chi-X. It does not operate in the same way as the ASX, and therefore markets participants in Chi-X will not have member rights and remedies that are available to particular ASX market participants. In the context of the ASX, and its operations as a corporation (or a company), s 140 of the Corporations Act establishes a contract between the relevant company and each of its members, as well as a contract operating between the members among themselves. This rule operates in addition to s 793B of the Corporations Act. As noted earlier that provides that the operating rules (other than the listing rules) have the effect of a contract between the ASX and its members (and a similar interpretation will apply insofar as Chi-X and its members are concerned. So there may be a remedy that the shareholders (members) may have against the company (ASX in its corporate form). The ability of members or shareholders of the company to have actions that may be brought in the name of the company in their own name has now been enhanced as a result of amendments to the Corporations Act in Pt 2F.1A. We have discussed these provisions briefly above and also in Chapter 12. The relevant applicant is more likely to be ASIC, or a member applying as a person who is otherwise allegedly aggrieved. In that context, it is our

view that s 793C alters the common law principle that a contract can only be enforced by the parties to the contract in the context of the impact of the operating rules: see Repco Ltd v Bartdon Pty Ltd (1980) 4 ACLR 787; [1981] VR 1: discussed at 11.25. Whether a different [page 441] shareholder would have standing in that situation is more doubtful. If standing to apply under s 793C depends on whether the complaining shareholder could have initiated proceedings on the statutory contract, pursuant to s 140 of Act, it is the authors’ view that the ability to bring proceedings will be quite limited in the context of suing on behalf of a company. This is so notwithstanding the broader reading of the statutory derivative action that we have referred to earlier. It is unclear whether every member of ASX would have the power to sue on behalf of the company to ensure that its operating rules should be observed. Nevertheless, there may be greater opportunity for the members to seek administrative law remedies in appropriate circumstances: see below at 11.37 for further discussion. However, standing to proceed under s 793C does not depend on standing to sue at common law, and any other shareholder can be regarded as a person with a special interest in having the operating rules observed. Although the operating rules may have no higher status than a contract, s 793C may have the effect of expanding the types of orders available from the court at the suit of a person who is not a party to the contract. For example, under case law in the exceptional cases in which a non-party can sue on a contract between others, he or she cannot obtain an order for specific performance. Section 793C appears to allow ASIC to obtain such an order. This matter was discussed, but not decided, in the context of a predecessor section to s 793C in Repco Ltd v Bartdon Pty Ltd (1980) 4 ACLR 787; [1981] VR 1 at 9. The section was, surprisingly, not relied on in Bell Group Ltd v Herald and Weekly Times Ltd [1985] VR 613; (1985) 9 ACLR 697 in a dispute involving the alleged failure on the part of the defendant to comply with

the business rules (now the operating rules) of the Melbourne Stock Exchange. Could the ASX or Chi-X be forced under s 793C to give effect to their rules in matters other than disciplining participants? There is an analogy here with the law in the Conciliation and Arbitration Act 1904 (Cth) s 141, now s 164 of the Fair Work (Registered Organisations) Act 2009 (Cth). Under this legislation, a member of an organisation is given a right to take action to enforce the rules of the organisation against particular persons in the organisation who can be directed to perform those rules. The predecessor Conciliation and Arbitration Act 1904 (Cth) provision was often used in relation to internal disputes as to who are entitled to be office-bearers, but was not limited to such cases: R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141.

Cases illustrating the consequences of failure to comply with the operating rules 11.32 An interesting case, Reynolds & Co Pty Ltd v Australian Stock Exchange Ltd (2003) 174 FLR 311; 44 ACSR 612 (Reynolds) (dealing with an older version of the Business Rules of the relevant Australian Stock Exchange), may impact on the way in which the operating rules are now to be interpreted and administered. While there has been a significant change in the way in which the ASX operates (it is now subject to potential oversight by ASIC, but as we have noted elsewhere, ASIC tends to rely heavily on the way the ASX administers its rules), Reynolds offers interesting precedential value, as to how courts will interpret the constantly changing [page 442] climate and regulatory regimes that may impact in this area. The case focuses on the consequence of working with a constantly changing body of rules and the possibility of enforcement, or orders for enforcement, in

certain circumstances involving the interpretation of these rules. Campbell J, in passing, observed that there was an obligation on the part of the ASX to act ‘fairly, reasonably, and without injustice’. The plaintiff — a stockbroker working in Reynolds & Co Pty Ltd (Reynolds) — was charged with a number of breaches of the ASX Business Rules. The first charge was the most significant in that it related to engagement in what was described, at different stages in the development of the rules, as prohibited conduct, and then unprofessional conduct. The details of the conduct are unimportant for our purposes. Campbell J referred to the relevant Business Rules and ruled that the conduct was prohibited conduct. He referred in particular to the then ASX Business Rule 1.10.01 which provided as follows: Unless expressly stated otherwise, in determining whether the act or omission of a party constitutes a contravention of the Operating Rules or constitutes Unprofessional Conduct, the matter will be determined with regard to the Operating Rules in force at the time of the relevant act or omission.

The judge refused Reynolds’ request to stay proceedings, even though there had been a delay on the part of the ASX to bring action in relation to the alleged unprofessional conduct. In his view, the ASX had acted promptly from the time it became aware of the irregular activities of the relevant member. Campbell J felt that this was enough even though, in carrying out supervision on the internal controls and systems of the relevant broker during the period of unprofessional conduct, the ASX had failed to detect activities in breach of the rules. He further ruled (at [151]) that the ASX was proceeding properly and acting ‘for the protection of the public’, which was an important factor against staying the relevant action. Another case which may have some precedential value is McLellan v Australian Stock Exchange Ltd (2005) 144 FCR 327; 54 ACSR 446. In this case the relevant company, Terrain Securities Pty Ltd (Terrain), conducted business as a stockbroker on the ASX, and had apparently breached several of the operating rules. In March 2004 the ASX brought charges against Terrain. These charges had been heard by the Adjudicatory Tribunal in 2004 and a fine of $150,000 had been imposed on the company. Terrain was later placed into administration. The administrator of Terrain sought a declaration that the fines that had been imposed by the ASX occurred after the company was in financial difficulties, and that

therefore the ASX was only a contingent creditor, and not bound by the scheme of arrangement entered into by Terrain. Finkelstein J ruled to the contrary. In his view, while the ASX was a contingent creditor of Terrain, it was bound by the relevant deed of arrangement. The penalties imposed for breaches of the ASX Business Rules had been imposed by the ASX in compliance with its rules. In his view, the Business Rules operated as a contract under seal between the ASX and each participant, including Terrain. Further he noted (at [10]) that from the moment that Terrain: [page 443] … became a participating organisation [of ASX] it was under an obligation to observe the Business Rules. The obligation was contractual in nature; the contract being imposed by [Corporations Act s 793B] … Terrain Securities had committed several breaches of the Business Rules and there was a possibility that each breach might be punished by fine. As a result ASX became a contingent creditor of Terrain Securities. It remained a contingent creditor down to the appointment date. Therefore, ASX was bound by the deed of company arrangement.

Additional orders which may be made by the court under s 1101B 11.33 In addition to s 793C assessing how the court may ensure that the relevant ASIC MIRs and the operating rules are given appropriate attention by the parties, s 1101B of the Corporations Act is also relevant. This should be read together with s 793C. Section 1101B, previously Corporations Law s 1114, was amended in 1994 to take account of recommendations of the Lavarch Committee in its report, Corporate Practices and the Rights of Shareholders.48 In 2001, the substance of s 1114 was transferred to s 1101B with the enactment of the Financial Services Reform Act 2001 (Cth). The new s 1101B widened ASIC’s enforcement powers and brought the language of the provisions into line with the new terminology used in Ch 7 of the Corporations Act. Section 1101B provides the Supreme Court and the Federal Court with wide power to make orders of prescribed kinds in at least three situations

relating to the rules of the ASX. (In addition, the section deals with situations similar to those discussed here as they impact on the operations of other financial services; for example, a clearing and settlement (CS) facility licence and a financial services licence.) The first situation in which courts may make relevant orders is where, on the application of ASIC, it appears to the court that a person has contravened a provision of Ch 7 of the Corporations Act or any other law relating to dealing in financial products or providing financial services, a provision of the operating rules or compensation rules (if any) of a licensee or a condition imposed on a licence, or is about to do an act with respect to dealing in financial services or products which would be such a contravention. With respect to prospective contraventions, the power is limited by the requirement that the proposed act has to be in respect of dealing in financial products or providing financial services. The second situation in which a court may make an order is where, on the application of a market licensee, it appears to the court that a person has contravened the operating rules or compensation rules (if any) of the licensed market. The third situation concerns the application of a person aggrieved who is seeking to have the MIRs, operating rules or compensation rules (if any) complied with by another person. The definition of ‘person aggrieved’ is cast in different terms to those expressed in s 793C of the Corporations Act, discussed above at 11.27–11.29. Section 1101B(2) provides one specific example of who may be a person aggrieved: the subsection identifies the relevant person as one who holds financial products of [page 444] a body corporate that are able to be traded on the licensed market. It is clear that the intention is for the expression to be given a broader rather than a narrower interpretation in the context of the operation of the securities markets. Section 1101B(4) sets out a range of orders that the court may make in the appropriate case. Not all the prescribed orders are applicable to the

enforcement of the operating rules, but the following could conceivably accompany an order directing observance of the ASX Operating Rules (enabling the market rules): in the case of conduct which contravenes the Corporations Act Ch 7, the MIRs, the licensee’s operating rules or any other condition of the market licence, an order restraining a person from carrying on a business, or doing an act or classes of acts, in relation to financial products or financial services (s 1101B(4)(a)); an order giving directions about complying with the MIRs or a provision of the operating rules, or the compensation rules (if any), of a licensed market to a person (or the directors of the body corporate, if the person is a body corporate) who contravened the provision (s 1101B(4)(b));49 an order requiring a person to disclose to the public or to specified persons specified information that the person to whom the order is directed possesses or to which that person has access, if the person contravened a provision of the operating rules of a licensed market or a condition relating to the disclosure or provision of information, or was involved in such a contravention (s 1101B(4)(c)); an order requiring a person to publish advertisements in accordance with the order at that person’s expense, if the person contravened a provision of the operating rules of a licensed market, or a condition relating to the disclosure or provision of information, or was involved in such a contravention (s 1101B(4)(d)); an order restraining a person from acquiring, disposing of or otherwise dealing with any financial products that are specified in the order, or an order restraining a person from providing any financial services that are specified in the order (s 1101B(4)(e) and (f)); an order appointing a receiver of property of a financial services licensee (s 1101B(4)(g)); an order declaring a contract relating to financial products or services to be void or voidable (s 1101B(4)(h)); to secure compliance with a s 1101B order, an order directing a person to do or refrain from doing a specified act (s 1101B(4)(i)); and

any ancillary order deemed to be just and reasonable in consequence of the making of an order under s 1101B (s 1101B(4)(j)). In our view, the intention of this regulation is to enlarge the powers of the courts to make orders under s 793C of the Corporations Act. A disciplinary proceeding [page 445] against a participant may lead to an order under s 1101B affecting persons other than those involved in a s 793C proceeding. Section 1101B(7) vests power in the court to direct that notice of a s 1101B application may be given to such persons as it sees fit, or for notice of an application to be published. The court can also make interim orders pending the determination of a s 1101B application. In exercising its powers under s 1101B, the court has to satisfy itself, so far as it can reasonably do so, that an order would not unfairly prejudice a person: s 1101B(1). Pursuant to s 1101B(11) the court may rescind, vary or discharge a s 1101B order or suspend its operation.

Illustration of a s 1101B order 11.34 The decision of Nicholson J in National Companies and Securities Commission v Monarch Petroleum NL [1984] VR 733; (1984) 8 ACLR 785 is an interesting case which illustrates the operation of the relevant section. It emphasises that there is a wide expression provided to the court to deal with issues that arise and the orders that the court can make. The facts of the case are rather unusual. A copy of a forged letter to its shareholders from a group of Perth companies known as the Magnet Group of Companies, purportedly signed by the chairman of the group, was delivered to the Perth Stock Exchange on 14 March 1984. The stock exchange read out the letter at 11.01 am (EST) on a loudspeaker system which operated on the floor of that exchange. As was usual, this broadcast was carried out at all other Australian stock exchanges. The information contained in the letter was false, but clearly indicated a

substantial ‘windfall’ to the Monarch Group as a result of the alleged settlement of a major piece of litigation. Trading in shares of the Monarch Group immediately increased dramatically. The secretary of the group, on hearing the announcement, hurried to the Perth Stock Exchange, examined the letter, and pronounced it a forgery. Trading in all shares of the group was then suspended. No employee of the Magnet Group was involved in the forgery. The National Companies and Securities Commission (the main predecessor body to ASIC) sought an injunction to prevent further trading or transactions in the shares, and was granted an interim injunction to restrain the companies from registering any transfer of shares occurring after 11.01 am on the relevant day. The respondents included the group of companies plus one person who had purchased shares following the announcement and who had consented to the original interim order. The court ordered widespread national advertising to give sufficient notice of the intention of the commission to seek permanent restraining orders to any person whose interests might have been affected. In fact, no other person other than the particular respondents referred to above attended the hearing. At the hearing the court ordered that all transactions following the announcement were void. In considering its wide powers under the terms of s 14 of the relevant legislation, Nicholson J was satisfied that sufficient opportunity to attend the hearing had been given to any person whose interests might have been affected. He made the [page 446] following comments on the commission’s obligation to protect the investing public (at VR 739; ACLR 792): The Commission is clearly intended to be a watchdog of the public interest which would include the interests of those members of the public seeking to trade upon stock exchanges. The nature and volume of such transactions makes it apparent that if it was necessary for every person affected to be joined before the court could exercise its powers under s 14, then the grant of such power would in most cases be illusory. The words of s 14(3) suggest that it is for the court in each case to consider whether any and what notice of an application should be given to persons who might be affected by an order. In the present

case I have exercised the court’s powers under this section and I consider that having regard to the national advertising and the advertising through national stock exchanges which has taken place at my direction then sufficient notice of the Commission’s application has been given to any person who might be affected and who might wish to be heard.

The court was satisfied that no person would be prejudiced by an order to restrain a transfer of any shares and that it had the power to make such an order notwithstanding the fact that the transactions took place in Perth. The operation of s 1101B is also discussed in Chapter 12.

Potential impact of the competition law statute, the common law, and administrative law rules on the activities of market operators 11.35 The provisions of the Competition and Consumer Act 2010 (Cth) (CCA) may have an impact in certain circumstances in relation to certain arrangements or actions in the relevant securities market. As a result of the Harper Report, referred to earlier in this chapter, amendments are likely to be made to the CCA by the Australian Government in the near future. Certain provisions in the CCA are likely to be amended to make the provisions of the relevant legislation more relevant in scenarios that we discuss below. In the current context, it is useful to discuss briefly the particular importance of ss 45 and 4D of the CCA. As Chi-X has been admitted as a market operator and has been in operation for a number of years, it is more likely than not that even if the Australian Competition and Consumer Commission (ACCC) chooses not to intervene if certain concerns are brought to its attention in relation to these matters, as there is a right of private action under the CCA, organisations such as Chi-X may seek their own remedies. The relevant circumstances which may give rise to allegations that a breach of the CCA has occurred include the following. For example, there may still be instances where the discretion of the market operators is perceived to have been exercised in breach of the CCA. For example, if two or more market participants were acting together to prevent an applicant receiving admission to the ASX or Chi-X as a participant, that applicant may be able to challenge the conduct under the CCA. Similarly, if it could be shown

that a person was being prevented from acquiring membership of the ASX as a result of an agreement between other members of those exchanges for an anti-competitive purpose, ss 45 and 4D of the CCA may still be breached. At the moment, other provisions in the legislation may apply if market participants break the general rules relating to anti-competitive conduct — but the authors assume that [page 447] as the market is highly regulated in the context of ASIC operations, many of the provisions that might otherwise impact on the interchange of information between market participants (for example, the prohibition against price fixing etc) will have limited impact. As indicated earlier the provisions of the CCA are likely to be amended as a result of the Harper Report. We will not consider the impact of s 50 of the CCA on potential mergers that may occur now that the federal government has accepted the recommendations of the Council of Financial Regulators (noted earlier in this chapter and discussed in more detail in Chapter 12) and will permit the licensing of a new operator in the market for the listing of products. It will also permit the ASX to seek mergers or similar arrangements with other exchanges. A proposed merger between the ASX and the Singapore Stock Exchange was blocked under the powers exercised by the Federal Treasurer pursuant to foreign investment review legislation some years ago. The likelihood of a merger being blocked under the laws, when the government introduces legislation to allow new entrants into the market, remains an interesting question. We believe that it is highly unlikely that the federal government will intervene to block the relevant merger if ACCC does not regard the merger as anti-competitive.

Common law rules of restraint of trade and related rules of natural justice 11.36 Some early cases illustrate the type of scenario that may well arise should circumstances warrant the consideration of these general law restraint of trade issues. The decision of the House of Lords in Weinberger

v Inglis (No 2) [1919] AC 606 may have some relevance in special circumstances. In this case, the House of Lords held that the rules of the London Stock Exchange did not give the committee an absolute discretion, to be exercised arbitrarily or capriciously so as to refuse to re-elect a member on the ground that he was born in Bavaria. In fact, the House of Lords held that the committee had not acted arbitrarily or capriciously. The onus of showing lack of good faith rests on the person alleging it. The body exercising power is under an additional duty to abide by the principles of natural justice or procedural fairness. This duty arises whenever the member of the association has a substantial interest at stake, such as the right to pursue his or her means of livelihood, and the tribunal is charged with the responsibility of deciding an issue and imposing a penalty: Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446. There are two basic principles of natural justice which are likely to be relevant in the circumstances. The relevant person who is alleging restraint of trade/or similar breaches of the law should be given an opportunity to be heard. The second principle is that any tribunal that is set up to consider whether the relevant person has rights to be investigated, must be set up in an appropriate fashion. A tribunal that is established to consider the application must be governed by appropriate rules to ensure that the interests of the relevant persons seeking remedies are properly investigated. These principles are applicable to tribunals in a stock exchange which enjoy the power to expel a participant whether the rules of the stock exchange recognise the principles or not. [page 448] In the Canadian case of Posluns v Toronto Stock Exchange (1964) 2 OR 547 (aff’d on appeal to the Supreme Court of Canada, 67 DLR (2d) 165), the question of the rules of natural justice in relation to stock exchanges was considered at length by Gale J. Posluns had become a shareholder in a member firm of the Toronto Stock Exchange, a body corporate. The Toronto Stock Exchange later fined the member firm for having acted improperly in connection with certain activities which were alleged to involve a conflict of interest. At the same time, because the plaintiff had

participated in these alleged offences, the exchange withdrew its consent to him acting as a shareholder, director or employee of the stockbroking firm. In an action for damages Posluns alleged that this ruling resulted in his discharge from the employ of the firm. A question raised was whether the Toronto Stock Exchange had acted honestly and bona fide in determining whether there had been a breach of the relevant rules of the stock exchange, and whether the principles of natural justice bound the stock exchange. The exchange had failed to provide the plaintiff with notice of charges against him in his personal capacity (even though a formal charge was not necessary), nor was he initially given an opportunity to argue the question of penalty. However, this position was later remedied and Posluns was permitted to make representations. The court held that the principles of natural justice applied to an association like the Toronto Stock Exchange. Furthermore, the court held that any tribunal set up by it was required to act in good faith. The court found that the exchange had satisfied its obligations in this regard. Gale J relied on Russell v The Duke of Norfolk [1949] 1 All ER 109 and on statements made in Silver v The New York Stock Exchange (1963) 373 US 341. The United States Supreme Court held in the latter case that the aims of the statutory scheme of self-policing in the Securities Exchange Act 1934 — that is, to promote fair dealing and to protect investors — would be defeated if an exchange such as the New York Stock Exchange could exercise economic power without giving reasons for its decision, and without giving persons over whom it exercised such power the right to make representations on matters that involved their livelihood. This approach by Gale J — that is, the requirement that the relevant exchange should follow the principles of natural justice — was endorsed on appeal by the Supreme Court of Canada.50 Most of the cases in which a relevant tribunal, in dealing with the rules of an association, has been held bound to apply the principles of natural justice have arisen in unincorporated associations. In England, Megarry J, in Gaiman v National Association for Mental Health [1971] Ch 317, was of the view that the principles of natural justice would be less readily found

to apply in relation to a company, whether limited by shares or guarantee, because a company is a legal entity whose powers [page 449] had to be exercised for the benefit of that entity, and those exercising the power of expulsion were bound not merely by their duties towards the other participants but also by their duties towards the company and its shareholders, which might be inconsistent with the observance of natural justice.51 This reasoning may put too much emphasis on the fact of incorporation. Even accepting that incorporation creates a new entity, under established company law doctrine in Australia a governing body in a company (usually the board of directors) is under a duty to exercise its then individual and collective powers for the benefit of the total membership of the company, viewed in the light of the objects for which they have come together. This doctrine applies alike to both unincorporated and incorporated associations.52 In Australia, application of the rules of natural justice in relation to trade unions incorporated under the industrial relations legislation — organisations which are similar in many respects to companies (Allen v Townsend (1977) 16 ALR 301 at 349) — is commonplace. Moreover, Australian courts have applied the principles of natural justice to companies limited by guarantee. In McNab v Auburn Soccer Sports Club Ltd [1975] 1 NSWLR 54 at 59, Needham J held that where a member of a social club incorporated as a company limited by guarantee is charged with some departure from the rules of the club and is faced with expulsion or other detriment, and where the rules of the club permit him or her to attend a meeting at which expulsion is to be considered and to answer the charges against him or her, the rules of natural justice apply to the proceedings of that meeting. In McNab’s case there was a second issue as to whether a member charged was entitled to legal representation. Needham J held that this was a matter within the discretion of the controlling body, and in the case before him the rules of natural justice did not confer a right to legal representation, but he recognised that there could be circumstances in which the rules of natural justice would not be

satisfied without the granting by the tribunal of a right of legal representation. Where, under a statute, a person has a right to make oral representations before a tribunal, he or she has a common law right to be represented: R v The Board of Appeal; Ex parte Kay (1916) 22 CLR 183 (Kay’s case).53 A similar right is not so clearly established where the tribunal is a purely domestic tribunal and the right to appeal is given by its rules. Stock exchanges which are subject to statutory regulation under the Corporations Act are not purely private organisations, and it may be that, because their rules can be enforced by virtue of s 793C and because amendments to existing operating rules can be disallowed by the Minister, they are to be equated to the kind of tribunal which was in question in Kay’s case.

Application of administrative law rules 11.37 Although tribunals that may adjudicate on disputes relating to the affairs of the association are bound to observe the principles of natural justice, they are not [page 450] obliged to model their procedures on those of a court of law. For example, although a tribunal is bound to ascertain whether there are facts which give it jurisdiction, it is not bound by the rules of evidence which are applied in courts of law: Caddigan v Grigg [1958] NZLR 708. There are important rules of administrative law which arguably may apply to disputes arising out of the operation of self-regulatory (albeit statutorily backed) organisations such as the ASX. But now with the increasing emphasis on the creation of a formal regulatory environment in Australia, since 2010 in particular, the potential impact of relevant administrative law rules becomes greater. The New Zealand Court of Appeal in New Zealand Stock Exchange v Listed Companies Association Inc [1984] 1 NZLR 699 distinguished the position of a body which was established by a set of agreements from one which had a public function to

perform. The ASX, we would suggest, is not in the same position as the New Zealand body, and would be subject to review under administrative law rules. The United Kingdom decisions R v Panel on Takeovers and Mergers; Ex parte Datafin plc [1987] 1 All ER 564; R v Panel on Takeovers and Mergers; Ex parte Guinness plc [1989] 1 All ER 509; and R v International Stock Exchange of UK and the Republic of Ireland; Ex parte Else [1993] 1 All ER 420 may also be influential in any future decisions raising the relevance of administrative review with respect to private organisations. An earlier Australian decision which was regarded with some significance in this context was that of Beaumont J in Chapmans Ltd v Australian Stock Exchange Ltd (1994) 51 FCR 501; 14 ACSR 726 (Chapmans). In this case Beaumont J considered the relevance of the administrative law regime and formed a narrow view of its relevance. He held that the decision of the ASX to remove a company from the official list could not be reviewed under the Administrative Decisions (Judicial Review) Act 1977 (Cth). He reached this view because although the decision was of an ‘administrative character’ it was not ‘made under an enactment’ for the purposes of the Corporations Act.54 He also held that the relationship between the ASX and a listed company is contractual, and neither the listing rules nor any agreement made between the company and the ASX could be construed as an ‘enactment’.55 In dicta, Beaumont J commented that as the ASX owed duties of a public character it might be susceptible to review pursuant to the court’s supervisory jurisdiction under the Judiciary Act 1903 (Cth). However, this point was not fully expanded upon by the judge. As the ASX is now incorporated as a company under the Corporations Act, it is suggested that the thrust of the decision in Gaiman v National Association for Mental Health [1971] Ch 317 (discussed further at 11.36) may be important. It is our view that the UK decisions may well take precedence over the statement of law as enunciated by Beaumont J in the decision in the Chapmans case. This is particularly [page 451]

so as the regulations now dictate the content of the operating rules. Pursuant to this case, participants will be able to challenge the actions of those in control under the traditional rules of company law — alleging breaches of duty on the part of directors of the ASX or alleging that there has been a fraud on the minority in the appropriate case. In light of the new regulatory regime, with ASIC overseeing to a large extent the operation of the ASX and Chi-X, it is arguable that both bodies enjoy a sufficient public interest ‘flavour’ for their decisions to be subject to judicial review on administrative law grounds in appropriate circumstances. Support for this view can also be found in the decision of Kyrou J of the Victorian Supreme Court in CECA Institute Pty Ltd v Australian Council for Private Education and Training [2010] VSC 552. Noting the increasing trend of the legislature to delegate certain governmental functions to private bodies, Kyrou J ruled that the Datafin56 principle, which provides that a private organisation may be subject to judicial review if its powers have significant public consequences, is applicable in Australia.57

ROLE OF THE MARKET OPERATORS TO ADMINISTER AND ENFORCE THEIR OPERATING RULES Corporate structure of the ASX, directors’ powers and the rights of members 11.38 We note that as the ASX Operating Rules do take effect in the context of the administration of a corporation (the ASX, a corporation limited by shares), a number of additional statutory rules and related rules of law may become relevant. There are a number of provisions in the ASX constitution which impact on the obligations of the company to its members. Under art 14.5 of the current ASX constitution, the directors of the ASX are empowered (to the exclusion of the company in general meeting) and authorised: (a) to exercise all powers and functions of the company under the Operating Rules; and

(b) to alter, add to, repeal or replace the Operating Rules for the time being in force.

The directors must also appoint and allow to function any tribunals provided for in the company’s operating rules (art 14.6: see, for example, the Appeals Tribunal, discussed at 11.49 below). It is appropriate to consider the impact of provisions of the Corporations Act. In particular, s 140(1) of the Corporations Act provides. (insofar as is relevant to the issues that are being discussed here) as follows: A company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract: (a) between the company and each member; and

[page 452] … (c) between a member and each other member; under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.

In essence, s 140 of the Corporations Act emphasises the fact that the relationship between the company and its members (and its directors as well, although this is probably not relevant in the circumstances surrounding the operation of the ASX in particular) will be treated as a statutory contract. As such, certain rights arise which need to be considered in the context of the legislation. Certain key decisions handed down by our courts over the last few years will play a significant part in interpreting the relationship between the ASX (and the board of directors who will be administering its affairs) and the individual members. In any new organisation which may be set up as a corporation, if no constitution is set out in the establishment of the corporation, the statutory replaceable rules applicable under the Corporations Act will take effect. Insofar as the ASX is concerned, however, its current constitution sets out a number of interesting rules governing the relationship between the company and its members. Recent judicial decisions have further emphasised that a company’s constitution will be interpreted in a manner that will ensure business

efficacy. This was clearly the underlying evaluation of the Full Federal Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; 236 ALR 561. McColl JA noted in the more recent decision of Stylis v United Medical Protection Ltd [2007] NSWCA 109 that, if the words of the constitution are so ambiguous as to lead to a number of possible interpretations, the court would always prefer the structure which will avoid a capricious, unreasonable or inconvenient interpretation, rather than a practical one. It is clear that while the contract in the form of a constitution will be given a normal commercial reading, the provisions of the Corporations Act would take precedence over the constitution to the extent that the constitution requires or suggests that members pursue activities which would bring them into conflict with the provisions of the Corporations Act (in relation to the licensing and other provisions that may be in place). However, if the statute is silent in relation to a particular scenario, and the ASX constitution contains rules that, for example, might require persons to acquire particular standards or reach particular positions, then the contract that exists between the company (in this case, the ASX) and the member would be critical. In this context, the language of Austin J in Ding v Sylvania Waterways Ltd (1999) 46 NSWLR 424; 150 FLR 239 at [46] may also be relevant (although it relates to financial rather than conduct issues): [T]he circumstances surrounding entry into membership may imply that the new member has entered into an additional [special] contractual relationship with the company … under which additional pecuniary obligations are incurred. The member’s liability to perform those obligations is the liability of a contractor rather than a contributory ….

[page 453] Any additional obligations agreed to by the member in these circumstances would be able to be enforced in the appropriate circumstances.

Impact of provisions in the Corporations Act on the exercise of directors’ powers

11.39 The fact that the contract of the ASX (being a constitution) is governed by s 140 of the Corporations Act may also be regarded of less relevance because of the operation of specific provisions of the Corporations Act (for example, s 793B of the Financial Services Reform Act 2001 (Cth)) which applies specifically to the operation of the securities market. Members, in addition to having to comply with the constitution of the ASX, must also comply, but under greater constraints, with the provisions of the Corporations Act (in particular Pt 7.4 and the operating rules), as a participant. In essence, while art 11 of the ASX constitution relates to the power of members to vote at particular meetings, the main article of relevance is art 9. The Act prohibits persons from being a member of the ASX in certain ‘unacceptable control’ situations. Article 9 of the ASX constitution provides guidance on how this particular constraint is to be administered by the ASX. In effect, if a member of the ASX obtains voting power greater than the relevant prescribed percentage, that person’s voting power is neutralised by virtue of the operation of the Corporations Act and the ASX constitution. Certain procedures must be followed by the directors of the ASX if an ‘unacceptable control’ situation exists in relation to a particular member. The powers of the directors include the ability to issue the registered holder of the relevant shares of ASX with a relevant notice. Such a notice will require the member in question to dispose of shares causing them to be in a position of unacceptable control. This effectively discontinues the status of unacceptable control. The company is given power to dispose of the relevant shares in the appropriate circumstances. Section 850B(a) of the Corporations Act defines the unacceptable control situation as one where the relevant member’s voting power is more than 15% of the relevant company. The statutory ceiling exists to encourage a diverse range of members and ownership of the ASX. As the ASX does have a limited regulatory function as well as being a company listed on its own market, there is a strong public interest in ensuring that unacceptable control scenarios do not arise and that conflicts of interest are reduced to a minimum (a matter that may arise in any event and which has been the subject of debate in the media in recent years).58

Finally, we emphasise earlier comments that the remedies provided to shareholders (members) of a corporation under the Corporations Act may give rise to rather interesting scenarios in which members may seek to enforce rights, especially if they allege that the persons in control of the corporation (that is the directors of the ASX acting in their position as members) behave in a way that may be regarded as oppressive, or unfairly prejudicial. [page 454]

ASX Operating Rules: an overview 11.40 In this next section of this chapter we discuss the ASX Operating Rules in a general way and make such relevant comparisons as need to be made to the operating rules of Chi-X. The current ASX Operating Rules are, as one would expect, quite detailed. The rules have been in operation for a number of years and many adaptations have been made to the rules over the years as the regulatory environment has changed. It is fair to say that the operating rules of Chi-X are quite simple in comparison. Sections 792A and 795B of the Corporations Act provide further guidelines on how the operating rules should be interpreted. In addition the ASIC MIRs (discussed earlier at 11.8–11.23) will also be relevant in certain circumstances. It is fair to say that the regulatory regime that is in operation is a dual regulatory regime. In addition to the relevant companies, the ASX and ChiX have the oversight of the operations of both organisations by ASIC. Section 792A provides (as relevant) that the operating and other rules must be drafted so as to ensure the ASX will (this also applies to Chi-X): (a) to the extent that it is reasonably practicable to do so, do all things necessary to ensure that the market is a fair, orderly and transparent market; and (b) comply with the conditions on the licence; and (c) have adequate arrangements (which may involve the appointment of an independent person or related entity) for operating the market, including arrangements for: (i)

handling conflicts between the commercial interests of the licensee and the need for the licensee to ensure that the market operates in the way mentioned in

paragraph (a); and (ii) monitoring and enforcing compliance with the market’s operating rules; and (d) have sufficient resources (including financial, technological and human resources) to operate the market properly …

These requirements are set out again in detail in the Corporations Act at s 795B(1)(a)–(d). In addition, s 793A of the Corporations Act refers to any relevant regulations that might be operative. These can provide more detail than the operating rules of what procedures must be followed. For completeness we set out the full regulation from the Corporations Regulations. Regulation 7.2.07 provides: For subsection 793A(1) of the Act, the following matters are matters with which the operating rules of a licensed market must deal to the extent that a matter is not dealt with in the market integrity rules: (a) access to the licensed market, including the criteria for determining persons who are eligible to be participants; (b) ongoing requirements for participants, including:

[page 455] (i)

the conduct of participants in relation to the licensed market with the objective of promoting honesty and fair practice; and

(ii) provision for the monitoring of participants’ compliance with the operating rules; and (iv) provision for the expulsion or suspension of, or enforcement action against, a participant for breaches of the operating rules; and (v) provision for the expulsion or suspension of a participant for breaches of Chapter 7 of the Act, or regulations made under that Chapter; and (vii) provision for the expulsion or suspension of, or enforcement action against, a participant for a failure or expected failure to meet the participant’s obligations under commitments entered into on the licensed market; (c) execution of orders; (d) the way in which disorderly trading conditions are to be dealt with, including disruptions to trading; (e) the class or classes of financial products that are to be dealt with on the licensed market by participants, including: (i)

a description of the nature of each class of financial product; and

(ii) for a class of derivatives, if most of the terms of the arrangement constituting the derivative are determined in advance by the market operator (including price, if determined in advance): (A) the standard terms of the arrangement that constitutes the derivative; and (B) a description of the asset, rate, index, commodity or other thing that is used for the matters mentioned in paragraph 761D(1)(c) of the Act; (f)

the terms of the contract formed between participants that enter into a transaction through the licensed market (to the extent to which paragraph (e) does not require that information);

(g) if appropriate, the listing of entities, including: (i)

admitting an entity to the official list of the licensed market for the purpose of enabling financial products of the entity to be traded on the licensed market, and removing an entity from the official list; and

(ii) the activities or conduct of an entity that is included on the official list of the licensed market, including a description of the arrangements for the disciplining of the entity for a breach of the operating rules; (h) mechanisms through which market-related disputes between participants may be settled (for example, arbitration arrangements); (i)

the power to facilitate the assessment and, if appropriate, the investigation of marketrelated disputes between participants;

(j)

any obligations on participants and listed entities that are necessary to ensure that the market licensee is able to comply with subparagraph 792A(c)(i) of the Act and regulations made under section 798E of the Act.

Chapter 2 of the ASIC MIRs sets out additional obligations which are imposed on participants (some of these were previously discussed in a different form in the section above when we discussed the ASX Market Rules). These relate to the need to set a management structure which facilitates compliance, requiring relevant participants’ responsible executives to have sufficient seniority and control, and [page 456] requiring persons involved in the business of the participants to be of good fame and character and high business integrity.

Access to the ASX market 11.41 The current ASX Operating Rules reflect the different regulatory

regimes, the existence of competitors, and other relevant matters. Section 1 of the ASX Operating Rules, Access to the Market, sets out the basis upon which a person may be admitted as a market participant in so far as the ASX is concerned. The relevant provisions in s 1 of the Corporations Regulations have been amended twice in recent years — on 1 January 2012 and 15 June 2015. For the benefit of our readers, we set out some details which provide the reader with an overview of the information and procedures with which a market participant working within the ASX must comply. 11.42 For an applicant to be eligible for admission as a ‘Market Participant’, the applicant must lodge an application in the form prescribed by ASX and satisfy ASX that it: (a) is a body corporate carrying on business in its own right and not as a trustee of a trust; (b) hold an Australian Financial Services Licence which authorises it to carry on its business as a Market Participant (unless such a licence is not required by the Corporations Act); (c) is of high business integrity; (d) has adequate resources and processes to comply with its obligations as a Market Participant under these Rules; (e) has adequate resources and processes to prevent any action or inaction which might result in a market for a Product not being both fair and orderly; (f)

has adequate resources and processes to prevent any action or inaction which might interfere with operational efficiency or proper functioning of the Trading Platform; and

(g) has in place and will maintain adequate clearing arrangements in accordance with Rule [1003] and Schedule 1. For these purposes, “resources” includes financial, technological and human resources and “processes” include management supervision, training, compliance, risk management, business continuity and disaster recovery processes. In assessing whether an applicant meets these requirements, ASX may have regard to the matters set out in the Procedures and to any other matters it considers appropriate.59

[page 457]

ASX ongoing compliance requirements 11.43 Section 5 of the ASX Operating Rules sets out guidelines and conditions that market participants must comply with in order to be able to continue to effectively operate.60 Rule [5000] imposes an obligation on a market participant to report on their circumstances that may necessitate ASX intervention. In addition, the ASX has significant powers to investigate the way in which market participants have operated, particularly in relation to obligations contained in the operating rules. Rule [5010] provides the ASX with the power to seek information from market participants as well as to enable it to investigate matters within the operations of the market participant. The ASX’s power to conduct investigations, interview persons and related matters, as set out in detail in rr [5011]–[5015], are detailed and we will not review these in this overview. If the ASX believes it needs the assistance of an expert to ascertain whether certain conditions have been met and obligations complied with, it may advise the market participant that such a report be prepared in the form acceptable to the ASX: r [5020]. The ASX must set out in some detail the matters to be evaluated and how the relevant report should be complied with by the market participant and its expert: r [5021]. The independent expert is required to co-operate and work with the ASX in order to ensure that the relevant investigations are properly conducted.

ASX’s power to sanction and discipline participants 11.44 The ASX has retained for itself a wide power to sanction market participants who have contravened the rules or conditions relating to the participation in the ASX framework. These powers must fit within the parameters of the ASIC supervisory role. If the ASX reasonably forms the view that participants have failed to comply with the relevant trading permission granted to them, the ASX may immediately suspend or withdraw the ability of the relevant market participant to participate in relation either to a whole range of products or in relation to particular types of activities: r [5110]. Rule [5111] provides that suspension by the ASX in this context remains in force until the ASX

is satisfied that all obligations under these requirements have been complied with and the difficulties encountered have been attended to by the market participant to the ASX’s satisfaction. Rule [5120] contains specific powers to be exercised by the ASX for breaches of operational requirements. The details of these powers of the ASX are set out in these rules. Furthermore, the ASX has power to take relevant action if the market participant does not comply with the other relevant requirements such as the Volume [page 458] Match Book Requirements, Derivative Market Contracts, and other relevant items set out in detail in rr [5130]–[5150]. The ASX Operating Rules, in r [5100], provides that if a market participant contravenes the operating rules, the ASX may take any action in accordance with the provisions of the ASX Enforcement and Appeals Rulebook (the Rulebook; previously the ASX Disciplinary and Appeals Rulebook) (per s 2.2.1 of the Rulebook).61 This includes (among other sanctions) the power to: (a) censure the Participant; (b) … impose a monetary penalty not exceeding the amount determined by ASX and set out in the Procedures, on the Participant in relation to that contravention; (c) specify the form, objectives and timeframe for a new, or an enhanced version of an existing compliance programme designed to prevent future contravention of the Operating Rules … (d) where the contravention arose from conduct of a particular Employee, direct that the Participant: (i)

cease to permit that Employee to remain involved in the Participant’s business as a Participant of ASX markets or facilities;

(ii) suspend that Employee’s involvement in that business for a period; or (iii) change that Employee’s role in that business in some way…

ASX also has the power to issue Alleged Minor Infringement Notices under s 2.4.1 or Enforcement Notices under s 2.5.1.

ASX’s power to suspend or terminate the role/actions of a market participant 11.45 The ASX retains a significant power vested under r [5160] which provides that if the ASX considers that any event of default has occurred (as defined by r [5161]), the ASX may take: [page 459] … any or all of the following actions in respect of the Market Participant … at the expense of the Market Participant, in any order immediately or at any time ASX determines, and without the need for any prior notice to or consent of the Market Participant or any other person: (a) cancel a Derivatives Market Transaction effected by the Market Participant which has not been reported to an Approved Clearing Facility for registration; (b) suspend the Market Participant’s admission as a Market Participant; (c) subject to Rule [5201] terminate the Market Participant’s admission as a Market Participant; (d) impose restrictions on the Market Participant’s rights or privileges as a Market Participant; or (e) without prejudice to any other rights which ASX may have under the Rules, under statute, at law or in equity, take any other action, or take no action, or direct the Market Participant to take any action or no action, in order to eliminate or minimise risk with respect to Market Transactions entered into by the Market Participant or which ASX considers appropriate for the protection of ASX, an Approved Clearing Facility, the Market or other Market Participants.

Rule [5201] referred to in para (c) above states that before the ASX takes any action in relation to these matters, it must allow for a period of appeal provided for in the rules to take effect. Events of default set out in the rules provide an important guideline to the ASX in determining what actions it may take in relation to these Rules. Rule [5161] sets out in some detail the matters that are regarded by the ASX as an event of default by a market participant. Rule [5161] provides that the ASX may regard any of the following events as an event of default by a market participant: (a) if the Market Participant is a Clearing Participant, the Market Participant ceases to be a Clearing Participant under the Clearing Rules and does not then comply with Rule

[1003] and Schedule 1; (b) if the Market Participant is a Clearing Participant; the Market Participant is suspended from being a Clearing Participant, or suspended from clearing certain categories of Market Transaction under the Clearing Rules and does not then comply with Rule [1003] and Schedule 1; (c) if the Market Participant is not a Clearing Participant; the Market Participant does not comply with Rule [1003] and Schedule 1; (d) the Market Participant fails to pay any amount due and payable to ASX or an Approved Clearing Facility or fails to perform any of its obligations to ASX or an Approved Clearing Facility or fails to comply with any reasonable direction, decision or requirement of ASX or an Approved Clearing Facility; (e) the Market Participant indicates that it will or may suspend payment to ASX, an Approved Clearing Facility or to creditors; (f)

the Market Participant is or states that it is insolvent under administration or ceases or indicates that it will or may cease to carry on business;

(g) the Market Participant becomes, or the Market Participant or any other person takes any step which might result in the Market Participant becoming, an externallyadministered body corporate or an insolvent under administration (as those terms are defined in section 9 of the Corporations Act);

[page 460] (h) any distress, execution or other process is levied or enforced or served upon or against any property of the Market Participant; (i)

an investigator, inspector or other officer is appointed, or an investigation directed or commenced under the Corporations Act or other legislation to investigate all or part of the affairs of the Market Participant or a related entity, in circumstances which are, in the opinion of ASX, material to the capacity of the Market Participant to meet its obligations to other Market Participants, ASX or an Approved Clearing Facility;

(j)

the Market Participant does not have the level of capital required under Rules [8400] to [8431] (or fails to comply with any exemption under Rules [8420] to [8426]);

(k) the Market Participant no longer satisfies the criteria for admission as a Market Participant or fails to comply with any condition of admission as a Market Participant; (l)

the Market Participant made a wilful omission or misstatement in respect of a material matter prior to, or in connection with, its application for admission as a Market Participant;

(m) the Market Participant has failed to comply with any of Rules [5010] to [5013] or [5020] to [5026]; (n) the Market Participant has failed to comply with a determination made by an Old Tribunal (as defined in Rule [8000]) pursuant to the Old Australian Securities Exchange Enforcement and Appeals Rulebook (as defined in Rule [8000]);

(o) the Market Participant fails to comply with any action taken by ASX in accordance with Rule [5100] or the provisions of the ASX Enforcement and Appeals Rulebook (including as may be affirmed or varied by the Appeal Tribunal (as the case may be following an appeal against such action) pursuant to the ASX Enforcement and Appeals Rulebook); (p) the Market Participant is suspended, expelled or terminated as a member or participant of any Australian or overseas derivatives, securities, commodity or stock exchange or market or any clearing house or clearing and/or settlement facility or is subject to sanctions imposed by an Australian or overseas regulatory authority; and (q) if the Market Participant is an individual, he or she dies.

Effect of the suspension of an ASX market participant 11.46 While the ASX’s suspension order remains in place, the market participants must not hold themselves out as market participants during the period of suspension: r [5163](b). The ASX may proceed to exclude the relevant member from participating as a market participant or may not grant that person admission to the market in these cases: r [5163](c). According to r [5164], where the ASX takes action in relation to these matters, it must: (a) … as soon as practicable, notify the Market Participant of the action taken by the ASX, and its reasons for taking that action.

If the action relates to particular market transactions, the ASX must identify that particular decision so that the market can take notice. [page 461] Rules [5165]–[5169] attempt to limit the ability of market participants to challenge the powers and actions of the ASX. The ASX and its officers, employees and other representatives for the time being, are irrevocably appointed by market participants as the agent for the market participant with the power to undertake the relevant matters set out in these rules. Furthermore, the ASX, its officers, employees, representatives, agents or contractors are not to be liable to a market participant or to any other person for loss, liability, damage, cost or expense arising out of the way in which the ASX carries out its powers and exercises its rights and discretions. But this safeguard applies only as long as these powers are

carried out in a bona fide way: see r [5166]. Rule [5167] requires each market participant to indemnify and keep indemnified the ASX and its various representatives (using this in the broad sense) against ‘all actions, proceedings, claims, demands, damages, costs, expenses and any other amounts against or incurred by any of ASX [or its representatives]’ arising out of the operation of these Rules.

ASX disciplinary process 11.47 As noted earlier, ASIC has established the Market Disciplinary Panel (MDP) to deal with non-compliance with the ASIC MIRs in relation to both markets. These rules operate outside the internal disciplinary provisions established by the ASX and Chi-X. The application of the MDP process and orders made are discussed briefly at 11.57. Since 1 August 2010, rather than disciplinary action resting with the ASX Disciplinary Tribunal (previously known as the National Adjudication Authority), the power now vests in the ASX Chief Compliance Officer. However, a right of appeal still remains with the ASX Appeal Tribunal in accordance with the Rulebook. In another departure from the previous regulatory regime, and in recognition of ASIC’s oversight powers, the ASX no longer operates a process to discipline members for unprofessional conduct (previously covered by its previous operating rules). A consideration of this conduct now falls within the primary jurisdiction of ASIC. It will act pursuant to its interpretation of the MIRs and refer appropriate decisions to the MDP.

Examples of ASX disciplinary action and processes considered in the courts under the previous regime 11.48 The new disciplinary process in operation with respect to unprofessional conduct, and the power of the newly established MDP to issue infringement notices, discussed below, have only provided minor examples of the processes that may be relevant. It is clear from the key decisions that have been issued that the previous manner in which the ASX exercised similar powers will be influential in the development of processes by the MDP. The creation of the new MDP may also influence both the

ASX and Chi-X to set up internal arrangements, subject to final ASIC oversight, to deal with complaints. Early decisions in dealing with these matters offer some insight into how the processes may develop under the new regime. Of interest is the New South Wales Court of Appeal in Australian Stock Exchange v McLachlan (2002) 43 ACSR 362. [page 462] It illustrates the position of the courts in dealing with relevant disciplinary action where breaches of rules were considered by the ASX under its power to discipline members who had breached the relevant market rules. In that case, it seems that the court approved the approach taken by Lander J in McLachlan v Australian Stock Exchange (1998) 30 ACSR 139. In this case the judge affirmed the power of the then Australian Stock Exchange’s ability to exercise significant overview of the behaviour of professional persons in these words (at 149): The defendant [the Australian Stock Exchange] occupies an important place in the commercial fabric of Australian society and its affiliates play an important part in transactions in which many sectors of the public and many members of the public take part. It is not only in the interests of the defendant that it uphold its own constitution and rules, but it is in the public interest, in my opinion, that it do so. The public interest is served by the defendant requiring the highest standards of behaviour and conduct on the part of its affiliates and ensuring compliance with the standards which it has set. It has a continuing obligation to ensure that the purposes, for which it exists, are served. Those purposes will only be served by ensuring the highest standards of behaviour of its affiliates.

It will be interesting to see how far this approach will influence the decisions of the MDP in dealing with similar situations. In our view the ASX, and to the extent relevant, Chi-X, as well as the newly formed MDPs are likely to be influenced, to a certain extent, by the decisions of both Santow J in Australian Stock Exchange Ltd v Hudson Securities Pty Ltd (1999) 33 ACSR 416; [1999] NSWSC 1237 and the appeal from his decision — Hudson Securities Pty Ltd v Australian Stock Exchange Ltd (2000) 35 ACSR 55. See also 11.23 for discussion of the Hudson case.

In this case the ASX sought to exclude certain persons from appearing as representatives of a participating organisation (Hudson) in a disciplinary hearing. The ASX also required confidentiality undertakings from interviewees in its investigations. The issue before Santow J was whether there was an implied term conferring procedural fairness affecting r 13.1 of the then Business Rules of the ASX, and whether the ASX had power to require confidentiality undertakings from interviewees and attendees at its hearings. Santow J held that there was such an implied term by reference to the ASX constitution and Ch 7 of the then Corporations Law. He also held that the public purpose of the ASX’s powers meant that the rules should be exercised so as to afford the minimum requirement of procedural fairness. However, he went on to state (at [99]): But such procedural requirements of fairness must accommodate the overriding requirement that the integrity of the investigation is not to be prejudiced in furtherance of its public purpose.

He therefore found that the ASX was permitted under r 13.1 to require a representative of a participating organisation to provide undertakings as to confidentiality. On appeal, the New South Wales Court of Appeal rejected Santow J’s implication of a requirement of procedural fairness, preferring to decide the issue by reference to [page 463] the express words of Business Rule 13.1(1).62 On this basis, the court held that, while Hudson was under an obligation to direct its officers to provide information and attend an interview in the course of the ASX’s investigations, the interviewees were not parties to the contract between Hudson and the ASX constituted by the Business Rules. The ASX, therefore, did not have the power to bind them to confidentiality. It is not open to an association by its rules to deprive the ordinary courts of jurisdiction to supervise the manner in which powers of punishment and expulsion are exercised. The rules can effectively provide that any dispute within the association must first be dealt with in the association before any

proceedings are instituted in a court of law. Such a clause, called the Scott v Avery clause after the case of that name ((1856) 5 HL Cas 811; 10 ER 1121), is often found in the rules of associations. The rules can also lawfully provide that any finding of the tribunal on a question of fact is to be final, but they cannot provide that findings on questions of law are to be final: Harbottle Brown & Co Pty Ltd v Halstead [1968] 3 NSWR 493.

Appeals and ancillary matters 11.49 If a market participant is dissatisfied with the decision of the ASX in relation to the various matters set out above, it may appeal to the Appeals Tribunal in accordance with the provisions of the Rulebook. The ability of members to seek appeals from the decisions of the ASX (which is the only relevant organisation that provides a relevant appeal mechanism) will no doubt depend on the facts of each case. While minor matters are better pursued through internal evaluation, where this is available, members of the ASX can, as we have noted earlier, pursue remedies associated with their position as shareholders of the ASX organisation. Remedies based on oppression, or unfairly prejudicial conduct, are the most likely avenue that may be pursued and we discuss these matters further below.

Resignation as an ASX participant 11.50 Apart from the disciplinary action referred to earlier, there are other ways in which membership of the ASX may be affected. The operating rules contain the range of provisions which deal not only with admission, ongoing compliance and trading rules, but also briefly with the question of resignation. Operating Rule [1600] provides that a market participant (ASX member) may resign as a market participant by complying with the terms of that rule. The relevant terms provide that the market participant must: (a) give at least 20 Business Days’ written notice to ASX of its intention to resign and the proposed date of resignation; (b) satisfy ASX that it has taken, or will have taken before the proposed date of resignation, proper steps for the orderly winding down of its activities as a Market

Participant; and (c) comply with any reasonable direction of ASX in relation to the orderly winding down of its activities as a Market Participant.

[page 464] The ASX must be satisfied that the matters raised by the relevant ASX rules have been complied with, all obligations have been fulfilled and all fees paid. But the ASX should not unreasonably refuse to accept a resignation under this rule. It is interesting to note that rr [5500] and [5501] continue to apply to the obligations of a market participant following its resignation.

Challenging the actions of the ASX 11.51 It is arguable that the constitution of the ASX, a corporation set up under the Corporations Act, offers another important avenue for challenges by the members of the ASX who wish to respond to actions of directors where the directors are applying the operating rules of the company. If a participant was also a ‘member’ of the corporation for the purposes of the Corporations Act (that is, a shareholder) and could show that the directors or a majority of members have been acting ‘unfairly’ (by expelling or excluding him, her or it), a more appropriate course might be for that participant to bring an action under s 232 of the Corporations Act. This section provides a remedy, where there is ‘oppressive, unfairly prejudicial or unfairly detrimental conduct’ that are alleged to have occurred. Members may also plead the broader ground, namely that the conduct is contrary to the interests of the members as a whole. While the particular provision was not successfully used by the complainant in the case of Wayde v New South Wales Rugby League (1985) 61 ALR 225 (Wayde), the High Court of Australia recognised that the equivalent section of the Code in force (s 320) might be the basis for an appropriate action.63 In Wayde, one of the 13 football clubs that made up the Sydney Rugby League competition organised by the New South Wales Rugby League (a

company limited by guarantee) was to be excluded from the competition because of a decision to rationalise the competition by reducing it to 12 teams. The Western Suburbs Rugby League Club alleged that it was being treated unfairly and oppressively by the decision of the board to exclude it, and that the board was not taking into account the interest of football as well as the interests of the relevant members of the organisation in reaching its decision. The High Court in a unanimous decision rejected the appeal from Western Suburbs. It held that the actions taken by the board of directors could be described as an exercise of power by them in the interests of the company. The court highlighted the difficulty that a minority shareholder (in the case of stock exchanges it would be a participant) will have in showing that a particular decision to exclude or terminate membership should be set aside (at 231): Given the special expertise and experience of the Board, the bona fide and proper exercise of the power in pursuit of the purpose for which it was conferred and the caution which a court must exercise in determining an application under s 320 of the Code in order to avoid an unwarranted assumption of the responsibility for management of the company, the appellants faced a difficult task in seeking to prove that the decisions in question were unfairly prejudicial to Wests and therefore not in the overall interests of the members as a whole.

[page 465] Brennan J, who delivered a concurring judgment, also highlighted the unwillingness of the courts to go behind decisions taken by a board of directors (at 234): Prima facie, it is for the directors and not for the court to decide whether the furthering of a corporate object which is inimical to a member’s interests should prevail over those interests or whether some balance should be struck between them. The directors’ view is not conclusive, but an element in assessing unfairness to a member is the agreement of all members to repose the power to affect their interests in the directors: see s 78 of the code. Nevertheless, if the directors exercise a power — albeit in good faith and for a purpose within the power — so as to impose a disadvantage, disability or burden on a member that, according to ordinary standards of reasonableness and fair dealing is unfair, the court may intervene under s 320.

The decision of the High Court in this case is regarded by some as unduly conservative in its interpretation of s 320.64 That section and its equivalent in the Corporations Act (that is, s 232) are both widely drawn.

Indeed, in recent years, remedies have been pursued with much more vigour and regularity in reliance on s 232 of the Corporations Act. There are two cases to note in this context. In Wambo Coal Pty Ltd v Sumiseki Materials Co. Ltd (2014) 290 FLR 18; (2014) 101 ACSR 643, the New South Wales Court of Appeal confirmed the decision of Hammerschlag J at first instance in Sumiseki Materials Co. Ltd v Wambo Coal Pty Ltd (No 2) [2013] NSWSC 488; 93 ACSR 693 that the attempt by the major shareholder in the relevant company to change the rights of the minority shareholder by removing its right to a relevant dividend and amending its interests into a loan interest, amounted to conduct of breach of s 232 of the Corporations Act and the proposed amendments were cancelled. An interpretation that may also be regarded as unusually broad is the recent decision of Yates J in the Federal Court decision of Wilmar Sugar Australia Ltd v Queensland Sugar Ltd [2016] FCA 20. Yates J ruled that the amendments to the constitution of Queensland Sugar to restrict the ability of sugar mill owners to participate in management and be involved in the appointment of directors amounted to oppressive conduct. This was so even though his Honour acknowledged that the directors amended the constitution due to competition concerns posed by these particular members, who had given notice to terminate their sugar supply agreements with the company. These recent decisions illustrate that the reliance on s 232 may prove to be a very useful avenue for members of the ASX to pursue, if they believe that their rights as members have been oppressed or unfairly prejudiced, or if certain opportunities that arise in the activities of the ASX are not pursued by the directors of the relevant company in an appropriate fashion. The potential for remedies in this area will continue to grow as litigation funding and other avenues become more generally available to investors. [page 466] In addition to these cases, the High Court has also been expansive in its

interpretation of minority rights of shareholders in other contexts — in particular, readers are referred to the High Court decision in Gambatto v WCP Ltd (1995) 16 ACSR 1. Although Windeyer J, in Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1997) 25 ACSR 783, expressed doubt as to whether the principles of natural justice apply in the case of a member’s right being expropriated in a company limited by shares. That decision is possibly of less significance in the context of the general development of principle by the courts in detailing with similar matters. In the Associated World Investments case, the rights attaching to shares in a company were limited by the issue of a dispersal notice in certain circumstances. Windeyer J found that the defendant company was under no obligation to give the plaintiff shareholder an opportunity to be heard prior to issuing the dispersal notice. If, on the balance of probabilities, it was in the interests of the company to issue a dispersal notice and that action was taken for a proper purpose, Windeyer J held that the company was not obliged to afford natural justice to the plaintiff. In addition, the then Trade Practices Act 1974 (Cth), now the CCA, through the joint operation of ss 45(2) and 4D prohibited the imposition of terms which would exclude persons from participating in particular organisations, obtaining entry into a joint venture or being able to trade in a normal fashion. We are generally of the view that a more generous interpretation will continue to be adopted by courts to provide remedies to members of the ASX, if those in charge adopt a rather harsh approach in their treatment of the rights that are provided to the members by the constitution and by the relevant provisions of the legislation. Furthermore, ASIC has the ability to have the particular behaviour reviewed in appropriate circumstances. In addition to the remedies in oppression and related remedies, members of the ASX, in view of the fact that it is a corporation, may be able to seek remedies on behalf of the corporation through the use of the statutory derivative action procedures set out in Pt 2F.1A of the Corporations Act. This remedy can be used by members to pursue narrower issues that may affect them more specifically, or to pursue action in a representative capacity, as well as in the context of corporate-wide concerns: see 11.25 and 11.31.

Chi-X admission requirements 11.52 The Chi-X participation requirements, in comparison to those of the ASX, are relatively simple. Readers will no doubt take into account the difference between an organisation such as the ASX, which has a rich history of internal governance as well as statutory compliance, and one such as Chi-X, which has only been operating on the market since 2011. The principal requirement in each case is compliance with the relevant legislation and regulations. Persons who wish to join the Chi-X operation must complete a relevant application form and provide additional information as required. The conditions for admission as a participant, contained in r 2.2,65 are brief: [page 467] (a) the applicant must be a corporation; (b) the applicant must, subject to rule 2.4, hold an appropriate Australian financial services licence; (c) the applicant must satisfy Chi-X that it has adequate internal procedures and controls and adequate execution and order management systems in place by providing Chi-X with; (i)

a document setting out the relevant entity’s proposed management structure and allocation of responsibilities;

(ii) resumes for each person who is a responsible executive of the entity under the Market Integrity Rules (Chi-X Market); (iii) the applicant must provide to Chi-X copies of the written certifications it has provided to and received from ASIC under the Market Integrity Rules (Chi-X Market) in respect of the applicant’s automated order processing; and (iv) any other information Chi-X may require for this purpose; (d) Chi-X must have no reason to believe that the applicant is not, or those of its employees that are involved in management are not, of good fame and character; (e) The applicant must have in place clearing and settlement arrangements for relevant transactions which comply with rules 6 and 7; (f)

The applicant must satisfy general technical and systems requirements determined by Chi-X.

In r 2.5 Chi-X reserves the right to amend the conditions for admission as a Chi-X participant.

Chi-X ongoing compliance requirements 11.53 Section 3 of the Chi-X Operating Rules contains the requirements for ongoing compliance by participants. Rule 3.1 requires participants to comply with all relevant trading rules, conditions, guidance notes and procedures of Chi-X, Ch 7 of the Corporations Act and all relevant MIRs. Under this section, participants must also ensure any information they submit to Chi-X is not false or misleading, that they retain competent advisers in relation to any review of various rules, and that any employees responsible for submitting their orders are adequately trained and knowledgeable. There are also continuing obligations with respect to a participant’s record-keeping, its responsibility for the actions of its employees, as well as matters about which a participant must continue to notify Chi-X — including an adverse change to the participant’s financial position, a breach of the various rules (including the MIRs) or the Corporations Act, as well as any legal, regulatory or disciplinary action in which the participant may be involved: see r 3.4.

Chi-X disciplinary action 11.54 Section 9 of the Chi-X Operating Rules sets out Chi-X’s disciplinary powers, including its ability to sanction participants without formal disciplinary proceedings: see r 9.1(a). According to r 9.3, Chi-X may impose one or more of the following sanctions in response to a contravention of the operating rules: [page 468] (a) a written warning; (b) the suspension or restriction of access to the Chi-X market; (c) a public statement identifying the participant and outlining the rule contravention; (d) termination of participation on any conditions that are appropriate, including as to the continued application of these rules to the participant; (e) a fine up to a maximum amount specified in the procedures;

(f)

disgorgement of any profit arising from the contravention of the rules;

(g) an order to pay the reasonable costs of Chi-X and any Review Committee; (h) obtain an undertaking by a participant to complete an education and/or compliance program; and (i)

any other sanction set out in the procedures.

In the exercise of such disciplinary powers, Chi-X must conduct itself according to the procedures it sets out in the operating rules, such as by keeping a register of its decisions available for inspection (r 9.4) and establishing a review committee to review a determination by Chi-X of contravention by a participant at the participant’s request: rr 9.1(a)–(c) and 9.6. Chi-X enjoys a broad, stand-alone right to restrict or suspend access to the market as a form of sanction where a participant has contravened the operating rules: see r 9.3. In addition, after giving notice to the participant, Chi-X may restrict, suspend or terminate access to the market under r 9.5 if Chi-X considers that circumstances exist which have or may have a material adverse effect on: (a) the capacity of the participant to meet its obligations to Chi-X, the designated central counterparty, an alternative central counterparty, relevant settlement facility or one or more other participants; (b) the financial position of Chi-X, the designated central counterparty, an alternative central counterparty, relevant settlement facility; or (c) the Chi-X market or the listing market.

In order for a participant to have such a decision by Chi-X reviewed, it must, within 10 business days following receipt of Chi-X’s notice to suspend, terminate or restrict access to the market, notify Chi-X that it objects to the decision and request a review committee be established: r 9.6.

Resigning as a participant of Chi-X 11.55 The conditions governing the resignation of participants from the Chi-X market are found in r 2.6 of the Chi-X Operating Rules. Unlike the ASX notice requirements, Chi-X requires much greater forewarning of a participant’s proposed resignation. A participant must provide the operator with at least three calendar months’ written notice compared to

ASX’s 20 business days requirement. Chi-X reserves the discretion to refuse to accept a notice of resignation where it believes there is an outstanding matter subject to an enforcement claim or ongoing investigation in which the participant is involved. Much like the ASX rules, there are obligations on Chi-X participants which survive resignation. For example, a participant who has given notice of resignation, or whose resignation has taken effect, must continue to comply with rr 1, 3.2, 3.3, [page 469] 4.5, 8, 9, 10, 11, 12 and 13 (concerning information to be provided to Chi-X during an investigation, disciplinary action and record-keeping, among other matters) and will remain liable for its acts and omissions and those of its employees during the period of participation: see r 2.6.

Enforcement issues affecting both markets 11.56 ASIC, together with all interested parties (in this case the ASX and Chi-X), is charged with the task of ensuring that the operating rules and the MIRs are complied with by the relevant persons. The ASX and Chi-X will also have the responsibility of ensuring compliance with their own operating rules where they deal with issues not specifically dealt with by the MIRs. Under the Corporations Act and a Memorandum of Understanding entered into between ASIC and each of Chi-X and the ASX, both market operators are obliged to notify ASIC of various matters such as suspected significant contraventions of the Corporations Act or their operating rules; matters that may adversely affect the ability of a market participant to meet its obligations as a financial services licensee; and disciplinary action against a market, clearing or settlement participant for breaches of the operating rules. The Executive Office within ASX Compliance is responsible for co-ordinating these referrals, information about which is published in the ASX Compliance Monthly Activity Report. In r 5 of the

Chi-X Operating Rules it is stated that participants must ensure that they behave and carry out their obligations in a fair, orderly and transparent manner (reflecting the intention of Chi-X to have its rules consonant with the ASIC MIRs). Further, any decision taken by Chi-X in relation to participation, including suspending or dismissing a participant, will be subject to both the operation of the MDP as well as the common law rules that make it relevant.

Role of the ASIC Markets Disciplinary Panel (MDP) 11.57 Prior to ASIC becoming responsible for a number of matters relating to the trading activities of the securities markets, the ASX controlled the disciplining of its own members in relation to noncompliance with the market operating rules, the listing rules and other rules under the jurisdiction of the ASX as recognised by the previous legislation. Following the introduction of Chi-X as an equities market competitor to the ASX, a new regime to oversee compliance was thought necessary. ASIC has set up a new body to ensure that questions of discipline are not left solely to the oversight of the ASX (or indeed to any other market licensee such as Chi-X). This body is the MDP. It has been established as an independent peer review body. Its role is to assess whether market participants and operators should be disciplined for alleged breaches of the new MIRs. The MDP comprises various part-time members who enjoy a range of professional experience.66 [page 470] Under the terms of the MDP’s operations (see ASIC RG 216: Markets Disciplinary Panel, July 2010 and ASIC RG 225: Markets Disciplinary Panel Practices and Procedures, May 2011), it exercises the powers enjoyed by ASIC to issue infringement notices and accept enforceable undertakings for breaches of any of the relevant rules. The use of infringement notices and the complementary penalties that may be ‘negotiated’ between the MDP (and ASIC) and market operators provides a new and controversial regulatory tool. Infringement notices have been

widely used since introduced into the Corporations Act in 2004 by the then Treasurer Peter Costello, in order to regulate breaches of the continuous disclosure regime, in the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth). The decision by the government to include specific provisions into the Corporations Act to vest the power on the then regulator, the Australian Securities Commission (now ASIC), to issue infringement notices was strongly opposed by the Australian Law Reform Commission in its Report, Principled Regulation; Federal Civil and Administrative Penalties in Australia, Report 95, March 2003. The then Treasurer indicated to certain interest groups that the operation of the infringement notice regime would be reviewed after two to three years. While a review did take place, this occurred in the last month of the then Coalition Federal Government. A report was prepared for the government but not released publicly. It is our view that there will be no stepping back from the use of infringement notices. The infringement notice regime remains very much in place (although ASIC chose to sue Newcrest Mining Ltd, in the most recent high profile allegation of noncompliance for continuous disclosure requirements). Indeed, the federal government (it seems both major political parties share this view) has now vested the power to issue infringement notices on bodies such as the ACCC (over 160 such infringement notices have been issued by that regulator), and other organisations have also been vested with that power. Indeed, the decision to vest that power in the MDP may be seen as a sensible way for this organisation to deal with ‘minor transgressions’. While we cannot disagree with the fact that most organisations, faced with the possibility of prosecution or compliance with an infringement notice (which carries no liability) will choose the latter procedure, the person ‘challenged’ can settle the matter with the regulator on an administrative basis. A relatively small fine will be paid by the person accused of having breached the relevant rules (in this case rules relating to the operation of the MIRs or other rules over which ASIC has prime responsibility), without the admission of liability, but with appropriate publicity being provided by the regulator. Forty-six such infringement notices have been issued by the MDP since this power has been vested in it.67 None has caused much concern or comment.

[page 471] Nevertheless, this initiative illustrates the significance of this power being used by the regulator in appropriate circumstances.68 Although the ASIC Capability Review Panel which reported to the government at the end of 2015 did not specifically target the use of infringement notices, the fact that it criticised ASIC for not bringing more high profile litigation (in essence suggesting that ASIC may have chosen the easy cases) is a worrying trend. While the use of infringement notices may be relevant in the context of the operation of the MDP, we would prefer to see this issue tackled on a broader policy basis. This is unlikely to occur in the near future in light of the election result.

CONCLUSION 11.58 The decision to allow an alternative listing organisation to commence operations in 2017, following on from the decision to allow the licensing of organisations such as Chi-X (although it still remains a relatively minor player in the market) and the potential licensing of new players to deal with different areas in the operation of securities markets, will no doubt influence the way the market operates in the future. Although ASIC has been given the general supervisory powers in this area and takes this role very seriously, ASIC has made it clear that it relies heavily on the advice and guidance that it receives from the ASX in areas where the ASX has enjoyed years of experience and has influenced the operation of the relevant markets in a number of different ways. In the next chapter (Chapter 12) we discuss in a little detail the proposed amendments to the current Listing Rules which the ASX has released for public consultation. The proposed amendments indicate a tougher stance is being taken by the ASX in relation to the listing of smaller companies on the ASX list. The introduction of a new player in 2017 may well overcome the frustration of smaller players in relation to that decision. Indeed competition in this regard will create interesting opportunities for the development of significant variations in the approach taken by the ASX in a number of areas (without significant changes in

principle but variations in approach to ensure that the ASX will continue to be an effective competitor). This will throw open the possibility of very interesting questions in regard to the administration of the securities markets and the players in the market.69 ___________________________ 1.

See ACCC, Ticketek Pty Ltd Penalised 2.5 Million for Misusing Its Market Power, Mid-year Release 253/11, press release, 22 December 2011.

2.

Six overseas financial markets have been issued licenses to operate in Australia. These licensed overseas financial markets are ICE Futures Europe, London Metal Exchange, Eurex Frankfurt AG, Chicago Mercantile Exchange Inc, Reuters Transaction Services Ltd and Board of Trade of the City of Chicago Inc. For further information and the most up–to-date list of licensed overseas financial markets operating in Australia see ASIC’s website: .

3.

For further information on any of the licensed financial market operators see their respective websites: ; ; ; ; ; ; ; ; ; .

4.

See ASIC RG 224 which applies to the Chi-X market; and ASIC RG 214 which applies to the ASX and ASX 24 markets.

5.

Provided that the relevant market is subject to Corporations Act Ch 7. The regime also makes provision for the operation of financial markets that do not have their home base in Australia: Corporations Act s 795B(2).

6.

The establishment of new securities exchanges must be gazetted: Corporations Act s 795C.

7.

Section 767A(2).

8.

See Minister for Small Business and Assistant Treasurer, Guidelines for the Exercise of Powers Delegated to ASIC under Chapter 7 of the Corporations Act 2001, April 2016.

9.

Section 795A.

10.

See Australian Law Reform Commission, Principled Regulation: Federal, Civil and Administrative Penalties in Australia, ALRC Report 95, 13 March 2013.

11.

It is interesting to note that an analogous definition also applies to the clearing and settlement facilities under the legislation.

12.

Section 793D.

13.

Section 793E(4) provides that the Minister must have regard to the consistency of the change with the licensee’s obligations under Pt 7.2, including the licensee’s general obligations mentioned in s 792A(a). Further, s 798A sets out the matters to be taken into account by the Minister in making decisions relating to market licences. These matters include, among other things, the size and structure of the market, the activities conducted by the market licensee and the market’s participants. Whether the Minister’s approval is ‘in the public interest’ is also relevant.

14.

It is interesting to compare the way in which the Australian regulatory regime operates to the

position in the United States. In that country the Securities and Exchange Commission, which has the role of supervising securities markets, and which occupies a role very similar to ASIC, has far more jurisdictional reach in dealings with these matters than is exercised currently by ASIC in the Australian scene — see Securities Exchange Act 1934 s 19(c). 15.

The Competition MIRs have been amended several times. The latest amendment commenced 27 October 2015.

16.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.4].

17.

Above, [223.8].

18.

ASIC RG 223.5 highlights that the Competition MIRs now include: (a) requirements for equity market operators and operators that offer trading services in ASX SPI 200 Futures on order entry and transaction controls, and a harmonised trade cancellation policy in the event of an extreme price movement; (b) rules on achieving best execution for clients; (c) pre-trade and post-trade transparency rules to promote the fairness and efficiency of our markets and in particular to promote liquidity and the quality of price formation; (d) rules on making market data available and promoting accessibility of consolidated market data; (e) rules on the provision of data to assist ASIC’s surveillance function; (f)

information sharing requirements between market operators;

(g) rules on the coordination of time, identifiers and tick sizes across markets and crossing systems; (h) a requirement that all transactions in equity market products are entered into under the rules of a licensed market, unless the transaction is a redemption or primary market action (see Rule 7.1.1 of the competition market integrity rules and RG 223.379–RG 223.383); (i)

rules prohibiting trading during a trading halt;

(j)

rules to allow equity market participants to aggregate transactions into a single confirmation; and (k) rules to promote greater disclosure about crossing systems and their fair and efficient operation.

19.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [B - Extreme price movements: Key points].

20.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.65].

21.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.72]–[223.85].

22.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.86]–[223.100].

23.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.116]–[223.121].

24.

ASIC Consultation Paper 145: Australian Equity Markets Structure: Proposals, November 2010, [145.87].

25.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015,

[223.166]. 26.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.167].

27.

ASIC RG 223: Guidance on ASIC Market Integrity Rules for Competition in Exchange Markets, May 2015, [223.233]–[223.234].

28.

See ASIC RG 214: Guidance on ASIC Market Integrity Rules for ASX and ASX 24 Markets, November 2015; ASIC RG 216: Markets Disciplinary Tribunal, July 2010, which deal with the scope and enforcement of those rules; K McPherson, ‘Proposed Reforms to Australian Market Regulation’ [2010] BCLB [188]; S Ebbott, ‘Market Supervisory Shift’ [2010] BCLB [497]; J Austin, ‘Government to the Rescue: ASIC Takes the Reins of the Stock Markets’ (2010) 28 C&SLJ 444.

29.

The ASX MIRs have been amended numerous times. The latest amendment took effect 27 October 2015.

30.

ASIC RG 214, Guidance on ASIC Market Integrity Rules for ASX and ASX 24 Markets, November 2015 notes that ASIC will assess a market participant’s compliance with rr 2.1.1 (management structure) and 2.1.3 (supervisory procedures) having regard to RG 104: Licensing: Meeting the General Obligations; RG 105: Licensing: Organisational Competency; Australian Standard on Compliance AS 3806 2006; Australian Standard on Customer Satisfaction AS ISO 10002-2006; Australian Standard on Risk Management AS NZ 4360 2004; ASX GN 6 Management Requirements; and the Best Practice Guidelines for Research Integrity, Stockbrokers Association of Australia and Securities Institute (RG 214.74).

31.

The term ‘responsible executive’ is defined in r 1.4.3, in relation to a market participant, as ‘an individual who is shown as having executive responsibility for the supervision and control of all or part of the business of that Market Participant in the document provided to ASIC under subrule 2.1.2(1) or (2) or the notification provided to ASIC under subrule 2.1.2(3)’.

32.

The term ‘cash market transaction’ is defined in r 1.4.3 as a transaction for one or more cash market products. The term ‘cash market product’ is, in turn, defined as quoted products, warrants admitted to trading status by ASX under s 10 and any other financial product which ASX authorises for trading on a trading platform and determines to be a cash market product.

33.

For further detail see M J Aitken and P Latimer, ‘Principal Trading by Stockbrokers’ (1995) 5 Aust Jnl of Corp Law 1.

34.

The term ‘market transaction’ is defined in r 1.4.3 as a transaction for one or more products entered into on a trading platform or reported to the market operator under the operating rules of the market.

35.

Rule 5.1.3 requires a market participant to deal fairly and in due turn with, among other things, client orders, and r 5.1.4 in turn specifies a number of matters which are relevant in considering whether a market participant has complied with r 5.1.3.

36.

Rule 5.1.5 requires a market participant to allocate market transactions fairly, and r 5.1.6 specifies a number of factors that are relevant to determining whether that obligation has been complied with.

37.

The term ‘automated order processing’ is defined in r 1.4.3 as the process by which orders are registered in a trading participant’s system and, if accepted for submission into a trading platform by the trading participant, submitted as corresponding trading messages without being keyed or rekeyed by a designated trading representative (as defined).

38.

The term ‘market bid’ is defined in r 1.4.3 as a market bid within the meaning of the Corporations Act and, in respect of an issuer incorporated or established outside Australia, any similar form of

bid. 39.

See information required in r 6.1.1(2).

40.

The ASIC Market Integrity Rules (Chi-X Australia Market) 2011 have been amended several times since being introduced in 2011. The latest amendment commenced 27 October 2015.

41.

ASIC Market Integrity Rules (Chi-X Market) 2011 Explanatory Statement, pp 1–2, prepared by ASIC.

42.

See also 11.48 for a discussion of other aspects of this decision which was upheld in part on appeal in Hudson Securities Pty Ltd v Australian Stock Exchange (2000) 35 ACSR 55.

43.

This principle was explored in the context of a body limited by guarantee in D’Souza v Royal Australian and New Zealand College of Psychiatrists (2005) 12 VR 42.

44.

Section 795B of the Corporations Act also requires the application to show that: (a) the application was made in accordance with section 795A; and (b) the applicant will comply with the obligations that will apply if the licence is granted; and … (e) the applicant has adequate clearing and settlement arrangements for transactions effected through the market, if the Minister considers that the applicant should have such arrangements; and (f)

neither subsection 881D(2) nor 882A(2) (relating to compensation arrangements) requires the Minister to reject the application; and

(g) no unacceptable control situation (see Division 1 of Part 7.4) is likely to result if the licence is granted; and (h) no disqualified individual appears to be involved in the applicant (see Division 2 of Part 7.4). 45.

Contrast the position in the United States of a registered National Securities Exchange which, under s 19(g) of the Securities Exchange Act of 1934, is subjected expressly to a statutory duty to enforce compliance with its rules by its members and their associates unless there is some reasonable justification or excuse for non-enforcement.

46.

Australian Institute of Marine and Power Engineers v Secretary, Dept of Transport (1986) 13 FCR 124 has also been considered in Trollope v The Honourable Justice Middleton (2008) 159 FCR 507 at 513 [17]; and Director-General, Department of Health (NSW) v NSW Nurses’ Association [2011] 209 IR 49 at 93–4. Broadbridge v Stammers (1987) 16 FCR 296 was also cited in Gupta v Australian Capital Territory [2011] ACTSC 39 at [103].

47.

For more reading on the conflict of the privity doctrine with a contractual analysis of ss 793B, 793C and 1101B, see P Spender, ‘The Legal Relationship Between the Australian Stock Exchange and Listed Companies’ (1995) 13 C&SLJ 240.

48.

The House of Representatives Standing Committee on Legal and Constitutional Affairs (Lavarch Committee), Corporate Practices and the Rights of Shareholders, November 1991.

49.

Note that this provision can be enforced against the directors of a company, thus in effect overturning the impact of the decision in Hillhouse v Gold Copper Exploration (No 3) (1988) 14 ACLR 423.

50.

This decision has been followed in Australia in Ansett Transport Industries (Operations) Pty Ltd v Australian Federation of Air Pilots [1991] 1 VR 637 in the Victorian Supreme Court and was cited in Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Corke Instrument Engineering Pty Ltd (2005) 223 ALR 480 at Federal Court level.

51.

See also Australian Securities Commission v Multiple Sclerosis Society of Tasmania (1993) 10 ACSR 489.

52.

The reasoning in Gaiman was considered by Windeyer J in Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1997) 25 ACSR 783 at 790–1.

53.

See also R v Commr of Police of Northern Territory; Ex parte Edwards (1977) 32 FLR 183.

54.

This decision was applied more recently in Police and Nurses Credit Society Ltd v National Australia Bank Ltd [2005] WASCA 68.

55.

See P Latimer, ‘Legal Enforcement of Stock Exchange Rules’ (1995) 7 Bond LR 1 and ‘Legal Enforcement of Stock Exchange Rules: Part II’ (1996) 8 Bond LR 210 for further discussion on the decision of Beaumont J and the decision of the Full Federal Court in Chapmans Ltd v Australian Stock Exchange Ltd (1996) 67 FCR 402; (1996) 21 ACSR 295 which upheld the decision of Beaumont J on appeal.

56.

R v Panel on Takeovers & Mergers; Ex parte Datafin plc [1987] QB 815; 1 All ER 564.

57.

P Latimer, ‘Judicial Review of Stock Exchange Market Integrity Rules and Operating Rules’ (2011) 26 Aust JCL 127 contains a very interesting and expansive discussion of relevant issues arising in relation to these matters: see also 12.32.

58.

For an excellent article on this issue see M Maiden, ‘Enforcer Under Pressure, But There’s No Easy Solution to Market Surveillance’, The Age, Melbourne, 16 April 2008, p 16.

59.

Rule [1000] was amended on 1 January 2012 and 12 June 2015 to reflect the above wording. Reformatting of words aside, it is interesting to note two parts of the former r [1000] that were omitted (that is, paras (h) and (i)) which provided: For an applicant to be eligible for admission as a Market Participant (other than a Principal Trader) the applicant must … (h) warrant to ASX that it is in compliance with the management requirements set out in the ASIC Market Integrity Rules … (j)

if the applicant is applying to be admitted up to one year after the Effective Time (as defined in Section 8), satisfy ASX that it complies with the Capital Requirements (as defined in Section 8) or any other requirements applicable in accordance with the conditions of any exemption from the Capital Requirements under Rules [8220] to [8226].

60.

Section 5 of the ASX Operating Rules was updated on 15 June 2015.

61.

The relevant rule book was updated on 24 December 2015. The previous wording, is set out in this footnote to enable the reader to identify the differences in the approach which has been developed over the last few years. The relevant rules provided previously: (a) censure the Relevant Person; (b) … impose a monetary penalty not exceeding the amount determined by ASX and set out in the Procedures, on the Participant for each contravention by it or any of its Relevant Persons; (c) specify the form, objectives and timeframe for a new, or an enhanced version of an existing, education and compliance programme designed to prevent future contravention of the Rules … (d) where the contravention arose from the conduct of a particular individual involved in the business of the Participant, direct that the Participant cease to permit that individual to remain involved or that the Participant change that individual’s role in the business in some way; (e) where the Relevant Person … is not a participant, direct the relevant participant to:

(i)

suspend that person’s role … for a period not exceeding 3 months upon such terms and conditions as the ASX thinks fit; or

(ii) where the ASX makes a finding of Unprofessional Conduct, terminate the person’s role … (f)

where the Relevant Person … is not a participant, make an order that the Relevant Person not be employed, or otherwise appointed, as a Responsible Executive (as applicable) for a period ASX thinks fit …

62.

A further case dealing with a related issue which may be relevant to the operation of these bodies is the case of Shaw Stockbroking Ltd v Australian Stock Exchange Ltd (1998) 26 ACSR 702.

63.

Section 320 of the relevant code is replicated in Corporations Act s 232 (formerly Corporations Law s 260).

64.

However, it was applied in a more recent case: McLaughlin v Dungowan Manly Pty Ltd (2007) 61 ACSR 335.

65.

The most recent Chi-X Operating Rules came into force on 7 March 2016.

66.

The current panel members are Ms Lisa Gay (MDP Chair); Ms Cilla Boreham; Mr Richard Brasher; Mr Ian Chambers; Mr Leigh Conder; Mr Simon Gray; Mr Geoffrey Louw; Mr Michael Manford; Mr Russell McKimm; Ms Sadie Powers; Mr Pete Robson; Mr John Steinthal; Ms Victoria Weekes; Mr Mark Pugsley; Ms Anne Brown; Mr Andrew Tanner; Ms Jane Lamming (as at June 2016). For the most up-to-date list of panel members, see .

67.

As at 29 June 2016.

68.

See the MDP infringement notices register at , go to ‘Markets’, ‘Markets Disciplinary Panel’ and ‘View the infringement notices register’ (as at 29 June 2016), for further detail on the decisions to issue these notices.

69.

ASIC Report 480: Assessment of ASX Ltd’s Listing Standards for Equities, June 2016.

[page 473]

Chapter 12 ENFORCEABILITY of the ASX LISTING RULES Introduction Legal Effect of the Listing Rules — An Overview Review of the Listing Rules by the Lavarch Committee ASX’s assessment of the enforceability of its Listing Rules Proposed changes to the Listing Rules Challenging the ASX denial of listing of securities Enforcement of the Listing Rules by Private Parties and by Regulators Relevant cases Early observations from the courts — Ampol Petroleum Cases dealing with the enforcement of ASX Listing Rules under the Act Two contrasting decisions — Devereaux Holdings and Boomalli ‘Neutral’ readings of the statutory power to enforce Listing Rules Decisions adopting a more ‘sympathetic’ interpretation of the enforceability of the Listing Rules Right to seek compliance with the Listing Rules and other rules — regulators, investors and third parties Will judicial review of decisions of the ASX be available? What remedies are available to ‘third parties’ in seeking compliance with the relevant listing rules? Joint Impact of ss 793C and 1101B on the Operation of the Listing Rules FAI Insurances

12.1 12.2 12.3 12.4 12.5 12.6 12.12 12.13 12.16 12.17 12.19 12.20 12.27 12.31 12.32 12.33 12.34 12.35



Shortall Fuelbanc What orders may be made by the court for a breach of s 1101B of the Corporations Act? Conclusion

12.36 12.37 12.38 12.39 [page 474]

INTRODUCTION 12.1 In Chapter 11 of this book we set out the current new regulatory framework relating to the regulation of the securities industry following the enactment of the Corporations Amendment (Financial Market Supervision) Act 2010 (Cth). This legislation came into effect on 1 August 2010. It is unnecessary to review the changes to the law, discussed in the previous chapter, and the way in which the federal government has decided to transfer the main regulatory role to the Australian Securities and Investments Commission (ASIC). However, despite this change, the Australian Securities Exchange (ASX)1 will continue to play a major role (in one sense a monopoly role which we will discuss in this chapter). This relates to its ability to determine whether companies can obtain listing of their securities on the securities exchange that currently operates in the Australian market, and also the relationship between those industry participants. As noted earlier, the Commonwealth Government has decided to accept the recommendation of the Council of Financial Regulators (CFR) to allow the establishment of a new listing exchange in Australia in 2017 thus ending the monopoly currently enjoyed by the ASX. This chapter examines the ‘legality’ or ‘enforceability’ of the Listing Rules that have been promulgated by the ASX, and in respect of which securities currently listed on the only securities exchange in Australia are governed, together with the Corporations Act 2001 (Cth) (Corporations Act). While ASIC is the major overseeing authority that can review the way

in which these powers are exercised, the final decision in relation to these matters is left to the Treasurer and the Assistant Treasurer of the Commonwealth of Australia.

LEGAL EFFECT OF THE LISTING RULES — AN OVERVIEW 12.2 In this chapter we also consider the impact of the Listing Rules and the legal effect of any obligation that may exist in requiring companies whose shares are listed on the ASX to comply with those rules. If there is no legal obligation to comply with those rules then what impact does the ASX have, through the operation of the ASX Corporate Governance Council (CGC), in influencing the behaviour of companies and their officers? The current Listing Rules, or at least many of them, especially those that relate to continuous disclosure, corporate governance and other related matters, play a vital role in the ongoing debate on the ‘culture’ that is expected of company directors, especially those of companies which are regarded as public companies (even if they do not have their securities listed on the ASX). At present, the community has seen the questioning of the appropriateness of the culture being displayed by directors of companies placed under the spotlight. ASIC has played a prominent role in the last [page 475] 12 months, in particular, in seeking greater recognition of appropriate culture on the part of directors of companies. It views the question of corporate culture as very relevant in the context of its regulation of the securities markets and the behaviour of company directors. While it cannot give legal effect to all of the rules set out by the CGC (now in their third edition), there is continued pressure on ASIC to seek legal enforcement of relevant duties on the part of directors and others in control of companies, rather than relying on general statements about the need to observe

adherence to good corporate culture. Quite often criticism has been levelled at ASIC for not pursuing legal remedies through the courts, where ‘bad cultural behaviour’ is evident, and choosing to rely on administrative solutions to problems where there is a need for effective rulings by our courts. The ASIC Capability Review Panel (Capability Panel), which was established in late 2015 and reported its findings to the federal government in December 2015 (its report was released to the public in April 2016), was critical of the failure of ASIC to bring more effective litigation where the suggestions of breaches of the duties of directors were apparent. In this regard, it is important to note that the ASX Listing Rules are significant to companies, whose shares are listed on the ASX ‘board’, as s 793C of the Corporations Act enhances the operation of these Listing Rules by giving them legal effect in the terms of the section. There are many other rules of corporate behaviour, and good governance, as recognised by the CGC and others, which do not carry with them the force of law. In this chapter we examine the ability of the ASX, in particular, to enforce the Listing Rules, as developed by the ASX over the years. Should these ‘enjoy’ full legal effect or should we rely on the courts to provide rulings on the behaviour expected of companies whose shares are listed on the ASX ‘board’? Non-compliance with the ASX Listing Rules, and matters related to that particular question, are matters that we also examine in this chapter.

Review of the Listing Rules by the Lavarch Committee 12.3 The ASX conducted a major review of its Listing Rules in 2002 in order to simplify them and to produce a more clearly structured manual that was written in plain English. This followed the earlier recommendations of the Lavarch Committee which recommended changes along these lines.2 The ASX review in 2002 led to amendments being made to the Listing Rules in 2007 by the ASX. However, while s 793C provides legal enforceability with respect to the operation of the Listing Rules, only some of these rules become relevant, in the eyes of the courts, and in the administration of the behaviour of companies whose shares are listed on the ASX.

ASX’s assessment of the enforceability of its Listing Rules 12.4 In the view of the ASX, the Listing Rules that it publishes and administers play a very significant role in the way in which companies, who wish to have their shares listed on the ASX, operate. In the foreword of the ASX Listing Rules, which [page 476] were considered by Bryson J in an early case, Peninsula Gold Pty Ltd v Sunbeam Victa Holdings Ltd (1996) 20 ACSR 553 (Peninsula). His Honour had to evaluate what weight the court should give to the Australian Stock Exchange’s description of the effectiveness of its administration of the official list of the Exchange especially when companies seek ‘official quotation’ of their securities on the Exchange (further discussed at 12.8). The relevant foreword of the Rules at the relevant time stated: The Exchange in its absolute discretion (without qualification whatsoever) may accept or reject any application for admission to the Official List and has absolute discretion in administrating the Listing Rules and in so doing, looks to companies to comply with the spirit as well as the letter of those Listing Rules throughout. The Exchange may at any time and from time to time in its absolute discretion waive compliance by a company with a Rule or part of a Rule contained in these Listing Rules. The grant of any waiver to these Listing Rules will be advised by the Home Branch of the company to the Australian Securities Commission (as published in Australian Corporations Law — Principles and Practice, LexisNexis Butterworths, looseleaf, vol 3).

Today, in the introduction to its current Listing Rules, the ASX continues to emphasise its absolute discretion to deal with questions of admission under ‘Admission to its List’. In the introduction to the Listing Rules under the heading ‘Application of Listing Rules’ the following statement is made: ASX has an absolute discretion concerning the admission of an entity to, or its removal from, the official list and the quotation or suspension of its securities. ASX also has discretion whether to require compliance with the Listing Rules in a particular case. In exercising its discretion, ASX takes into account the principles mentioned above on which the Listing Rules are based. ASX may waive compliance with a listing rule, or part of a

rule, unless the rule in question says otherwise. The Listing Rules necessarily cast a wide net. However, ASX does not want to inhibit legitimate commercial transactions that do not undermine the principles on which the Listing Rules are based.3

Listing Rule 1.19 states that admission to the official list and the category of the submission is at the absolute discretion of the ASX. The rule goes on to suggest that the ASX may admit an entity on any conditions it thinks appropriate. It also states that the ASX may grant or refuse admission without providing any reasons for that particular decision.4 Recently, this exercise of absolute discretion has been the subject of an interesting discussion in light of the removal of certain appeal rights with respect to decisions of the ASX. These rules relating to appeals have been included in the earlier version of the Listing Rules. The ASX asserts a firm view of its position to decide what should or should not be included as relevant rules that govern its administration of the Listing Rules. It is interesting to note that it continues to adopt such a view of its status in this regard and this is reflected by the proposed changes to the Listing Rules discussed in the next paragraph. [page 477]

Proposed changes to the Listing Rules 12.5 Currently the ASX is seeking to amend its Listing Rules to ‘maintain the quality, integrity and international competitiveness of the ASX’.5 The intention of this update is to improve and clarify the operation of the relevant admission rules. The key proposals for change set out by the ASX in its consultation paper are intended to: increase the financial thresholds for companies seeking to list its securities — this will be done both by dealing with the relevant profit test and the assets test currently applied; introduce a 20% minimum free float requirement; change the ‘spread test’ which would better demonstrate whether there is a sufficient level of investor interest in the relevant company (or organisation) and its proposed securities to justify listing;

ensure that the working capital requirements of companies admitted to the ASX list under the assets test are consistent across all relevant entities; and introduce a requirement that entities admitted under the assets test will provide audited accounts for the previous three full financial years to substantiate and support the application for listing. The ASX announced, placing these proposals into the public arena for comment, that it wished to: … strengthen the ASX Listing Rules’ framework and maintain an appropriate balance between the interest of issuers and investors in promoting efficient capital raising, maintaining market integrity and providing a market that is internationally competitive.6

It will be interesting to see how these proposals for amending Listing Rules are dealt with in the final document released. Suffice it to say that there has been strong opposition to the current proposals, especially from smaller mining and other companies in Western Australia in particular, and even some political intervention suggesting that perhaps the ASX may have gone too far. A second matter worthy of brief comment is the decision of the ASX to remove the appeal rights in relation to decisions of the ASX to delist companies, whose shares have previously been listed on the ASX ‘board’, and decisions to deny listing of securities of companies seeking admission to the ASX ‘board’. These rights were removed late in 2015 without any public consultation. This particular initiative by the ASX has been met with considerable criticism from different sources, including the Law Council of Australia’s Corporations Committee which has strongly argued against the way in which the ASX has approached its decision to remove the appeal rights without consultation. While ASIC approval was obtained for this ASX decision, the absence of consultation by the ASX, in contrast with its current approach of seeking public feedback in relation to its proposed [page 478]

changes to the Listing Rules, has caused some considerable commentary. It is interesting to note, in this context, that the ASX in April 2016 created a ‘pre-vetting’ process for companies who intend to apply for admission of their securities.7 The purpose of this process is to help identify any potential listing issues before any formal application is made. Finally, in this context, we note the recent decision of the ASX to refuse admission to the relevant ASX ‘board’, the securities of Guvera Limited. This has been the subject of a wide range of commentary in the community, but the ASX has made a clear commercial decision in relation to the suitability of that company’s listing. In the absence of any competing ‘board’ in which such shares can be listed, the powerful position adopted by the ASX, which is of course subject to review by ASIC and by the government, continues to throw up a number of questions for consideration. In the next sections of this chapter, we discuss a range of decisions in which questions concerning the ability of the ASX to refuse listing of securities, and associated questions, are considered in light of judicial intervention where appropriate, as well as questions surrounding the enforceability of the ASX Listing Rules. The question of enforceability will be examined from both the perspective of listed companies that are subject to decisions made by the ASX (which these companies seek to challenge), and third parties in private litigation that raise issues regarding the enforcement of the Listing Rules by the ASX (or rather non-enforcement of these rules by the ASX). The ASX has the ability to seek enforcement of its own Listing Rules and further questions related to this ability will be considered in this chapter, including issues surrounding the way in which third parties can seek to force the ASX to seek the enforcement of its Listing Rules.

Challenging the ASX denial of listing of securities Brolga 12.6 In Brolga Minerals NL v Stock Exchange of Perth Ltd (1971–73) ASLC 75-007 (Brolga), the plaintiff company, Brolga Minerals NL, had

applied to the Stock Exchange of Perth Ltd for listing of its shares following the issue of a prospectus by the company. While the application was under consideration, certain indications were made to the directors of the company that there would be a favourable reaction to its application for listing, although it was quite clear at all times that no decision had been taken by the Perth Exchange, nor by any person who had the authority to bind the Exchange to grant listing. The prospectus was issued subject to the provisions of s 44 of the then Companies Act 1961 (WA) (now s 723(3) of the Corporations Act). This section provided that, where a prospectus indicated that an application had been made by the issuing company for listing of its shares on the official list of any stock exchange, the allotment of shares issued pursuant to the prospectus would be void unless listing was granted within a six-week period commencing from the date of issue of the prospectus, or such further period not exceeding 12 weeks, as was [page 479] notified to the applicant by or on behalf of the stock exchange concerned (note that different time limitations now apply under the rules).8 The company alleged that because its prospectus indicated that listing had been sought, the Perth Exchange was under a legal obligation to the company to consider the application in a proper manner and to exercise properly its discretion to grant listing. Virtue SPJ noted (at 85,171) that s 44 of the Companies Act did not impose any statutory duty upon the stock exchange to consider the company’s application for listing. He indicated that the relevant provision was introduced to enable shareholders in companies which had subscribed for shares in the company to be free from liability under any contract arising from allotment where listing was not obtained. His Honour, however, ruled that there could be a contractual duty imposed on a stock exchange to consider fairly and honestly any application by a company where a contract could be said to have arisen between the stock exchange and the company. Despite ruling that a contract did exist in this case, Virtue SPJ held that the plaintiff had not satisfied the court that the Perth Exchange had not given fair and honest

consideration to the company’s application for listing of its securities. Indeed, the evidence suggested that a proper application for listing had not been submitted. Nevertheless, this case is important in its suggestion that a relevant stock exchange was, upon receipt of an application form together with the relevant application fees, under some contractual duty to give consideration to a company’s application for listing. The Perth Exchange’s obligation was to consider an application where all the material and facts necessary for compliance (with the statutory and listing requirements) by the applicant company had been provided by the applicant company. The court did not, however, consider whether the Perth Exchange owed a duty to grant listing to a company that appeared to satisfy criteria prescribed by the statute and the relevant Listing Rules, but which the Perth Exchange nonetheless considered should not be listed for reasons other than non-compliance with the relevant rules.9 The nature of the business that the applicant company was to conduct and the skills and experience of the management of that company were not considered matters that related to this overall obligation undertaken by [page 480] the ASX. That is an issue that is raised by an example provided in LR 1.19 of the ASX Listing Rules which states: … an entity may be refused admission if its management does not, in ASX’s opinion, have the skills and experience to ensure that it will discharge its obligations as a listed entity. In the case of a trust the management of the responsible entity or management company must have the necessary skills and experience.10

Kwikasair 12.7 In Kwikasair Industries Ltd v Sydney Stock Exchange Ltd [1968] ASLR 30,701 (Kwikasair), different questions of fact were raised but the same fundamental question arose for decision as had been raised in Brolga. To what extent do companies which apply for listing of their securities on the relevant stock exchange have to comply with all the rules of the relevant stock exchange in order to ensure that their shares are listed? The

Sydney Stock Exchange (Sydney Exchange) had suspended the shares of Kwikasair Industries Ltd because, in the view of the committee of the Sydney Exchange, the activities of the company were not being executed in accordance with the spirit of the Listing Rules of the Sydney Exchange. In refusing to overturn this decision, Street CJ in Eq made a number of relevant comments in determining the power of the court to review actions of stock exchanges relating to the status of securities already listed. The extract from his judgment may also be relevant in assessing an obligation to consider applications for listing by other companies. His Honour said (at 706): The stock exchange is not only entitled but is bound to be vitally concerned with the maintaining of a fair market for the buying and selling of securities … paramount and predominant amongst all [of its] objects is … to promote and protect the interests of all members of the public having dealings on The Sydney Stock Exchange or with members of The Sydney Stock Exchange Limited.

Having considered this as a vital object, his Honour added (at 708): In the context in which agreements are made for the listing of securities on the Stock Exchange Official List, there are obvious reasons in favour of the Committee having the power of summary removal. In the absence of any term in an agreement fettering the Committee in the exercise of its power of summary removal, it would seem to be difficult to justify a right to remain on the official list such as to attract the protection of the Equity Court by way of injunction. Moreover, so long as the Stock Exchange continues in this community to discharge, with the acquiescence of the legislature, the important public duty expressed in its paramount and predominant object (cl 6), the members of its committee should be left free to exercise honestly their powers of entry on or removal from the official list unencumbered by any prospect of their having to face a litigious investigation of the correctness of their decisions. The powers of the Committee in this regard are arbitrary; they are intended to be exercised summarily and fearlessly in protecting the public interest.

[page 481] Surprisingly, this decision has not been the subject of more detailed analysis in later cases where related issues have been raised. Apart from a brief discussion in Chapmans Ltd v Australian Stock Exchange Ltd (No 3) (1995) 17 ACSR 524 (Chapmans) (see also 11.37, 12.14 and 12.32), these particular issues have not been the subject of any detailed judicial consideration in later cases. Although issues relating to efficiency and the

soundness of the market have been the subject of comment in later cases, as well as being a matter of consideration in the earlier decision of Re Castlereagh Securities Ltd and The Companies Act (No 1) [1973] 1 NSWLR 624 at 638 (Re Castlereagh Securities),11 it is somewhat surprising that we have not seen more cases in which these issues have been raised. In the Kwikasair case, it was the court’s view that the Australian Stock Exchange’s evaluation of the need for accurate disclosure, which was important to encourage the investing public to have confidence in the operation of the stock market, was a relevant factor to be considered by the courts. It reflects a line of reasoning in other cases dealing with the obligation of the Exchange to consider applications for listing: see Oil Basins and Delta Gold at 12.10 and 12.11. More specifically, these are cases that involve consideration of the activities of companies whose shares may already be listed and which may be seeking further enhancement of the listing, and that consider the importance of balancing the interests of these companies against the needs and interests of the public.

Peninsula 12.8 In the case Peninsula Gold Pty Ltd v Sunbeam Victa Holdings Ltd (1996) 20 ACSR 553 (Peninsula), similar issues were raised in relation to the interpretation of Listing Rules. The case did not deal directly with any challenge to a ruling by the Australian Stock Exchange, but nevertheless it provides useful commentary on the Listing Rules relevant to the dispute between the parties, namely what rules should apply to a transfer of shares in a company listed on the relevant exchange. In this case, Bryson J of the Supreme Court of New South Wales recognised that the Listing Rules of the Australian Stock Exchange (ASA) (now the ASX) had a legal impact regardless of the fact that they were not published in a legal text. Sunbeam Victa Holdings Ltd (Sunbeam) was listed on the Exchange. Peninsula Gold Pty Ltd (Peninsula) was a shareholder of Sunbeam. In April 1996 a takeover bid had commenced for Sunbeam. On 18 April 1996 Peninsula transferred shares to 1158 groups of transferees. Various share transfer documents were sent to the secretariat of Sunbeam to be registered. Sunbeam applied to the Australian

Stock Exchange (then under LR 3D(2)) for a waiver of its obligation to register transfers within five business days of lodgment. That waiver was refused and the transfers were registered on 24 May 1996. Peninsula and the transferees applied for a declaration that the Listing Rules and s 777 of the (then) Corporations Law (see now the Corporations Act s 793C) required Sunbeam to indicate that the registration was effective as at 8 May. Sunbeam argued [page 482] that it was not obliged to register the transfers while it exercised its rights to apply to the Australian Stock Exchange for the waiver discussed above. It claimed that this right was conferred on it by the statement in the foreword to the Listing Rules of the day. As noted earlier in discussing the nature of the Listing Rules (see 12.4), the judge in this case, Bryson J had discussed the impact of both the relevant legislation (s 777 of the Corporations Law as it then was) and the Listing Rules. In doing so, he adopted a relatively generous approach as to what constituted the Listing Rules. While his Honour held that it was normally appropriate to prove the legal effectiveness of the Listing Rules by the relevant rules of evidence, he was prepared to give judicial notice to the named publication. In his view, the issue was ‘whether, as a matter of construction of the content of the [looseleaf service], the page headed “Foreword” and the definitions form part of the Listing Rules which are given effect by s 777’.12 The plaintiffs argued that the material in the foreword incorporated editorial comments that were not intended to be part of the Listing Rules. The plaintiffs further contended that the Listing Rules only comprised the full text; the foreword was irrelevant. While Bryson J agreed that the term ‘Foreword’ suggested an element of separation from the text, and that there was some historical material present in it, the language of the foreword, when read in the context of the Listing Rules (at 558): … contained provisions which, if they are to be effective at all, are effective in their operation with and as part of the Listing Rules. The material within the last paragraph of

the Foreword is interrelated in that an absolute discretion in administering the Listing Rules and the requirement of compliance with the spirit as well as the letter are closely related to an absolute discretion to waive compliance.13

He saw no reason for reading the Listing Rules and the foreword in isolation, and found it impossible to do so. Nevertheless, in light of the relevant words in the foreword, the application was dismissed.

Premier Pacific Pharmaceutical Industries Ltd 12.9 A later case, Premier Pacific Pharmaceutical Industries Ltd v Australian Stock Exchange Ltd (1995) 17 ACSR 426 provides a further set of observations on how [page 483] the Listing Rules might be interpreted by the courts. Premier Pacific Pharmaceutical Industries Ltd (Premier), a foreign corporation, wanted to raise capital in Australia by listing its shares on the Australian Stock Exchange. It applied to the Exchange for listing in conjunction with the issue of a prospectus. The Exchange agreed to list their relevant shares but imposed a number of conditions. One of the conditions imposed was that there would be at least 500 shareholders, each owning a parcel of shares having a value of at least $2000 (to comply with the spread that the Exchange wish to see involved in companies of this kind). Instead the Exchange received in return a qualified undertaking from the directors of the company to ensure that these events occurred. The Exchange was not prepared to accept the qualified undertaking arguing that the requirements of the then legislation (s 1031(7) of the Corporations Law) had not been satisfied. At first instance, Gummow J held that the Exchange had not granted permission for the shares to be listed and dismissed an application from the company that its undertaking should be accepted by the Exchange as fulfilling the obligations under the legislation. The company appealed to the Full Federal Court, which, in separate judgments of Davies, Beaumont and Burchett JJ, dismissed the appeal. In the view of the court, the undertaking to be provided by the directors in such a case

needed to be unqualified as Davies J stated: at 431. The judge noted that the requirement of an undertaking was an important safeguard: Ultimately, it is for the ASX, acting in accordance with its rules under the exercise of its powers, to determine whether or not the securities will be listed … Companies seeking listing in the ASX itself, must recognise that [the legislation] provided an important safeguard for investors and that parliament has set down a time frame … [for compliance] if that timeframe is not complied with, any allotment under the prospectus will be void

Davies J also noted that the undertaking must be ‘a simple, unqualified, and unconditional undertaking’. She ruled that the undertaking must accept and match the requirements specified by the Exchange. A nonidentical purported acceptance would not have served the purpose. There was no satisfactory undertaking provided in this case. Burchett J agreed to a large extent with the judgment of Davies and Beaumont JJ, while adopting a slightly different approach to that of Davies J in principle with the conclusions. Davies J also noted that the relevant provisions of the then Corporations Law did not attempt to regulate all matters relating to listing of securities and did not impose any statutory obligations upon the Exchange to list securities, even if the undertakings had been provided in accordance with the provisions listed by the Exchange in response to the application.

Oil Basins Ltd v Bass Straight Oil Company 12.10 This case involved a dispute between relevant parties rather than a challenge to the rulings of the ASX. Nevertheless, the observations made by Gordon J in her decision are relevant in evaluating the interpretation of the ASX’s powers. Gordon J, while sitting in the Federal Court, considered whether the issue of shares in Bass Straight Oil Co Ltd (BAS) breached the relevant Listing Rules and whether the alleged breach required her to make certain rulings to overturn the relevant issue [page 484] of shares and require a different set of circumstances to be followed in

relation to the issue of shares. The decision in Oil Basins Ltd v Bass Straight Oil Company [2012] FCA 1122 concerned other issues as well but we will be focusing on the allegation that the issue of shares by BAS contravened LR 7.1 (as well as the constitution of the company). Oil Basins Ltd (OBL) sought orders from the Federal Court which would have led to shares, which had been issued to a third party (Somerton Energy Ltd), being deleted from the share register of BAS, thus reversing the apparent dilution of shares held by OBL in BAS. The application was challenged by BAS on the basis that the court could rectify any technical breach of the rules in its constitution (or in the Corporations Act pursuant to s 1322 of the Act) for the validation of the relevant issue of the shares thus obviating the need for any further orders to be made. OBL sought as a variation of the remedies, the setting aside of the relevant shares to the extent that the issue has exceeded the number of securities that were permitted to be issued by BAS pursuant to the operation of LR 7.1. Gordon J, in an interesting and lengthy judgment, held that BAS had in fact breached LR 7.1 by issuing 10,000,000 more ordinary shares than it was entitled to issue at the relevant date without obtaining the approval of the relevant security holders in the company. Her Honour was of the view that while the relevant resolution leading to the issue of shares could be rectified pursuant to s 1322 of the Corporations Act, and while it was also true that there had been a breach of Listing Rule 7.1, the court should not exercise its discretion under s 793C(2) or s 1101B(1)(d) of the Corporations Act to set aside the whole of the issue. In her judgment (at [106]) Gordon J made it clear that the requirements imposed on companies whose shares are listed on the ASX are of no less significance and meant to be complied with in full. The mere fact that BAS is what can be described as a ‘small cap’ company with limited cash to package the underwriting for the issue of the relevant securities did not alleviate it from the requirement that it should comply with the Listing Rules. She noted that BAS could have packaged the relevant arrangements in a number of different ways to ensure that there was still compliance with the Listing Rule. She added (at [106]): The manner in which [the relevant package is prepared] will depend on a number of factors including the state of the capital market, the size and nature of the company seeking the capital, and, of course, the identity of the underwriter and its business. There are no restrictions on the underwriting fee being structured and paid in that manner. But

those commercial factors and considerations do not and cannot alter the requirement that a publicly listed company comply with LR 7.1 and the limited exceptions in LR 7.2.

Gordon J rejected (at [109]) arguments that the exception to LR 7.1 should be interpreted in such a way that the operation of the relevant Listing Rule might be qualified. In her view the ‘policy and purpose of [relevant Listing Rules] would be simply have no role [in such a case]’. In the conclusion to the judgment, Gordon J considered the appropriate relief that was being sought by OBL. Its reliance on ss 793C(2) and 1101B(1)(d) of the Act would require her Honour to the make a series of rulings. In her view the court should not exercise its discretionary powers in relation to s 793C(2) (hence and/or [page 485] s 1101B(1)(d)) of the Act. After setting out the detailed provisions of the relevant sections, and asking the question that ‘what then should the court do’ (see [119]), as well as considering the detailed evidence that had been provided in the relevant case, her Honour made a limited declaration to the effect that the relevant issue of shares contravened LR 7.1. Gordon J made no further orders, as she took into account the undertakings that had been provided by BAS to the ASX that it would reduce by 10 million the number of securities it was entitled issue under LR 7.1 in the following 12month period. Gordon J considered (at [127]) arguments as to the reach of the defect of the Listing Rules and how the court should interpret them. BAS referred to the decision in Delta Gold discussed previously as authority for three propositions. These were: 1.

the Listing Rules are not a statute;

2.

a breach of Listing Rules is not an unlawful act; and

3.

in the context of these arguments the court should not make any far reaching orders in this case because the ASX knew of all the facts and has not itself made any complaints or sought to be heard.

Gordon J rejected the third proposition and in particular noted that while she did not resolve from the position taken by Allsop J in Delta Gold (at [58]) that the view of the ASX should be respected in general terms, the relevant Listing Rules under consideration in this case were different from the Listing Rules that were considered by Allsop J. There was no evidence that the view of the ASX was required in relation to the matters under consideration here and therefore it was unnecessary to provide a view as to how far the court should go in ‘rubber stamping’ the views of the ASX in the context of the matters under consideration here. Clearly the decision of Gordon J leaves open for further consideration the question of the reach and effect of the Listing Rules in situations where disputes of this kind arise.

Delta Gold decision — An anomalous decision? 12.11 The decision of Allsop J, as he then was, in Re Delta Gold Ltd [2001] FCA 1817; (2001) 40 ACSR 347 (Delta Gold) provides an interesting commentary by Allsop J, on the impact of the Listing Rules when a proposed merger of two mining companies, namely Delta Gold Ltd (Delta) and Goldfields Ltd (Goldfields), were considered. The boards of directors of the two companies, which were in the business of exploring for and producing gold, wanted to effect a merger of the operations of the two companies which would lead to greater efficiencies and success. The scheme had been supported by a significant number of shareholders of both companies. When the scheme of arrangement was brought to the Federal Court for approval (as is required by the legislation), a significant shareholder of Goldfield applied to the court for a review of the earlier decisions which had been taken to green light the proposed scheme of arrangement. Allsop J noted (at 349) of the decision that he had been satisfied by all of the material brought to the court while he supervised the matter and that the scheme of arrangement should therefore be approved pursuant to the provisions of the legislation. [page 486] Allsop J dismissed the application brought by the particular shareholder.

He recognised that while the shareholder provided detailed arguments in favour of the request to reconsider the matter, there was no argument put that the particular scheme had not been pursued by the directors of the relevant companies in good faith and for the best interests of the relevant companies. A number of interesting legal arguments were raised by the complaining shareholder including suggestions that LR 7.1 (known as the 15% rule) which prevents the issue of shares of more than 15% without shareholder approval. Allsop J after examining the relevant legal and related arguments dismissed this submission, ruling that the particular steps taken by the relevant companies were not in breach of the Listing Rules, and even if they had breached the Listing Rules, he held that the provisions of the legislation (Corporations Law) did not invalidate the relevant transaction. A breach of the Listing Rules ‘is not an unlawful Act’: see [33]. Arguments that two other Listing Rules had been breached in the events that had taken place were dismissed by Allsop J. He was particularly comforted by the fact that ASIC had been appraised in relation to the relevant matters by the Australian Stock Exchange, and that in these circumstances it would be inappropriate for a court to disregard the views of ASIC in evaluating any such claim. As he noted (at [58]): I think the view of the ASX which has been taken would be a powerful consideration why a Court would not exercise its discretion [to set aside the transaction] … [t]hat view would only be reinforced by the recognition that ASIC had been apprised of the relevant matters and not sought to take any action or indicate any view of concern.

His reflections on what remedies might be pursued if there had been a breach of the relevant Listing Rule are interesting (at [60]): [Such a conclusion] does not make voidable, independently of an application under s 777 [of the Act], an issue of shares in breach of a Listing Rule made with the power provided under s 124 of the Act. It does not follow that because there has been a breach of the Listing Rule that leads to the necessary consequence, irrespective of s 777, that the issue is voidable and would be set aside.

For all these reasons, Allsop J dismissed the application to disallow the scheme of arrangement in the relevant circumstances. This is clearly a matter of some importance as we move towards a scenario where the ASX may not be the only listing body with responsibility for the listing and trading of shares on the market. The

interaction between the operation of listing rules and law, and the role that ASIC plays in this context, may need some further clarification in light of a number of interesting decisions which impact on these issues, including the recent decision of Barrett J in Re Centro Properties Ltd (in its capacity as a responsible entity of Centro Property Trust) (2011) 86 ACSR 584: discussed below at 12.13. Counsel argued that Allsop J should also take into account the views of the Full Court of the Western Australia Supreme Court in Quancorp Pty Ltd v MacDonald (1999) 32 ACSR 50: see 12.29. Allsop J was not certain that that case stood for the [page 487] proposition that relief was precluded. He was particularly comforted by the fact that ASIC had been appraised of the reasoning and consideration of the relevant matters by the ASX, and that in these circumstances it would be inappropriate for a court to disregard the views of ASIC in evaluating any such claim. As noted (see above) in his judgment in Delta (at [58]), Allsop J relied on the views of the ASX in dismissing the challenge to the statutory scheme of arrangement. In his view the consideration of these issues by the ASX was totally convincing. For these reasons Allsop J dismissed the application to set aside the scheme of arrangement.

ENFORCEMENT OF THE LISTING RULES BY PRIVATE PARTIES AND BY REGULATORS 12.12 In Chapter 11 we discussed briefly the application of both ss 793C and 1101B of the Act in context of the enforceability of the Market Integrity Rules (MIRs) promulgated by ASIC. In this chapter we will discuss the associated question of whether these two sections, working in association with the need to ensure compliance with the relevant operating rules (as discussed in Chapter 11), create a stronger layer of obligation on the part of the relevant private parties to ensure compliance with these

relevant rules and the market players (as well as the regulator) to ensure that the rules are complied with or enforced. In our view, s 793C does provide an important layer of enforceability. If any person is under an obligation to comply with the relevant rules, including the operating rules, then a number of parties may be in the position to seek to have the relevant persons comply with those rules. The range of parties that we believe are given the opportunity to seek the enforcement of these rules is very wide and would include the regulator. In essence, the parties who may seek to have an order made by a court, as a result of an alleged breach of s 793C of the Corporations Act, include ASIC (which would of course be the most significant person to ensure compliance), the relevant licensee, and the relevant operator of the licence (if a different person). It also extends to the operators of any clearing or settlement facility with whom the licensee has clearing and settlement arrangements and to ‘any person aggrieved’ by the alleged failure to comply with the statutory provisions. It is unnecessary for our purposes to consider in any detail the question of who will have standing to seek the enforcement of the relevant rules, and in particular the MIRs. In that context, the meaning of the expression ‘a person aggrieved’ has been discussed in detail in Chapter 11 and encompasses the consideration of a number of statutes under common law rules which provides a broad reading to that particular concept: see 11.27–11.29.

Relevant cases Re Centro 12.13 In this context, it is also useful to refer to certain comments made by Barrett J, who considered the significance of the Listing Rules to the way courts assess schemes [page 488] of arrangement in Re Centro Properties Ltd (in its capacity as a responsible entity of Centro Property Trust) (2011) 86 ACSR 584 (Re

Centro). His Honour noted that the Listing Rules had a ‘contractual’ effect as well as a more general statutory effect. Listed entities were required to comply with the Listing Rules of the ASX ‘not just [as] a matter of contract, [but] also [as] a statutory matter’: at [86]. Barrett J observed that the Listing Rules were enforceable against listed entities and their associates. He noted (at [86]) that the relevant rules themselves state that the ‘listing rules create obligations that are additional in complimenting the common law obligations and statutory obligations’. In summing up on this particular question, Barrett J noted (at [87]): [In] the ordinary course of events a listed entity is expected to comply, not extricate itself from compliance of the listing rules.

It is our view that the same interpretation should be adopted in assessing the obligations imposed on other parties who are operating in the securities industry regime.

Chapman 12.14 In this context, it is interesting to note the earlier decision of Chapman Ltd v Australian Securities Commission (1994) 14 ACSR 726: see also discussion in 11.37 and 12.32. In this case Beaumont J of the Federal Court considered the importance of administrative law in determining whether the Australian Stock Exchange had enjoyed the right of removing a company from its official list without possible review under the administrative law regime — namely the Administrative Decisions (Judicial Review) Act 1977 (Cth). In his view, although the decision was one that was of ‘administrative character’, it had not been made under an ‘enactment’ pursuant to the operations of the Commonwealth legislation. Beaumont J ruled that the relationship between the Exchange and a company whose shares were listed on the Exchange was contractual. Neither the Listing Rules nor any agreement made between the company and the Exchange could be construed as an ‘enactment’ pursuant to the Act. In obiter dicta Beaumont J noted that the Exchange owed duties of a public character which made it susceptible to possible review under the general supervisory jurisdiction of the Federal Court pursuant to the operation of the Judiciary Act 1903 (Cth). However, he did not elaborate on this particular matter.

12.15 To further illustrate our views on the enforceability of these relevant rules, we now review a series of cases in which these questions have been considered by the courts. In doing so the courts are dealing not only with litigation brought by private parties in disputes, but also with applications made by regulators for the enforcement of the relevant rules.

Early observations from the courts — Ampol Petroleum 12.16 The next series of cases to be discussed concern the ability of third parties to obtain remedies against persons for non-compliance, or seek rectification of action taken by the regulators (both ASIC and the Australian Stock Exchange) where [page 489] disputes have arisen. In this context it is useful to note the views expressed by Street CJ of the Supreme Court of New South Wales in Ampol Petroleum Ltd v RW Miller (Holdings) Ltd [1972] 2 NSWLR 850 (Ampol Petroleum) which were upheld by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68. In considering whether there had been a breach of directors duties, Street CJ also noted that the relevant action by the company’s directors was in breach of the stock exchange rules. The Privy Council confirmed that there had been a breach of the contract that existed between the company and the stock exchange. In the litigation surrounding the dispute in the Ampol Petroleum Ltd, it was accepted as common ground that the relevant company was bound by contract to observe the rules of the Australian Stock Exchange. Neither Street CJ nor the Privy Council on further appeal dealt with these matters in their judgments. It is important to note that these observations were made without the benefit of any equivalent legislation that is currently in place in ss 793C and 1101B of the Corporations Act. The course of their observations on the importance of these common law rules will add further weight to arguments that the statutory provisions enhance the general obligations of the parties to comply with the relevant rules.

Cases dealing with the enforcement of ASX Listing Rules under the Corporations Act Repco 12.17 The first important case in which the statutory provisions were considered in this context was Repco Ltd v Bartdon Pty Ltd [1981] VR 1 (Repco). In this case, the Full Court of the Supreme Court of Victoria considered the scope of s 31 of the Securities Industry Act 1975 (Vic). Section 31 (the earliest predecessor of s 793C of the Corporations Act) provided, among other things, that where any person ‘under an obligation to observe, enforce or give effect to the Business Rules or Listing Rules of a stock exchange’ (that is, a listed company) failed to observe, enforce or give effect to them, the court could make an order to direct compliance with, and enforcement of, or give effect to, the rules. The Full Court commented, however, that there was no similar legislation imposing an obligation on an unlisted company to observe the Listing Rules of the Stock Exchange of Melbourne Ltd (Melbourne Exchange). This was because an unlisted company was not in any contractual relationship with the exchange that embodied the Listing Rules. Despite a number of statutory changes, including the change in the regulatory regime (with ASIC now taking over the major role of regulation from the ASX) it would seem that the relevant provision still only applies to corporations and those who are under an obligation, by virtue of contract or other arrangements, to comply with those rules. Unless there exists some relationship between the unlisted company and listed companies that might give rise to a relationship with the ASX implying an obligation to comply with its relevant rules, it would appear that the amendments do not overturn the decision in Repco. It was not necessary for the Victorian Full Court in Repco to decide whether there was a contract between a listed company and the Melbourne Exchange which arose [page 490]

from the acceptance of an application for listing. However, in rejecting arguments that an unlisted company was under an obligation to observe the relevant Listing Rules, the court interpreted s 31 of the Securities Industries Act 1975 (Vic) as a measure aimed at giving standing to the relevant regulator, the Commissioner for Corporate Affairs (the regulator in Victoria at that time), or a person aggrieved to seek enforcement of an obligation imposed by a contract to which they were not parties. That explanation at least implied acceptance by the court of the existence of a contract between the stock exchange and a listed company. The court did not consider the Ampol Petroleum case referred to above.

Designbuild 12.18 Section 31 of the Securities Industry Act 1975 (NSW) (a provision identical to that considered in the Repco case) was considered by the Supreme Court of New South Wales in Designbuild Australia Pty Ltd v Endeavour Resources Ltd (1980) 5 ACLR 610 (Designbuild). The proposition that a contract arose from the acceptance by a stock exchange of an application for listing appears to have been accepted by Powell J in Designbuild, although the relevant contract did not, in his view, impose on the listed company any obligation to observe the Listing Rules. Powell J did not refer to the Ampol Petroleum case either. Assuming that these cases, and others discussed in this chapter, establish the proposition that there is a contract between the ASX and the company whose shares are listed, the question arises as to the scope of the contract. Previously, the relevant application form for the listing of shares (securities) and the relevant Listing Rules were less detailed than they are now. As a result, the content of the contract was largely ascertained by inference. Generally, a court would only imply terms necessary to give business efficacy to the relationship between contracting parties. This created the opportunity for opposing arguments to be vigorously pursued. When one adds to these comments the fact that there is now a different regulatory regime, with ASIC playing a more significant role, it would appear to the authors to be even more arguable that the Listing Rules do require compliance in a quasi-contractual, if not a fully contractual, fashion. In this case, Powell J did not consider that it was necessary to imply into

the contract an obligation to observe the listing requirements, in order to give business efficacy to the relationship between the Sydney Exchange and a listed company. The relevant listing requirement prohibited an issue of shares in a company within three months of receipt of the notice of a takeover scheme, unless the issue was made to all members of the company rateably according to existing shareholdings. Whether the Sydney Exchange could have obtained an injunction to stop an issue of shares, otherwise than in accordance with the listing requirements, was not discussed by Powell J. In the authors’ opinion, Powell J’s view that the listing requirements did not impose a relevant obligation of compliance on a listed company seems at odds with the language of s 31 of the 1975 securities legislation.

Two contrasting decisions — Devereaux Holdings and Boomalli 12.19 In Devereaux Holdings Pty Ltd v Pelsart Resources NL (1985) 9 ACLR 879 (Devereaux), the court recognised less weight should be given to the effectiveness [page 491] of the legislation preceding s 793C of the Corporations Act. In this case, Cohen J made but passing reference to the impact of s 42 of the Securities Industry (NSW) Code (see now s 793C of the Corporations Act) in the context of the relevant stock exchange having the absolute discretion to waive compliance with appropriate listing requirements. After referring to this discretion, Cohen J noted that such an exercise of ‘power’ was at the election of the relevant stock exchange, and it was a matter in respect of which he would not intervene. In his opinion, it was not an issue that required the court to act, unless and until the relevant stock exchange exercised an appropriate discretion. In contrast, Olney J, in a decision that receives less attention, Boomalli Ltd v Hake (1982) 7 ACLR 516 (which predated Devereaux) suggested

that once a company had its securities listed on the relevant stock exchange (in this case the Perth Exchange), it became bound by the rules contained in the Australian Associated Stock Exchange Listing Manual (as it was then known) and, in particular, the Continuing Listing Requirements. While the judge deferred the question of whether the stock exchange rules could override the powers of the directors of a company under its constitution (at that time the articles of association), in practical terms the company ‘could not disregard the listing requirements and expect to remain listed’: at 525. There was no reference to the equivalent of s 793C of the Corporations Act in this short decision, which depended very much on the facts of the case.

‘Neutral’ readings of the statutory power to enforce Listing Rules 12.20 In the next section we consider a number of cases in which a ‘more neutral’ interpretation of the contractual obligation of the Listing Rules may have been adopted by the courts. In this context, there are a number of decisions of the courts in which related questions have been considered and a variety of interpretations have been adopted by the courts dealing with the issues at the heart of the disputes. It is interesting to observe that there have been very few appellate court decisions and certainly no High Court decisions in which the relevant questions have been considered in detail.

Harman 12.21 The first of these cases is Harman v Energy Research Group Australia Ltd [1986] WAR 123; (1985) 9 ACLR 897 (Harman). Brinsden J in the Supreme Court of Western Australia noted (at [129]) that the listing requirements did not have statutory force. In this case, the various plaintiffs sought to restrain the company from holding an extraordinary general meeting on the basis that the directors had failed to accept nominations on behalf of the plaintiffs to stand for election to the board of directors of the company: at [129]. The plaintiffs had nominated for appointment to the relevant board of directors within the time limits set down by the company’s articles of association. It was argued by the

defendants, among other things, that the nominations were lodged outside the time limit prescribed in the then cl 3L(2) of the listing requirements (equivalent to the current LR 14.3). The company alleged that it was bound by the relevant predecessor of s 793C of the Corporations Act (s 42 of the Securities Industry (WA) Code), as well as an article in the company’s articles of association that required observance of the listing [page 492] requirements. The exchange felt it enjoyed a discretion to waive compliance with any of the listing requirements. There was no provision in the articles of association which allowed the company such a discretion if there was inconsistency between the company’s articles of association and the listing requirements. Brinsden J held (at [129]–[130]) that the relevant statutory obligation (together with a specific article in the company’s articles of association): … can only mean an obligation to comply with such of the Listing Requirements as the Stock Exchange, in its discretion, has required the company to comply with. It is apparent the Stock Exchange did not require the company to amend [the relevant article of association]. Hence, it seems to me that the only reasonable inference from that fact is, that if the correct construction of cl 3L(2) be that it is inconsistent with [the relevant article of association], then the stock exchange waived compliance with 3L(2).

Zytan Nominees 12.22 Three years later, in Zytan Nominees Pty Ltd v Laverton Gold NL (1988) 1 WAR 227; 14 ACLR 524 (Zytan Nominees), the relevant action arose with the plaintiff seeking the continuation of an interim injunction against the issue of shares in the context of a takeover. Malcolm CJ, in agreeing to a continuation of the injunction, recognised the obligations of companies to comply with the Listing Rules of the Perth Exchange, in particular the (then) LR 3J(3)(a) (now largely contained within LR 10.1– 10.2). It was argued that the obligation to comply with these rules flowed in part from the operation of the equivalent provision to s 793C of the Corporations Act. His Honour held, however, that it was not necessary for the shareholder to rely on this section, as the company was under a contractual obligation to the shareholder (quite independent of the

statutory obligation) to comply with the Listing Rules and to seek shareholder approval of the takeover in these circumstances (where a director was to benefit from the takeover). Malcolm CJ cited Repco and Designbuild in support of his views. However, as this case was only a decision seeking an interim injunction, it was not necessary for Malcolm CJ to discuss these matters in depth.

TNT Australia 12.23 The following year, in TNT Australia Pty Ltd v Poseidon Ltd (No 2) (1989) 52 SASR 383; 15 ACLR 80 (TNT), Jacobs J of the Supreme Court of South Australia had to consider the effect of a particular Listing Rule which made it imperative for a company to make a full and fair disclosure of information surrounding certain contracts. The plaintiff company, TNT Australia Pty Ltd (TNT), had made a takeover offer of Poseidon Ltd (Poseidon), which was a listed company. Poseidon had called a meeting of shareholders at which it proposed to pursue a merger with another group of companies. This would impact on the TNT takeover offer. TNT argued that this meeting and the events surrounding it breached the relevant Listing Rules. Poseidon disputed this interpretation of the Listing Rules and their application to the arrangements. While Jacobs J agreed that the relevant Listing Rules were not binding on Poseidon (because of the special facts that were relevant, rather than the general interpretation [page 493] of the Listing Rules), he made some interesting comments about the role of the Listing Rules. TNT had argued that the Listing Rules in effect created an obligation on Poseidon to comply with the full terms of the Listing Rules, by making a more detailed and relevant disclosure. Jacobs J was not prepared to give the Listing Rules the extended operation that TNT had suggested. He nevertheless held that the rules were aimed at ensuring that companies complied with the spirit of the Listing Rules, as well as the letter of guidance provided by the stock exchange. He added (at 388) that the Listing Rules were in effect:

… a commercial document [which] ought to be construed and interpreted by a court in such a way to give effect to the spirit and purpose of the [relevant rules].

In the circumstances, he declared that the notice calling the meeting of the defendant company was invalid. This meant that certain directors who were to be appointed to the board of the defendant company could not be appointed pursuant to that notice. There was only a brief mention of s 42(2) of the Securities Industries (SA) Code, without any ruling as to whether it created a binding obligation on the part of the company.

Ashton Millson Investments 12.24 In Ashton Millson Investments Ltd v Colonial Ltd (2001) 162 FLR 145; 38 ACSR 323 (Ashton Millson Investments), a dozen years later, Warren J in the Supreme Court of Victoria (as she then was) had to consider certain orders under what was s 1094 of the previous legislation (Corporations Law). These issues arose from a decision of the directors of the relevant company to refuse to register the transfer of certain shares in the relevant company. The question before Warren J was whether the decision of the directors not to register the transfer was consistent with the interpretation of the relevant Listing Rule of the then Australian Stock Exchange. Listing Rule 8.10.1(h) required the listed entity not to (in any way) prevent, delay or interfere with the administration of the registration of shares. However, an exception to the rule allowed the directors to refuse registration where a ‘new’ holding was for less than what was described as a marketable parcel of shares. The articles of association of the relevant company, Colonial Ltd, contained a provision which enabled the directors to refuse registration if it was within the exception defined by the Listing Rules. There is a useful discussion by Warren J of the statutory framework of the legislation, in particular s 777 of the Corporations Law. Against a fairly complex set of facts concerning the reasons for the directors’ refusal to register, Warren J refused the application to have the directors’ decision overturned. In her view, the articles of association did not seek to override the operation of the Listing Rules. She ruled that the directors had appropriately exercised the discretion prescribed, nor was it inconsistent

with the application of what is now s 793C of the Corporations Act. Compliance with the Listing Rules was regarded as being an appropriate way to interpret s 1094 of the Corporations Law. As such, any claim for damages would not succeed. In essence, Warren J held that the Listing Rules had been complied with and thus there was no inconsistency with the relevant provisions of the statute. Warren J’s decision was upheld on appeal to the Victorian Supreme Court of Appeal [page 494] in Ashton Millson Investments Ltd v Colonial Ltd (2003) 48 ACSR 581. A special leave application was made to the High Court of Australia to review the decision of the Court of Appeal. The High Court rejected this leave application in Ashton Millson Investments Ltd v Colonial Ltd [2004] HCA 348.

Bateman 12.25 Three years following the decision in Ashton Millson Investments, in the Supreme Court of New South Wales, Barrett J adopted a similar approach to these questions to that of Malcolm CJ in the Zytan Nominees case. Arguably, his Honour also appeared to agree with the approach taken by Warren J in the Ashton case discussed above. In Bateman v Newhaven Park Stud Ltd (2004) 49 ACSR 454, his Honour applied what might be described as a purposive method in interpreting the Listing Rules. Barrett J appeared to regard this interpretation as consistent with the obligation of the ASX to protect market participants and their shareholders. The plaintiffs, Bateman and others, who were shareholders of the defendant company, sought injunctions to restrain the defendant company from holding a meeting to pass resolutions regarding the buyback of shares in Newhaven Park Stud. Their main argument was that the company had breached ASX LR 10.1, which provided: An entity … must ensure that neither it, nor any of its child entities, acquires a substantial asset from, or disposes of a substantial asset to, any of the following persons without the approval of holders of the entity’s ordinary securities: 10.1.1 A related party.

10.1.2 A subsidiary. 10.1.3 A substantial shareholder, if the person and the person’s associates have a relevant interest, or had a relevant interest at any time in the 6 months before the transaction, in at least 10 per cent of the total votes attached to the voting securities. 10.1.4 An associate of a person referred to in rules 10.1.1 to 10.1.3.

Barrett J did not accept the plaintiffs’ submission that a failure to strictly comply with this rule, when taken together with a failure to comply with LR 14.1, amounted to a breach of the Listing Rules. Listing Rule 14.1 required the notice of a meeting in cases such as those described in ASX LR 10.1 to contain a statement to the effect that neither ‘any party to the transaction’ nor an ‘associate’ of any such person was entitled to vote on the resolution. In his view, there had been sufficient information included in the documents and if the company was required (at 457) to adopt ‘an uncompromisingly literal approach of this kind [this could be] at odds with the nature of intent of the Listing Rules’.

Melbourne City Investments 12.26 In a more recent decision, Ferguson JA in Melbourne City Investments Pty Ltd v Worley Parsons Ltd [2014] VSC 523 (Melbourne City Investments) considered a different but related question concerning the enforceability of ASX Listing Rules. She specifically discussed whether a court could make an order under s 793C of [page 495] the Corporations Act to direct a company to comply with ASX Listing Rules in the future (bearing in mind that these issues were clearly conjectural). The plaintiff, Melbourne City Investments Pty Ltd (Melbourne City), commenced proceedings against Worley Parsons Ltd (Worley Parsons) alleging that Worley Parsons had breached its continuous disclosure obligations under LR 3.1 in relation to forecasts that it had made in relation to the 2014 financial year. Worley Parsons, in response, made an interlocutory application for the case to be dismissed on the basis that

Melbourne City did not have a valid cause of action. Worley Parsons pointed to the uncontested facts to support its claim. Specifically, Melbourne City had purchased shares in Worley Parsons before the alleged breached of LR 3.1. Furthermore, Worley Parsons had already made ‘corrective disclosures’ in relation to the 2014 financial year forecasts. Ferguson JA struck out the litigation on the basis that Melbourne City had no reasonable prospect of success in obtaining the relief being sought. In her view, the order that Melbourne City sought was an order requiring future compliance with the Listing Rules on the basis of past alleged noncompliance. Melbourne City had failed to articulate a cause of action that would enable a court to make this order. Furthermore such an order would, in effect, place Worley Parsons in contempt of court should it breach the relevant Listing Rule in the future. Ferguson JA noted (at [38]): [T]here is no reasonable prospect that the court would direct a company to comply in the future with a Listing Rule in such broad terms as are sought. The effect would be to turn a breach of the obligation imposed by Listing Rule 3.1 into one that was punishable as a contempt … So, even if it were established at trial that Worley Parsons had failed to comply with Listing Rule 3.1 so far as the earnings forecast matters were concerned, the court would not be in a position to fashion a direction for future compliance tied to the failure in 2013 in respect of those confined matters.

Decisions adopting a more ‘sympathetic’ interpretation of the enforceability of the Listing Rules 12.27 In the previous pages we have discussed cases where there have been some mixed views expressed by the relevant judges interpreting the importance of the relevant Listing Rules. They have also considered the enforceability of those Listing Rules. However, even in those years in which the judges have adopted a more sympathetic interpretation or a tougher interpretation, there have been other cases in which the courts have taken a more supportive view of the interpretation of the Listing Rules. In particular, in the Supreme Court of Victoria, the Supreme Court of New South Wales and the Full Court of the Supreme Court of Western Australia, some interesting decisions were handed down.

Zephyr

12.28 In Zephyr Holdings Pty Ltd v Jack Chia (Aust) Ltd (1988) 14 ACLR 30 (Zephyr), Brooking J adopted what one can regard as a more ‘sympathetic view’ of the application of the relevant Listing Rules. This case involved Jack Chia (Aust) Ltd (JCA), a public company. The value of its shares after trading on the stock exchange [page 496] for a while had fallen from a high of 50 cents to approximately 20 cents. JCA had issued two series of options exercisable in 1990 and 1991, at a price of one dollar. There was no reasonable prospect of the options being exercised. Certain companies (respondents) associated with a director of JCA held 63% of the shares in JCA and 93% of the existing options. The applicant held 14% of the shares in JCA but no options. JCA held a meeting at which resolutions were passed, eliminating the existing options. Instead, it offered new 25 cent options to shareholders and existing option holders on a one-for-one basis. The respondents voted in favour of the resolutions. The applicant sought an injunction restraining the issue of the options. The applicant claimed there was a breach of s 320 of the Companies Code (Vic) in the issue of the option which was not in the interests of the members and was oppressive. It further claimed that the issue would amount to a breach of the then LR 3E(8)(a) of the Australian Stock Exchange Listing Rules (current equivalents are contained within LR 10.11–10.15B). The rule prohibited an associate of a director of a company from participating directly or indirectly in an issue by the company of equity securities or other securities with rights of conversion to equity unless one of certain exceptions applied. Brooking J of the Supreme Court of Victoria held that the issue of options by the defendant company amounted to a potential breach of the then LR 3E(8)(a). Brooking J noted (at 35) that the relevant rule was an: … important Rule, based on the special position and responsibilities of directors and the danger that they will abuse their powers and not properly discharge their duties. Prima facie the Rule is to be enforced so as to prevent a breach in a matter of substance. It is true that the Stock Exchange has power, in its absolute discretion, to waive compliance with

the Rule, and if I thought it likely that the Exchange would, once the Rule has been construed by me, proceed to waive it for the purposes of the present proposed issue of options, then I might well in the exercise of my own discretion decline to make any order under s 42. I find myself, however, unable to form a view as to the likely attitude of the Stock Exchange to any future request for waiver.

In the circumstances, the court was prepared to grant the injunction (although Brooking J held that there was no oppressive conduct under the equivalent of Pt 2.F1 of the Corporations Act).

Quancorp 12.29 The next case in point of time is the decision of the Full Court of the Supreme Court of Western Australia in Quancorp Pty Ltd v Macdonald (1999) 32 ACSR 50. Cudgen RZ Ltd (Cudgen), a listed public company whose major asset was a 50% shareholding in another listed public company, Consolidated Rutile Ltd (R), announced a decision to declare a dividend payable in R’s shares. It then wished to convene a general meeting to consider a resolution to approve the winding up of Cudgen, which would result in the distribution to its members of the remaining assets. The appellants, who operated a corporate advisory service, purchased shares in Cudgen after the winding up announcement was made. They then informed one of [page 497] the major shareholders in Cudgen that they wished to acquire a controlling interest in the company. Preliminary negotiations were unsuccessful, and in 1997 a partial takeover offer was made to the shareholders of Cudgen. The major shareholders decided not to accept the offer and the directors of Cudgen resolved to continue with the proposed dividend distribution and liquidation. The appellant sought an interlocutory injunction. This was unsuccessful and the winding up process continued under the supervision of a liquidator. The appellants then sought alternative relief in damages. This action was dismissed as well. The appellants appealed their failure to obtain damages to the Full Court of the Supreme Court of Western Australia.

Malcolm CJ, on behalf of the Full Court, dismissed the appeal. He discussed the major ground of the appeal, which was that the declaration of dividends by Cudgen to its substantial shareholders was in fact a breach of the then LR 2.1 and LR 11.2. The appellants based their claim on the assertions ‘that it was an implied term of the contract between the appellants as shareholders that Cudgen would comply with the ASX Listing Rules’: at 53. It was further alleged that the subsequent resolution to wind up also constituted a breach of the Listing Rules. In dismissing the appeal, Malcolm CJ, after reciting the relevant terms of s 777 of the Corporations Law, noted (at 54) that, as the appellants were shareholders of Cudgen, ‘Cudgen was under a contractual obligation to the appellants to comply with the ASX Listing Rules quite independently of the statutory provisions’. He cited a number of cases including Repco Ltd v Bartdon Pty Ltd [1981] VR 1; Designbuild Australia Pty Ltd v Endeavour Resources Ltd (1980) 5 ACLR 610; and Zytan Nominees Pty Ltd v Laverton Gold NL (1988) 1 WAR 227; 14 ACLR 524 (discussed at 12.18 and 12.22). He ruled that it was not a breach of the relevant Listing Rules for the company to distribute its major asset to two shareholders who controlled over 95% of the company’s capital. But what was more interesting and important was his view (at 55) that no relief could be granted because the relevant stock exchange was not a party to the particular litigation: [P]rimary relief which [the appellants] seek is a declaration that the actions of the directors and Cudgen were void as contravening the listing rules of the [Australian Stock Exchange] and/or as contravening the directors’ duties owed to Cudgen and the appellants. I am quite unable to perceive any basis upon which such a declaration could be made in proceedings to which the [Australian Stock Exchange] was not a party.

The appellants had previously complained to the Australian Stock Exchange about the alleged breach and the Stock Exchange decided not to take any action. The Stock Exchange also indicated they had no wish to be joined as a party in the relevant action. In the judge’s view, that was no answer to the question — ‘it was open to the appellants to join the [Australian Stock Exchange] as a party’ (at 55), inferring that it should have been joined in considering a matter of this kind. The suggestion by Malcolm CJ, that the primary obligation noted on the Australian Stock Exchange to insist that parties in default of the Listing

Rules take corrective action, implies that the court cannot make an order against a director of a company that is not a party to the Listing Rules themselves. It is interesting to note that, even if the Australian Stock Exchange had required corrective action to be taken (in this [page 498] case to seek approval of the relevant decision to distribute the assets), this would still not necessarily have meant that the transaction was void. This reasoning should apply to the operations of the ASX which has now taken the place of the Australian Stock Exchange — see also the discussion in Delta Gold in which Quancop was considered at 12.11.

FAI Insurances 12.30 While this decision pre-dates the decisions discussed previously, it is appropriate to reflect on a number of matters considered by Kirby P in the New South Wales Court of Appeal. Later in this chapter, we discuss other aspects of the decision dealing with interesting issues surrounding the interpretation of the rules administered by the ASX and reviewed by the court. Kirby P, as he then was, in FAI Insurances Ltd v Pioneer Concrete Services Ltd (No 2) (1986) 10 ACLR 810 (FAI Insurances) considered the question of enforceability of the relevant provisions of the Securities Act 1975 (NSW): ss 31 and 42. These provisions of course are now replicated in the Corporations Act. His Honour noted (at 810): … s 42 is in language which is marginally more emphatic. It affords a definition of the persons under the obligation. This is provided by s 42(2) which had no equivalent in the predecessor section. Under s 31 of the Securities Industry Act 1975 it was necessary to establish, outside the section, a contractual or statutory obligation to observe the listing requirements but s 42 of the Securities Industry Code imposes its duties more clearly. By the force of the section it gives statutory recognition and significance to the listing requirements of the Securities Exchange.

The implications of this decision, in respect to other questions arising for consideration in the context of these matters, are discussed further: at 12.35.

Right to seek compliance with the Listing Rules and other rules — regulators, investors and third parties 12.31 On the basis of the various cases that have been discussed above, and some further decisions considered below, we now turn to consider the question of whether the ASX can be forced to seek compliance where parties are concerned at the way in which the Listing Rules are administered and the ASX does nothing to intervene. As noted at the commencement of this chapter the ASX reserves to itself an absolute discretion concerning the admission of an entity to the Listing Rules, and also to determine whether there has been compliance with the Listing Rules. There is no need to revisit these questions here but we shall return to a final view on these matters after considering a range of cases in which the broader question of whether investors (and others who have interests in the operations of the securities market) have a right to seek an enforcement of the Listing Rules in the appropriate circumstances. While it is clear that companies whose securities are listed on the ASX will have this right, in our respectful view, it is perhaps even more relevant to note that the combined operation of s 793C of the Corporations Act, working side by side with the Operating Rules, and the impact of s 1101B of the Corporations Act, may significantly increase the effectiveness of this proposal. [page 499] Barrett J in Re Centro, which we discussed earlier at 12.13 with respect to his reflections on the broad applicability of the Listing Rules, also made a number of interesting observations about the duties of directors in observing the relevant Listing Rules. He suggests that directors of companies whose shares are listed on the relevant securities exchange, should comply with the Listing Rules. This will impact on decisions that they make in relation to the affairs of those companies. Indeed, it could be argued that as a result of this interpretation, directors are under a direct obligation to comply with the Listing Rules and failure to do so may

amount to a breach of their statutory duty of care under s 180(1) of the Corporations Act. In our view similar reasoning was adopted by the Full Federal Court (especially Keane CJ), in the decision of Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364; 274 ALR 731; 81 ACSR 563; [2011] FCAFC 19, in which his Honour held that the failure of Andrew Forrest to ensure compliance by the company with the continuous disclosure regime, and the provision of misleading information to the ASX, amounted to a breach of s 180(1) of the Corporations Act. The High Court of Australia in Forrest v ASIC, Fortescue Metals Group Ltd v ASIC (2012) 247 CLR 486 overturned the decision of the Full Federal Court by ruling that there had been no breach of the continuous disclosure rules nor the provision which banned misleading or deceptive conduct. However, the High Court did not challenge the ruling of Keane CJ that there had been, in the context of the facts ruled on at first instance, breaches of the continuous disclosure regime, the misleading and deceptive conduct rule, and therefore a further breach of the duty of care.14 The ability of the courts to find an even greater obligation on the part of directors to comply with their duty of care suggests that similar arguments may be made if there is a failure to comply with provisions of other legislation, which imposes upon directors significant duties. In addition, as we discussed in Chapter 11, ASIC can rely on s 1101B of the Corporations Act to ensure compliance with the Operating Rules. It is therefore important to consider the relevance of ASIC and its ability to play a more active part in ensuring that appropriate behaviour occurs in the securities market. ASIC plays a dominant role in the issue of MIRs, and is constantly being consulted by the ASX on changes to rules and related matters and so, it would not be a surprise if ASIC was to become more involved in this area, as we shall discuss in the next section of this chapter.

Will judicial review of decisions of the ASX be available? 12.32 We noted earlier in this chapter (as well as in Chapter 11) that the Australian courts have taken the view that decisions made by the ASX and related bodies in interpreting the rules of the ASX do not necessarily

provide an opportunity for judicial review to be obtained. However, as a result of the joint regulatory regime that now operates, and in particular the position of ASIC in overseeing the work [page 500] of the ASX, it may be possible that the decision in Chapman (discussed at 11.37 and 12.14) may no longer stand for the correct interpretation of the law. Paul Latimer, in his article ‘Judicial Review of Stock Exchanges Integrity Rules and Operating Rules’15 has suggested that stock exchanges with the important powers that are vested in them (and he was writing before the decision of the federal government to vest primary supervisory powers on ASIC) now has to operate under a ‘quasi public’ regime rather than a private regime. In his view, they should be treated as though they are a delegate of the government.16 In this context, the United Kingdom decision may be useful. In R v Panel on Take-Overs & Mergers; Ex parte Datafin plc [1987] QB 815; 1 All ER 564 (Datafin), the court noted that in effect bodies such as the United Kingdom Takeovers Panel, or similar bodies (which actually exercised either monopolistic or quasi-monopolistic powers to regulate industries), should be subject to judicial review at common law. The Takeovers Panel had been established in the United Kingdom to deal with the regulation of takeovers in the market and other matters that impacted on the operations of the securities market. The decision of the United Kingdom Court of Appeal provides an interesting oversight of this area of the law in Australia because of similarities between the United Kingdom Takeovers Panel and a similar organisation that operates in Australia. However, there are significant differences in which the two regulatory bodies operate — certainly the Takeovers Panel in Australia does not deal with matters relating to the operation of the securities market per se: see Chapter 15. The United Kingdom Takeovers Panel is not required to make decisions under statutory powers but its decisions (as with the Takeovers Panel’s decisions in Australia) have a significant impact. The existence of such a

power led Kyrou J in the Supreme Court of Victoria case of CECA Institute Pty Ltd v Australian Council for Private Education and Training [2010] VSC 552 (CECA) to state (at [99]): [I]n my opinion, the Datafin principle represents a natural development in the evolution of the principles of judicial review. Indeed, it is a necessary development to ensure that the principles can adapt to modern government practices. The last 20 years or so have seen a growing tendency by the legislature and the executive to out-source important governmental functions to private organisations. As this trend is unlikely to abate, the Datafin principle is essential in enabling superior courts to continue to perform their vital role of protecting citizens from abuses in the exercise of powers which are governmental in nature.

It is interesting to note that the decisions in Datafin and CECA have been cited with approval by Victorian courts.17 [page 501]

What remedies are available to ‘third parties’ in seeking their compliance with the relevant listing rules? 12.33 On the basis of the cases which suggest that the courts are more likely than not to insist on compliance with the relevant listing rules in appropriate circumstances, there is a further question that needs to be considered. Do investors (and others who have interests in the operations and securities markets) have the right to seek an enforcement of the relevant listing rules in the appropriate circumstances. As noted earlier, the operation of s 793C of the Corporations Act in conjunction with the Operating Rules, may enable licensed market operators, licensed operators of clearing and settlement facilities, as well as any person whose interests is affected to ensure that there is strict compliance with the relevant rules and the Listing Rules. Over the years, new rules have been introduced to ensure greater continuous disclosure of price sensitive information by relevant corporations, and to give more teeth to the operation of the ASX. Amendments to the law were also made following the report of the House

of Representatives Standing Committee on Legal and Constitutional Affairs (Lavarch Committee).18

JOINT IMPACT OF SS 793C AND 1101B ON THE OPERATION OF THE LISTING RULES 12.34 In considering just how effective these two provisions are in ensuring that the Listing Rules are given more than passing operations, but do in fact enhance the powers of the ASX (and through that the role to be played by ASIC), it would be useful to endorse the approach of Barrett J in Centro. While it is useful to refer to earlier decisions in which a similar approach was taken, less emphasis should be given to these cases. The first of these cases is White v Shortall (2006) 68 NSWLR 50 (Shortall), Campbell J did adopt a sympathetic approach to the application and the importance of the relevant rules: see 12.36. In the later case, ASIC v Fuelbanc Australia Ltd (2007) 64 ACSR 17 a different interpretation was applied in dealing with a quite different set of circumstances: see 12.37.

FAI Insurances 12.35 Earlier in this chapter (see 12.30) we referred briefly to the statements of the court in the New South Wales Court of Appeal decision FAI Insurances Ltd v Pioneer Concrete Services Ltd (No 2) (1986) 10 ACLR 801 (FAI Insurances). FAI Insurances (FAI) had announced a takeover offer for Pioneer Concrete Services Ltd (Pioneer), whose shares were listed on the Sydney Stock Exchange. In order to counter the takeover offer (at a minimum, this was alleged), Pioneer issued 41 million shares to 19 persons other than FAI, two days after the announcement was made. FAI contended that this was a breach of the Stock Exchange Listing Requirements. [page 502] FAI submitted that s 42 of the legislation allowed it to apply to the court

for an order to remedy the breach, by removing from the register of Pioneer the names of the persons to whom the relevant shares had been issued. It also sought an interlocutory injunction to restrain dealings in the relevant shares pending determination of the final challenge. Young J at first instance rejected the application. He held that s 42 did not allow the substantive relief which was being sought by FAI. His Honour further held that the section only gave the court power to direct a company to comply with the listing requirements. If a listing requirement had been breached, no order could be made under s 42. A court could make an appropriate order under s 14 of the SIC, however, but only on an application from the relevant regulator (now ASIC) or the relevant stock exchange: see s 1101B(1)(a) and (b) of the Corporations Act. In its leave to appeal application, FAI raised a further claim — the directors of Pioneer failed to act in good faith in the issue of the relevant shares. Leave to appeal was refused, but a temporary interlocutory injunction was issued to allow FAI to commence proceedings, based on the alleged breaches of directors’ duties. The judgment of Street CJ and Samuels JA exposed the weakness of s 42 in this context. Street CJ also emphasised (at 806) the importance of: … enabling the stock exchange to impose requirements upon listed companies according to ordinary and proper commercial standards … [In addition] ss 42 and 14 confer on the court jurisdiction to underwrite the binding nature of the stock exchange rules. The obligation to comply with them is expressly imposed by s 42(2) and the jurisdiction conferred by s 42(1) and by s 14(1) imposes upon the court a complementary responsibility to hold itself ready, in appropriate cases, to underwrite and enforce that binding significance … The only generality regarding the rules that can safely be made is that the legislature, in these two sections, has plainly indicated that they are to be binding and enforceable. The stock exchange itself has available to it the sanction of delisting for disregard of the rules. The court has a more wide-ranging jurisdiction. In the case of both the stock exchange and the court, however, the question of whether or not the particular situation calls for intervention is ultimately a matter of discretion.

Kirby P was more generous in interpreting the language of s 42. He noted that the parties had not used the parliamentary debates or other memoranda to aid the court in interpreting the use of this section. After reviewing the cases referred to earlier, he added (at 810): By the force of the section it gives statutory recognition and significance to the listing requirements of the securities exchange. The facility for these to be invoked by ‘a person aggrieved’ suggests to my mind that the Parliament intended thereby to secure protection

of the general public interest, including the interests of the investing public amongst whom will be the existing shareholders of a listed company. Accordingly, quite apart from the consideration that the decisions cited do not bind the court, I would distinguish them on the ground that they all relate to the language of a section in a previous Act which, in relevant and important respects was different.

[page 503] Having distinguished the earlier cases, he noted that both ss 42 and 14 of the SIC should, in his view, be given a wider role to play because they necessarily affected (at 812): … large transactions, potentially [involving] the movement of very considerable funds and concern[ed] the public interest as well as the private interests of shareholders. Although the considerations to which Young J referred can properly be taken into account in the exercise of the court’s discretion to grant or deny relief under the section, they are not, in my view, reasons for giving a narrow construction to the power which the legislature has conferred on the court by the provisions of s 42.

Kirby P did not find it necessary to express a concluded view on the precise scope of s 42. His Honour’s views in relation to s 14 were similar. He held that there was an inescapable overlap between ss 14 and 42 of the SIC, despite the attempts by Young J to avoid a construction which involved an overlap (at 811): The intersection of the provisions arises by reason of the reference in each to the powers of the Commission and of the securities exchange to take steps following contravention of [s 14] or non-compliance with, non-observance of, non-enforcement of, or failure to give effect to [s 42] the listing requirements.

He concluded that s 42 should not be given a narrow construction, and stated (at 811): The fact that a ‘person aggrieved’ may initiate proceedings under s 42 suggests the possibility that the section contemplated remedial action which might affect third party rights such as are likely to be raised by the typical concerns of such persons aggrieved about non-compliance with the listing requirements.

Kirby P’s views concerning possible third party rights, however, were not shared by Street CJ or Samuels JA. The decision illustrates the weakness of the earlier versions of ss 793C

and 1101B. Some of those weaknesses have been overcome by the changes to the sections as a result of the adoption of the Lavarch Report. Whether these changes have distorted the thrust of the provision may be assessed by considering more recent decisions such as White v Shortall (2006) 68 NSWLR 50 (Shortall) and the interesting decision of Heerey J in Australian Securities and Investments Commission v Fuelbanc Australia Ltd (2007) 64 ACSR 17.

Shortall 12.36 In the Shortall decision, the relevant provisions of the legislation, namely ss 793C and 1101B, were not critical in the final decision reached. However, the judge’s consideration of the relevant statutory provisions is interesting. Shortall owned a parcel of shares which were subject to a restriction (by virtue of an escrow). Shortall indicated that he would sell those shares to the plaintiff, White, ‘at any time you request after the 1 August 2003’. Shortall failed to transfer the [page 504] shares to White, who sued. The question was: what constituted White’s damages and how did the impact of the Listing Rules affect the decision? Campbell J commented on the impact of the relevant rules in interpreting the rights. The issue was summed up as whether, having established a valid trust, any transfer of shares between White and Shortall could be prevented by operation of the Listing Rules. In this case, the shares had not been listed as ‘restricted shares’. Campbell J noted (at 710– 11): [I]t seems to be a fairly clear assumption running through the Listing Rules that an entity seeking quotation of any of its securities can issue securities to a person involved in its promotion or flotation only if the securities issued are restricted securities.

As Campbell J ruled that the shares had not been ‘restricted’, LR 9.5(b) imposed limitations on the ability of these shares to be listed and on how

they were to be transferred. The agreement prohibited the disposal of the shares. In dealing with these issues, he discussed the possible impact of ss 793C and 1101B of the Corporations Act and made some interesting comments. In doing so, he appeared to endorse the views reached by Young J in the first instance decision in Fire & All Risks Insurance Co Ltd v Pioneer Concrete Services Ltd (1986) 10 ACLR 760 that was overturned in part by the New South Wales Court of Appeal in FAI Insurances Ltd v Pioneer Concrete Services Ltd (No 2) (1986) 10 ACLR 801 (discussed at 12.30 and 12.35). When Young J decided Fire & All Risks Insurance Co Ltd v Pioneer Concrete Services Ltd (1986) 10 ACLR 760, ss 14 and 42 of the Securities Industry Code 1981 (NSW) contained provisions conferring powers on the court analogous to those now conferred by ss 793C and s 1101B of the Corporations Act. In discussing the operation of these provisions in relation to the facts before him (these facts are not particularly relevant for our purposes), Young J noted (at 765): The listing requirements are, as they state themselves, standards which govern the conditions upon which a company can remain on the official list. Ordinarily the remedy for gross breach of those requirements will be de-listing, if other factors do not indicate that such is not in the public interest, and it seems to me that the powers of the court under s 14 and s 42 of the Securities Industry (New South Wales) Code (1981) are a supplement to the powers of the exchange, a supplement that is similar to the powers which traditionally equity had in respect of the common law. The traditional role of equity in those cases was to intervene where the common law remedy was insufficient or where there was some equitable fraud or oppression or unfairness in the way in which the rules were being administered in the common law action. Likewise, under s 42 the court, to my mind, will ordinarily only interfere in analogous cases …

As noted earlier, although the decision of Young J was not completely supported by the Court of Appeal in the FAI Insurance Co Ltd case, the paragraph quoted above was not criticised by the Court of Appeal. For our purposes, it is not relevant to discuss the differences of approach to the final result in the FAI Insurance Co Ltd case. [page 505] However, it was the decision of Young J that was given particular consideration in Shortall. Campbell J held that even if the company

Shortall had been in breach of the Listing Rules, this would not necessarily render the contract invalid. As a result, in his Honour’s view, the ASX had the power to impose additional conditions that would allow the relevant parties to proceed with the contract as drafted.

Fuelbanc 12.37 In contrast to the decision in Shorthall, the decision of Heerey J in Australian Securities and Investments Commission v Fuelbanc Australia Ltd (2007) 64 ACSR 17 illustrates that the relevant section, s 1101B, when considered in conjunction with other provisions of the Corporations Act, may have a more significant role to play in the regulation of companies whose securities are the subject of dispute in appropriate circumstances. In this case ASIC sought an order from the court for the winding up of an organisation known as Fuelbanc Australia Ltd (Fuelbanc), which was an unregistered managed investment scheme. Orders were also sought against persons associated with Fuelbanc, including Mr Steven McDougall. Under the relevant scheme, participants would pay a flat ‘membership fee’ and a ‘plan fee’ in return for receiving a debit card that could be used to purchase fuel and other items at service stations, using the EFTPOS system. The incentive for participants was that, if they purchased amounts above a certain quantity over a period of time, a discount of 50% would apply. McDougall sought to fund the credit that his organisation was passing on to participants by using returns from another company with which he was involved. In fact, the participants’ fees were being used by McDougall and others to purchase real estate. The ever-growing number of members to the scheme would continue to fund the offloading of the operations of this rather clever endeavour. Heerey J held that these actions breached certain provisions of the Corporations Act (including failure to register as a scheme under s 601ED). He found it useful (at 29) to rely on s 1101B (as well as s 1324(1) of the Corporations Act) to permanently restrain McDougall and the company as well as others associated with him from: (a) carrying on any business related to, concerning or directed to be a managed investment scheme within the meaning of the Corporations Act; and (b) being in any way, directly or indirectly, knowingly concerned in or a party to the

promotion or establishment of, or the carrying on of the business of, a managed investment scheme within the meaning of the Corporations Act …

He also ruled, again pursuant to ss 1101B and 1324 of the Corporations Act, that McDougall and others could not carry on any business in relation to financial products or financial services unless he (or they) held an official financial services licence. The case demonstrates the flexibility of the orders that may be obtained under this provision. [page 506]

What orders may be made by the court for a breach of s 1101B of the Corporations Act?19 12.38 Section 1101B of the Corporations Act provides the court with wide discretion as to the types of orders that can be made should the relevant Listing Rule not be complied with in the appropriate circumstances. The matters which the court may make orders in relation to does not include a reference to the Listing Rules of the ASX. It does, however, cover failure on the part of a person to comply with the condition imposed on it by a market license issued by ASIC. It applies to the contravention of the Operating Rules (or Compensation Rules, if any) of a license market operator and operators under similar facilities which relate to clearing and related services. The application may be made by the market licensee if it believes that a person has contravened the relevant Operating Rules or Compensation Rules. The question remains at large, but in any action the court must exercise its discretion carefully, and must not make an order unless it is satisfied that awarding it would not unfairly prejudice any person in relation to the market. The variety of orders that may be made by the court, as set out in s 1101B(4) of the Corporations Act, provides an interesting illustration of the range of scenarios that may arise in the context of the conduct of

securities markets and problems that may arise in complying with the relevant regulation dealing with market integrity and related matters. Set out below is a list of the orders that can be made. As can be seen from this list, it applies to the Operating Rules (which include the ASX Listing Rules), MIRs and Compensation Rules: (a) an order restraining a person from carrying on a business, or doing an act or classes of acts, in relation to financial products or financial services if the person has persistently contravened, or is continuing to contravene: (i)

a provision or provisions of this Chapter; or

(ii) a provision or provisions of any other law relating to dealing in financial products or providing financial services; or (iii) a condition on an Australian market licence … Australian CS facility licence or Australian financial services licence; or (v) a condition of an exemption from a requirement to hold an Australian market licence … ; or (vi) a provision of the operating rules, or the compensation rules (if any), of a licensed market … ; or (b) an order giving directions about complying with a provision of the operating rules, or the compensation rules (if any), of a licensed market … to a person (or the directors of the body corporate, if the person is a body corporate) who contravened the provision; and (c) an order requiring a person to disclose to the public or to specified persons, in accordance with the order, specified information that the person to whom the order is directed possesses or to which that person has access, if the person:

[page 507] (i)

contravened a provision of the operating rules of a licensed market or a condition relating to the disclosure or provision of information; or

(ii) was involved in such a contravention; and (d) an order requiring a person to publish advertisements in accordance with the order at that person’s expense, if the person: (i)

contravened a provision of the operating rules of a licensed market, or a condition relating to the disclosure or provision of information; or

(ii) was involved in such a contravention; and (e) an order restraining a person from acquiring, disposing of or otherwise dealing with any financial products that are specified in the order; and (f)

an order restraining a person from providing any financial services that are specified

in the order; and (g) an order appointing a receiver of property … of a financial services licensee; and (h) an order declaring a contract relating to financial products or services to be void or voidable; and (i)

an order directing a person to do or refrain from doing a specified act, if that order is for the purpose of securing compliance with any other order under this section; and

(j)

any ancillary order considered to be just and reasonable in consequence of the making of an order under any of the preceding provisions of this subsection.

CONCLUSION 12.39 While there has been no High Court decision that considers the impact of the Listing Rules and the necessary obligations of parties to comply with the Listing Rules, the various decisions of courts throughout Australia have been consistent in recognising that there is a general obligation on the part of companies whose shares are listed on the ASX ‘board’, as well as their directors, to ensure that there is compliance with the Listing Rules. Obviously, there will be scenarios, such as those considered by Allsop J in the Delta Gold case, to examine the thrust of how far parties have to go in complying with every aspect of the ASX Listing Rules. There is no doubt that courts will make appropriate further orders if necessary (see, for example, the decision in Oil Basins in comparison to the commentary of Ferguson JA in Melbourne City Investments). It will be fascinating to see how the High Court will reflect on the powers of semi-regulatory bodies, such as the ASX, in making far reaching decisions that can affect the lives of companies seeking listing on the ‘board’ of the ASX, in their pursuit to ensure that they can continue to generate sufficient public confidence in their markets. With the potential entry into the Australian market in 2017 of a rival organisation to conduct listing arrangements, the competition that may develop between the two organisations will add some further interesting questions for consideration in the context of the types of disagreements that may arise. In the meantime, ASIC continues to regard the ASX as having considerable power to regulate the markets to ensure that these markets are being conducted efficiently

[page 508] and effectively. This is despite the fact that there have been some concerns as to the way some decisions have been reached by the ASX, for example, the removal of appeal rights in relation to the ability of companies to have their securities listed. The further question of the enforceability of rules of corporate governance, which link to the ASX Listing Rules (and perhaps future Listing Rules), remains an interesting and important question to be considered. ___________________________ 1.

The Australian Securities Exchange (ASX), as it is now known, was known as the Australian Stock Exchange until 2006. Where we refer to the Australian Stock Exchange (ASA) it will be because at the time of the relevant case the organisation was the ASA and not the ASX.

2.

See House of Representatives Standing Committee on Legal and Constitutional Affairs, Corporate Practices and the Rights of Shareholders, November 1991, Recommendation 15.

3.

Australian Securities Exchange Listing Rules, LexisNexis Butterworths, looseleaf, Introduction, p 1.

4.

Australian Stock Exchange Listing Rules, LexisNexis Butterworths, looseleaf, Ch 1, p 117.

5.

See ASX, Updating ASX’s Admission Requirements for Listed Entities, Consultation Paper, 12 May 2016.

6.

Above, p 4.

7.

See ASX, Listed@ASX Compliance Update, Update No 4/16, 21 April 2016.

8.

The Corporations Act s 723(3) now provides that if a disclosure document for an offer of securities states or implies that the securities are to be quoted on a financial market (whether in Australia or elsewhere) and: ‘(a) an application for the admission of the securities to quotation is not made within 7 days after the date of the disclosure document; or (b) the securities are not admitted to quotation within 3 months after the date of the disclosure document; then: (c) an issue or transfer of securities in response to an application made under the disclosure document is void; and (d) the person offering the securities must return the money received by the person from the applicants as soon as practicable.’

9.

The example provided in current LR 1.19 states that ‘an entity may be refused admission if its management does not, in the ASX’s opinion, have the skills and experience to ensure that it will discharge its obligations as a listed entity. In the case of a trust the management of the responsible entity or management company must have the necessary skills and experience’: Australian Securities Exchange Listing Rules, LexisNexis Butterworths, looseleaf, Ch 1, p 117.

10.

Australian Securities Exchange Listing Rules, LexisNexis Butterworths, looseleaf, Ch 1, p 117.

11.

Earlier recognition that a sound stock market (the Exchange) was important insofar as the expectations of investing public was clearly recognised by Street CJ.

12.

At this time the relevant Listing Rules were published in Australian Corporations Law — Principles and Practice, LexisNexis Butterworths, looseleaf, vol 3. This is now a separate publication. The relevant

quote is at p 557. 13.

The foreword of the rules at the relevant time stated: ‘Companies desiring to be admitted to the Official List of the Australian Stock Exchange Limited and to secure Official Quotation of their securities shall make application to the Exchange in the forms set out in the Appendices to the Listing Rules. The Exchange in its absolute discretion (without qualification whatsoever) may accept or reject any application for admission to the Official List and has absolute discretion in administering the Listing Rules and in so doing, looks to companies to comply with the spirit as well as the letter of those Listing Rules. The Exchange may at any time and from time to time in its absolute discretion waive compliance by a company with any Rule or part of a Rule contained in these Listing Rules. The grant of any waiver to these Listing Rules will be advised by the Home Branch of the company to the Australian Securities Commission’: Australian Corporations Law — Practice and Procedure, LexisNexis Butterworths, looseleaf, vol 3.

14

Commonly referred to as the ‘stepping stone’ theory. Edelman J has recently questioned the utility of this line of argument in ASIC v Cassmimatis (No 8) [2016] FCA 1023.

15.

(2011) 26 Aust JCL 127.

16.

Latimer also cites Spigelman CJ’s comments that these bodies attract ‘judicial review on administrative law grounds’ because, ‘[a]s with the British Takeover Panel, the Australian Stock Exchange plays a significant role in a governmental regulatory scheme’. See P Latimer, ‘Judicial Review of Stock Exchanges Integrity Rules and Operating Rules’ (2011) 26 Aust JCL 127 at 157.

17.

Mickovski v Financial Ombudsman Service Ltd (2012) 36 VR 456; Mickovski v Financial Ombudsman Service Ltd [2011] VSC 257.

18.

We discussed the role of the Lavarch Committee (House of Representatives Standing Committee on Legal and Constitutional Affairs, ‘Corporate Practices and the Rights of Shareholders’, November 1991) and the amendments to the Listing Rules earlier in this chapter at 12.3.

19.

The terms of s 1101B of the Corporations Act were amended to take account of the Lavarch Committee recommendations: see fn 17 above.

[page 509]

Part 4 Intermediaries

[page 511]

Chapter 13 AUSTRALIAN FINANCIAL SERVICES LICENSING Introduction Australian Financial Services Licences Requirement to hold an Australian financial services licence Exemptions from the requirement to hold an Australian financial services licence Agency exemption Whether a financial services business is carried on in the jurisdiction Credit ratings agencies Application for an Australian financial services licence Obligations Imposed on Licensees Regulation of licensees’ conduct ‘Efficiently, honestly and fairly’ standard Obligation to manage conflicts of interest Other requirements under s 912A Additional requirements applicable to dealings with retail clients Licensee’s obligation to provide information to ASIC Licence conditions imposed under the Corporations Act Authorised Representatives Regulation of representatives Prohibition on holding out Appointment of representatives Liability of financial services licensees for conduct of authorised representatives Representative acting for multiple principals

13.1 13.2 13.2 13.9 13.12 13.13 13.15 13.16 13.17 13.17 13.18 13.19 13.23 13.29 13.36 13.37 13.38 13.38 13.39 13.40 13.47 13.48



Effect of Div 6 Civil liability of licensees for the conduct of their representatives under other provisions of the Corporations Act Exclusion from the Financial Services Industry Variation, suspension or cancellation of a licence

13.49 13.50

13.51 13.51 [page 512]



Banning orders Disqualification by the court Orders that may be made by the court under ss 1101B and 1324 Registers and Restrictions on Use of Terminology Registers relating to financial services Restrictions on use of terminology Dealings with Unlicensed Persons Agreements with unlicensed persons Unenforceability of agreement formed with a nonlicensee against the client Other remedies in respect of dealings with unlicensed persons

13.56 13.63 13.64 13.65 13.65 13.66 13.67 13.67 13.71 13.72

INTRODUCTION 13.1 The licensing regime for Australian financial services licensees secures the adequacy of capitalisation of providers of financial services; excludes untrained and unqualified persons from the financial services industry; and enforces compliance with ethical standards.1 The process of licensing imposes a threshold control over the admission of persons to the financial services industry, and continuing control over the activities of such persons once admitted. The existence of a licensing regime and the imposition of civil liability upon financial intermediaries can be justified on grounds which include: the need to ensure that those intermediaries act to

promote a fair and orderly market, in order to maintain investor confidence in the financial markets; the need to impose liability upon financial intermediaries given the disparity of expertise between intermediaries and their clients and the consequent vulnerability of clients to misconduct of financial intermediaries; and the ability of financial intermediaries to insure against loss more readily than individual clients.2 On the other hand, the licensing regime involves administrative costs for the Australian Securities and Investments Commission (ASIC), and compliance costs for market participants and regulatory requirements that are set at too high a level could reduce competition in the financial services industry.3 Part 7.6 of the Corporations Act 2001 (Cth) (Corporations Act) requires a person who carries on a financial services business in the jurisdiction to obtain an Australian financial services licence (AFS licence). The requirement to hold an AFS licence applies, for example, to securities dealers and investment advisers; futures brokers; [page 513] life insurance companies and general insurance companies; deposit-taking institutions and foreign exchange dealers; persons operating custodial services; providers of noncash payment facilities; underwriting agencies; and those representatives of financial services providers that may operate as principals such as multi-agents for insurers.4 The requirement to hold an AFS licence also applies to product issuers who sell products directly to clients or engage representatives to do so. The holder of an AFS licence must satisfy financial requirements and conduct requirements, including requirements as to its compliance procedures and requirements as to the supervision and training of representatives. Although a licence is required where services are provided to either wholesale or retail clients, licensees who offer services to retail clients are placed under additional obligations: see 13.29. Licensees may authorise natural persons or corporate representatives to act on their behalf and authorised representatives are able to act for more than one licensee with the written consent of each licensee: see 13.40.

This chapter first deals with the requirements for AFS licences, including when a financial services business is carried on (13.2); the exemptions from the requirement to hold an AFS licence (13.9); whether a financial services business is carried on in the jurisdiction (13.13); and the requirements to be met by an application for an AFS licence (13.16). We then deal with obligations imposed on licensees, including the ‘efficiently, honestly and fairly’ standard (13.18); the obligation to manage conflicts of interest (13.19); compliance procedures (13.24); supervision requirements, adequacy of the licensee’s resources, training requirements and other requirements for licensees (13.25–13.28); additional requirements applicable to dealings with retail clients, including dispute resolution and compensation arrangements (13.29–13.32); the licensee’s obligation to provide information to ASIC (13.36); and the imposition of licence conditions (13.37). We then consider the regulation of representatives (13.38–13.46) and the liability of a licensee for conduct of its representatives (13.47–13.50); exclusion from the financial services industry (13.51–13.64); registers and restrictions on use of terminology (13.65–13.66); and dealings with unlicensed persons (13.67–13.72).

AUSTRALIAN FINANCIAL SERVICES LICENCES Requirement to hold an Australian financial services licence 13.2 Subject to specified exceptions, a person who carries on a financial services business in the jurisdiction must hold an AFS licence covering the provision of the financial services: Corporations Act s 911A(1). (All section references in this chapter are to the Corporations Act 2001 (Cth) unless otherwise specified.) A contravention of s 911A is an offence. The courts have made orders against unlicensed entities that were carrying out a financial services business in many cases.5 A contravention [page 514]

of s 911A also exposes the unlicensed person to the risk that a customer may rescind any agreement relating to the provision of the financial services: s 925A; and see 13.68–13.69.

‘Providing financial services’ 13.3 As noted above, the requirement to hold an AFS licence applies to a person who carries on a financial services business. The term ‘financial services business’ is defined as ‘a business of providing financial services’: s 761A. The term ‘financial service’ is in turn defined in s 766A as providing financial product advice (see s 766B); dealing in a financial product or making a market for a financial product (see ss 766C–766D); operating a registered scheme; providing a custodial or depository service (see s 766E); or engaging in conduct of a kind prescribed by regulations. A person does not provide a ‘financial service’ where his or her conduct is done in the course of work of a kind ordinarily done by clerks or cashiers: s 766A(3). It appears that this exemption applies to purely administrative or mechanical functions which do not involve the exercise of any independent judgment and which are provided in relation to a licensee’s business.

Matters that are not ‘providing financial services’ 13.4 The licensing regime does not apply to certain activities that are excluded from the concept of ‘providing financial services’. A person is taken not to provide a financial service by providing the services specified in reg 7.1.29 of the Corporations Regulations 2001 (Cth) (Corporations Regulations) where they are reasonably necessary to conduct specified activities and are an integral part of those activities. This exemption extends, among other things, to the preparation or audit of financial reports and taxation advice in the specified circumstances. Regulation 7.1.29A previously allowed an exemption from the licensing regime for accountants providing limited financial advice in respect of self-managed superannuation funds. An alternative licensing regime for accountants was introduced by the Corporations Amendment Regulation 2013 (No 3), allowing a streamlined regime for accountants who previously relied on that exemption to obtain an Australian financial services licence, and that exemption ceased from 1 July 2016.

Regulations 7.1.30–7.1.33B of the Corporations Regulations specify a number of other activities that are taken not to amount to providing financial services within [page 515] the meaning of s 766A(1)(a), which broadly relate to advice as to voting rights attached to securities or interests in managed investment schemes (reg 7.1.30); passing on, publishing, distributing or disseminating a document which contains financial advice in specified circumstances (reg 7.1.31); providing advice relating only to the structuring of remuneration packages for another person’s employees (reg 7.1.32); providing a recommendation or opinion in handling or settling claims or potential claims in relation to an insurance product (reg 7.1.33); and providing a recommendation or opinion about the allocation of funds among listed asset types (reg 7.1.33A). An issuer also does not provide financial services within the meaning of s 766A(1)(a) by preparing general advice in relation to its own products, where a third party licensee will give that advice to its recipients and, in that case, the licensee which gives that advice is taken to provide the relevant financial service: reg 7.1.33B.6

‘Providing financial product advice’ 13.5 The licensing regime also applies where conduct involves carrying on a business of providing ‘financial product advice’, which falls within the concept of ‘financial service’ in s 766A. The term ‘financial product advice’ is defined as a recommendation or statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products or an interest in a particular financial product or class of financial products, or could reasonably be regarded as having been intended to have such an influence: s 766B(1). Whether an opinion or recommendation is intended to influence or could reasonably be regarded as being intended to influence such a decision will be a question of fact. Communications that do not involve a recommendation or opinion, including purely factual information, are

generally not financial product advice. Conversely, factual information may constitute financial product advice if it is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product or class of financial products. For example, in Australian Securities and Investments Commission v Online Traders Advantage Incorporated (2005) 194 FLR 449; 23 ACLC 1929; [2005] QSC 324, an internet site which provided information about United States-listed companies was held to amount to giving financial advice and not merely organising information, since it generated recommendations as to the acquisition, holding and sale of securities based on criteria nominated by clients. Other cases where conduct amounted to the giving of financial advice so as to require an Australian financial services licence include Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192 (company provided financial product advice by recommending variation to existing superannuation arrangements and establishment of self-managed superannuation funds); Australian Securities and Investments Commission v Oxford Investments [page 516] (Tas) Pty Ltd (2008) 169 FCR 522; [2008] FCA 980 at [17]–[22] (provision of a trading methodology); Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 205 FCR 120; 90 ACSR 523; [2012] FCA 630 (business facilitated trading of foreign exchange contracts by online trading platform); Australian Securities and Investments Commission v Monarch FX Group Pty Ltd (2014) 103 ACSR 453; [2014] FCA 1387 (recommendations to set up selfmanaged superannuation fund in order to undertake trading on foreign exchange contracts); and Australian Securities and Investments Commission v Activesuper Pty Ltd (in liq) (2015) 105 ACSR 116; [2015] FCA 342 (recommendations as to superannuation). In Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527, Sackville AJA noted that the authorities indicate

that a person may provide information or present material in a way that impliedly makes a recommendation or states an opinion in relation to financial products (at [366]); that the relevant question is whether recommendations or opinions were intended to influence decisions in relation to financial products or could reasonably be regarded as so intended, not whether clients were actually influenced to make particular decisions (at [399]); and that these provisions can apply where a recommendation is made which is intended to encourage the creation of a financial product, although that financial product does not exist at the time of that recommendation (at [412]).

Exclusions from the definition of ‘financial product advice’ 13.6 Certain matters are excluded from the concept of ‘financial product advice’. Relevantly: The provision of an exempt document or statement is not taken to be the provision of financial product advice: s 766B(1A). The concept of ‘financial product advice’ also excludes advice given by a lawyer in his or her professional capacity about matters of law, legal interpretation or the application of the law to any facts; and, except as prescribed by regulations, advice given by a registered tax agent or BAS agent (within the meaning of the Tax Agent Services Act 2009 (Cth)) that is given in the ordinary course of their respective activities and is reasonably regarded as a necessary part of those activities: s 766B(5). This provision would not permit a tax agent to carry on a discrete financial services business unless he or she was licensed, since it is restricted to advice given in the ordinary course of activities of that tax agent that is reasonably regarded as a necessary part of those activities. Advice as to the cost or likely cost of a financial product (for example, an insurance product) which is calculated by reference to the valuation of an item (for example, a house or car to which an insurance policy would relate) also does not involve making a recommendation or providing any other kind of financial product advice relating to a financial product: s 766B(6). The provision of information in response to a person’s request about the cost of or rate of return on a financial product, where such

information could also be provided about other financial products, also does not constitute the [page 517] making of a recommendation or the provision of any other kind of financial product advice in relation to that financial product: s 766B(7).

Dealing in a financial product 13.7 The licensing regime applies to conduct which involves carrying on a business of dealing in financial products, which also falls within the concept of ‘financial service’ in s 766A. The concept of ‘dealing in a financial product’ includes applying for or acquiring a financial product; issuing a financial product; underwriting securities or managed investment interests and varying a financial product or disposing of a financial product: s 766C(1). For example, a dealing in financial products was established by the issue of interests in unregistered managed investment schemes in Re Risqy Ltd (No 2) (2008) 66 ACSR 679; [2008] QSC 139. ASIC has expressed the view that this concept extends to decisions made by consumers to make additional payments or contributions in relation to financial products held by them; and, in relation to superannuation, includes decisions made by consumers about joining a superannuation fund; the level of contributions to be paid to the fund; selecting a particular investment or insurance option within the superannuation fund; moving funds between sub-plans within a fund; claiming superannuation benefits; and moving funds from one fund to another fund.7 The concept of dealing in a financial product also includes arranging for a person to engage in such conduct, unless the actions concerned amount to providing financial product advice: s 766C(2). The concept of ‘arranging’ extends to the process by which a person negotiates for, or brings into effect, a dealing in a financial product.8 A person is taken not to deal in a financial product if he or she deals in that product on his or her own behalf, either directly or through an agent

or other representative, unless that person is an issuer of financial products and the dealing is in relation to one or more of those products: s 766C(3). This provision has the effect that a person who regularly deals in financial products as principal, for example, in managing his or her own share portfolio, and is not a product issuer, will not be required to be licensed.

Carrying on a financial services business 13.8 Whether a person is required to hold an AFS licence under s 911A depends on whether the person carries on a financial services business in the jurisdiction. The Explanatory Memorandum to the Financial Services Reform Bill notes (at [11.5]) [page 518] that ‘one-off transactions relating to the provision of financial services and financial products are unlikely to be caught by the new regime’. The concept of ‘carry on’ a financial services business is in turn affected by s 761C, which provides that Pt 1.2 Div 3 needs to be taken into account in determining whether someone carries on a financial services business. Part 1.2 Div 3 has the effect, among other things, that a reference to a person carrying on business includes a reference to that person carrying on business otherwise than for profit or, in the case of a body corporate, otherwise than for the profit of the members or corporators of the body: s 18. For the purposes of the Corporations Act, a business includes a business that is carried on as part of or in conjunction with another business: s 19. A reference in the Corporations Act to a person carrying on a business includes carrying on a business alone or together with other persons: s 20. The latter extension would include, for example, the carrying on of a business in partnership or in an unincorporated joint venture. Section 21(3) specifies certain matters that do not give rise to a body corporate carrying on business in Australia, or in a state or territory. Section 21(3)(e), which provides that a body corporate does not carry on business in Australia or in a state or territory merely because it solicits or procures an order that becomes a binding contract only if the order is

accepted outside Australia, or the state or territory, does not apply for the purposes of Ch 7: s 761C. Earlier cases dealing with carrying on a securities business give assistance as to the concept of carrying on a financial services business. For example, in Waldron v Auer [1977] VR 236; (1977) 2 ACLR 514, the respondent money lender solicited deposits from the public and made loans to others at higher rates of interest. The Victorian Commissioner for Corporate Affairs sought orders against the respondent for breaches of s 32 of the Securities Industry Act 1975 (Vic), which corresponded to s 911A of the Corporations Act. The court held that the respondent had contravened s 32 of the Securities Industry Act by carrying on a business of dealing in securities while he did not hold a dealer’s licence, and restrained the respondent from carrying on or holding himself out as carrying on the business of dealing in securities. Earlier authorities suggested that to carry on a business requires a series or repetition of acts9 and later authorities have emphasised the elements of system and regularity. In Hyde v Sullivan (1956) 56 SR (NSW) 113 at 119, the Full Court of the Supreme Court of New South Wales held that to ‘carry on a business’ is ‘to conduct some form of commercial enterprise systematically and regularly with a view to profit’, the concept involving ‘features of continuity and system’; see also Australian Securities and Investments Commission v Matthews (1999) 17 ACLC 528 at 530; [1999] FCA 164. In Hungier v Grace (1972) 127 CLR 210 at 217; [1972] HCA 42, dealing with money lending legislation, Barwick CJ observed that the absence of system, repetition and continuity ‘may well deny that a business is being carried on’, although the fact that a person conducts a transaction regularly and systematically does not necessarily establish that the transaction is in the course of carrying on a business. A single venture may, depending upon its scope, amount to the carrying [page 519] on of a business.10 Cases in the income tax context indicate that the factors relevant to whether an undertaking amounts to the carrying on of a business include the degree of system involved in the undertaking; the

degree of regularity involved in the transaction; whether there exists a series of repeated transactions of the same kind; and whether or not the motive of profit can be attributed to the undertaking.11 On the other hand, a company raising capital by a one-off issue of shares does not carry on a financial services business.12

Exemptions from the requirement to hold an Australian financial services licence 13.9 Certain persons are exempted from the requirement to hold an AFS licence for a financial service that they provide under s 911A(2) and the Corporations Regulations.

Exemptions under the Corporations Act 13.10 Dealing first with exemptions under the Corporations Act, the following matters are exempted from the requirement to hold an AFS licence for the provision of a financial service: Acting as a representative: A person is exempt from the requirement to hold an AFS licence if he or she provides a financial service as representative of an Australian financial services licensee (AFS licensee) which holds a licence that covers the provision of the service or is exempt from the requirement to do so: s 911A(2)(a); and see 13.35. This exemption is only available to a person who is acting as a representative and not to a person acting as principal. ASIC has identified indicators that a person is acting as a principal and not as a representative as that his or her conduct is not monitored and supervised by someone else; he or she holds out that he or she is a principal; his or her conduct is not covered by anyone else’s compensation arrangements; client assets are held in an account in his or her name; clients are directed to pay any fees owing for the provision of financial services to that person or into an account in that person’s name; that person receives commissions directly from product issuers; and he or she has ownership of, access to or liability for client information.13 Intermediary authorisations: A person (‘product provider’) is exempt

from the requirement to hold an AFS licence if it issues, varies or disposes of a financial product pursuant to an arrangement (‘intermediary authorisation’) between the product provider and a financial services licensee, under which (1) the financial services licensee or its authorised representative makes offers to people to arrange for the issue, variation or disposal of financial [page 520] products by the product provider; and (2) the product provider is to issue, vary or dispose of financial products in accordance with such offers, if they are accepted, provided that the offer under which the issue, variation or disposal is made was covered by the licensee’s AFS licence: s 911A(2)(b). A person is also exempt from the requirement to hold an AFS licence if the service it provides is the entry into an intermediary authorisation of this kind: s 911A(2)(ba). Variation or disposal of products: A product issuer is also exempt from the requirement to hold an AFS licence if (1) it issued the original product; (2) the service is the variation or disposal of the financial product by the issuer; and (3) the issuer provides the service at the request of the person to whom it is provided, rather than through an intermediary: s 911A(2)(c). This exception permits the holder of a financial product to vary or dispose of that product on his or her own initiative by dealing directly with the issuer and without the need to involve a financial intermediary in the transaction. Activities incidental to operation of licensed market or clearing and settlement facility: A person is also exempt from the requirement to hold an AFS licence if the relevant financial service is provided incidentally to the operation of a licensed market or a licensed clearing and settlement facility (CS facility) operated by the person: s 911A(2)(d); and see Chapter 10. Provision of general advice in media, information services etc: A person is exempt from the requirement to hold an AFS licence in relation to the provision of general advice:

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which is provided in a newspaper or periodical of which that person is the proprietor or publisher, if the newspaper or periodical is generally available to the public otherwise than only on subscription, and the sole or principal purpose of the newspaper or periodical is not the provision of financial product advice: s 911A(2)(ea);

–

by means of an information service (including a broadcasting, interactive or online database service), where the transmissions are generally available to the public and the sole or principal purpose of the transmissions is not the provision of financial product advice: s 911A(2)(eb); or

–

in sound recordings, video recordings or data recordings supplied to or displayed to the public, where the sole or principal purpose of the recordings is not the provision of financial product advice: s 911A(2)(ec).

Regulation 7.6.01B specifies conditions which apply to the exemption, in respect of financial product advice provided by the media, from the requirement to hold an AFS licence under s 911A(2) (ea)–(ec): Employee share schemes: Broadly, a corporation whose financial products have been issued or sold under an eligible employee share scheme, or an entity that it controls, is exempt from the requirement to hold an AFS licence in respect of the provision of general advice relating to that scheme; dealing in a financial product where the operation of the scheme requires the purchase or disposal of shares in certain circumstances; the operation of a custodial or depository service in connection with the scheme; and dealing in an interest in a contribution plan: s 911A(2)(ed)–(eg). [page 521] Official receivers etc: A person is also exempt from the requirement to hold an AFS licence for a financial service which it provides while performing functions or exercising powers in specified capacities

broadly associated with insolvency or death; for example, as a receiver, receiver and manager or liquidator, administrator of a body corporate or a deed of company arrangement executed by a body corporate, trustee or person administering a compromise or arrangement between a body corporate and another person or persons or a personal representative of a deceased person: s 911A(2) (f). However, a personal representative of a deceased financial services licensee loses the benefit of the exemption under s 911A(2) (f) at the end of six months after the death of the licensee, or when the person is discharged or removed as personal representative of the licensee, or on the final distribution of the licensee’s estate, whichever happens first: s 911A(3). APRA-regulated entities: A person is also exempt from the requirement to hold an AFS licence if (1) it is regulated by the Australian Prudential Regulation Authority (APRA); (2) the service is provided in the course of carrying on the business which causes that regulation by APRA to be required; and (3) the service is only provided to wholesale clients: s 911A(2)(g). This exemption is available, for example, to reinsurers and specialist workers compensation insurers that are licensed under the Insurance Act 1973 (Cth) and only provide financial services to wholesale clients, and to insurers that distribute their products exclusively through licensed intermediaries. Entities regulated by foreign regulators: A person is also exempt from the requirement to hold an AFS licence if (1) it is regulated by an overseas regulatory authority; (2) the provision of the service by that person is covered by an exemption specified by ASIC; (3) the service is provided in the course of carrying on the business or undertaking which causes that regulation to be required; and (4) the service is provided only to wholesale clients: s 911A(2)(h) and see ASIC Regulatory Guide 176 — Foreign financial services providers, June 2012. Provision of services to related bodies corporate etc: A person is also exempt from the requirement to hold a licence if: – it provides the service only to related bodies corporate; –

it provides the service in its capacity as trustee of a self-managed

superannuation fund, within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth); or –

the provision of the service is covered by an exemption prescribed in regulations or is covered by an exemption specified by ASIC in writing and published in the Gazette: s 911A(2)(i)–(l).

The exemptions under s 911A(2) do not apply to a financial service provided by a person that is the operator of a registered scheme or a traditional trustee company service: s 911A(4). [page 522]

Exemptions under the Corporations Regulations 13.11 Several categories of persons are also exempt from the requirement to hold an AFS licence under the Corporations Regulations. Relevantly: Referrals: A person is not required to hold an AFS licence if (1) his or her activities are limited to informing another person that a financial services licensee or a representative of that licensee is able to provide a particular financial service or class of financial services, and giving that other person information about how he or she may contact the financial services licensee or representative; (2) the first person is not a representative or a related body corporate of the financial services licensee; and (3) the first person discloses to the other person any benefits (including commission) that he or she or his or her associates may receive in respect of providing that information or that are attributable to that information, and gives that disclosure in the same form as the information which he or she provides: reg 7.6.01(1)(e). The disclosure of the benefit acquired by reg 7.6.01(1)(e) does not need to be in writing, provided it occurs in the same manner as the referral occurs. A similar exemption is available to a representative or related body corporate of a licensee, without requiring that representative or related body corporate to disclose any benefit or commission which it will receive in respect of

the referral, or which is attributable to that referral, since that information will be disclosed in the Financial Services Guide issued by the licensee to which the referral is made: reg 7.6.01(1)(ea). Foreign providers dealing with foreign clients: An entity which is not in the jurisdiction is exempt from the requirement to hold an AFS licence if it arranges, on behalf of another person, for a holder of an AFS licence to deal in a financial product; and that entity believes on reasonable grounds that the other person is not in the jurisdiction: reg 7.6.01(1)(f). An entity which is not in the jurisdiction is also exempt from the requirement to hold an AFS licence if it trades on behalf of another person in a financial product that cannot be traded on a licensed market; it believes on reasonable grounds that the other person is not in the jurisdiction; and it believes on reasonable grounds that each person who is a party to the dealing, or any transaction to which the dealing relates, is a person that is not in the jurisdiction: reg 7.6.01(1)(g). Dealing on own behalf to manage risks in the ordinary course of business: A financial services licence is not required where a person deals in derivatives or foreign exchange contracts on its own behalf, for the purpose of managing a financial risk that arises in the ordinary course of a business. This exception is not available if the relevant conduct extends to making a market for derivatives or foreign exchange contracts, or if dealing in derivatives or foreign exchange contracts is a significant part of that person’s business: reg 7.6.01(1)(m). Examples to this regulation indicate that it will be available for a series of forward foreign exchange contracts entered into by a gold mining company to hedge against the risk of a fall in the price of gold, but not for the issue and disposal of derivatives relating to the wholesale price of electricity. [page 523] There are several other exemptions available under the Corporations Regulations and class orders in relation to persons conducting business outside Australia: see 13.13.

Agency exemption 13.12 Section 911B deals with persons who provide financial services on behalf of other persons who carry on a financial services business. A person (‘provider’) must only provide a financial service in the jurisdiction on behalf of another person (‘principal’) who carries on a financial services business if, among other things, the provider is: an employee or director of the principal or of a related body corporate principal, or is an authorised representative of the principal, in specified circumstances; or an employee of an authorised representative of the principal, where the relevant authorisation covers the provision of the service by the authorised representative and that service is the provision of a basic deposit product or a facility for making non-cash payments related to a basic deposit product, or the provision of financial products of a kind prescribed by regulations made for the purposes of s 911B(1) (c); or the provider holds its own AFS licence covering the provision of the service: s 911B(1). This provision avoids the need for a service provider under an arm’s length arrangement between two AFS licensees to be appointed as authorised representative of the first licensee. A contravention of s 911B is an offence. If a provider holds its own AFS licence covering the provision of the service, then, for the purposes of Ch 7, that service is taken to be provided by the provider and not by the principal unless the regulations otherwise provide: s 911B(3). The immediate intention of this section appears to be to establish which entity would be regarded as providing a financial service and would therefore be liable for that service, where a financial services licensee provides a service on behalf of another financial services licensee.14 However, this section may have a wider result so that, if all activities of a foreign provider of financial services which take place in Australia and all dealings with Australian clients are provided by the holder of an AFS licence, then the relevant service would be taken not to be provided by that foreign provider, and the holder of the AFS licence would be regarded as

providing the relevant service. If that view were correct, then a principal would not be required to hold an AFS licence where services are provided by an appropriately licensed person on its behalf. Section 911B(3) would not be applicable, however, if a licensee and another person were providing different services, for example, because the licensee was arranging for a person to deal in a financial product and that other person was executing transactions on behalf of clients of the licensee. In the absence of an applicable exception, that other person would be required to be licensed in that situation. [page 524]

Whether a financial services business is carried on in the jurisdiction 13.13 The requirement to hold an AFS licence under s 911A only applies to a person who carries on a financial services business in the jurisdiction. A person is taken to carry on a financial services business in the jurisdiction if, in the course of that person carrying on the business, it engages in conduct that is intended to induce people in the jurisdiction to use the financial services which it provides or conduct which is likely to have that effect, whether or not the conduct is intended, or likely, to have the effect in other places as well: s 911D(1). This provision does not limit the circumstances in which a financial services business is operated in the jurisdiction for the purposes of Ch 7: s 911D(2). This provision will extend the licensing requirement, for example, to providers of financial services who target Australian investors from overseas by internet or telephone contact. This section may also have wider operation, even if an overseas financial services provider does not target sales in Australia, if it provides information as to its services at the client’s request, or provides client support or market information to the client, which may constitute conduct ‘intended to induce the use of the service’ within the scope of s 911D(1).

Exemptions under the Corporations Regulations and class order

relief 13.14 There are several exemptions under the Corporations Regulations and class orders which restrict the potentially over-expansive scope of s 911A in relation to persons conducting business outside Australia, including: An entity which is not in the jurisdiction is exempt from the requirement to hold an AFS licence if (1) it provides a financial service to another person who is in the jurisdiction; (2) that service consists only of dealing in a financial product or class of financial products; and (3) a financial services licensee whose financial services licence covers the provision of the service arranges for the overseas entity to provide that service to the other person: reg 7.6.01(1)(n). This exemption would, for example, allow a United States broker–dealer to provide services to an Australian resident which consisted of dealing in a financial product or class of financial product on that resident’s behalf, if an AFS licensee arranged for the broker–dealer to provide those services to that person. This exemption is not limited to dealing ‘on behalf of’ the other person and it would be available, for example, if an Australian client enters into an over-the-counter derivative with the offshore entity, provided an AFS licensee whose financial services licence covers the provision of that service arranges for that offshore entity to provide it to the Australian client. However, since that exemption is limited to ‘dealing’ in a financial product or class of financial product, it would not permit an overseas entity to provide financial product advice to an Australian client or to make a market for a financial product. Regulation 7.6.02AG modifies s 911A by inserting s 911A(2A)–(2E) to provide exemptions from the requirement to hold an AFS licence for foreign financial service providers in specified circumstances. [page 525] ASIC class orders also provide exemptions from licensing to offshore entities that provide financial services to Australian wholesale clients and

are regulated by foreign regulators approved by ASIC, which include the Securities Exchange Commission (US), the Financial Conduct Authority and Prudential Regulation Authority (UK), the United States Federal Reserve, the Monetary Authority (Singapore), the Securities and Futures Commission (HK), the Commodities and Futures Trading Commission (US) and the BaFin (Germany).15 ASIC Class Order 03/824 also provides relief where the only reason that an overseas service provider is considered to be ‘carrying on a financial services business in Australia’ is due to the operation of the deeming provision in s 911D. This class order will provide relief to a person who would be deemed to carry on a financial services business in Australia because of an isolated offshore transaction with an Australian wholesale client. In particular, this class order should be available to an offshore entity that provides financial services only to Australian wholesale clients, from outside Australia, and ensures that any contracts with such entities are formed outside Australia.

Credit ratings agencies 13.15 Since 1 January 2010, credit rating agencies have also been required to hold Australian financial services licences. The form of licences issued to credit rating agencies require them to comply with the IOSCO Code of Conduct in respect of credit rating agencies; they are subject to the conduct of business requirements applicable to licensees; and they are required to have an internal dispute resolution procedure and be a member of an external dispute resolution scheme (see 13.34) if they provide ratings for investment products issued to retail investors. These requirements reflect the international regulatory response to concerns as to the role of credit rating agencies in the circumstances that gave rise to the global financial crisis. Both regulatory authorities and academic commentary have pointed to conflicts of interest and failures of competence in credit ratings agencies’ treatment of complex financial products as a significant contributor to that crisis. It appears that credit rating agencies were exposed to conflicts of interest, where they depended on payments by issuers for rating structured finance products, were often engaged by investment intermediaries which had close familiarity with their rating methods and also provided advice and indicative ratings for those products; and they have also been criticised for failing to recognise both

that their risk modes were not adequate to address the complexities of the products they rated and the correlation of risks across different product types, so that the failure of one product class would adversely affect other product classes.16 Investors and regulators also arguably placed excessive [page 526] reliance on credit ratings, which were often used as a substitute for fundamental analysis, particularly in respect of complex structured financial products.17

Application for an Australian financial services licence 13.16 An application for an AFS licence must include information required by regulations made for the purposes of s 913A(a) and must be accompanied by any documents required by regulations made for the purposes of s 913A(b). Regulation 7.6.03 in turn specifies the information which is required as part of a licence application. ASIC must grant an AFS licence to an applicant if, and must not grant a licence unless: the application is made in accordance with s 913A (s 913B(1)(a)); ASIC has no reason to believe that the applicant is likely to contravene the obligations that will apply under s 912A (see 13.17–13.31) if the licence is granted (s 913B(1)(b)); the applicant meets the applicable requirements as to good fame and character under s 913B(2)–(4) (s 913B(1)(c)); the applicant has provided ASIC with any relevant additional information requested by ASIC (s 913B(1)(ca)); and the applicant meets any other requirements prescribed by regulations (s 913B(1)(d)). If the applicant is a natural person, ASIC must be satisfied that there is no reason to believe that he or she is not of good fame or character: s 913B(2). Matters relevant to whether a person is of good fame and character for the purposes of the section include the person’s honesty, integrity and openness, and the assessment is to be made objectively and

having regard to the purpose of the law to protect the public including investors and creditors.18 If the applicant is a body corporate or partnership, ASIC must be satisfied that there is no reason to believe that any of its responsible officers or partners are not of good fame or character; or, if ASIC is not satisfied of that matter, that the applicant’s ability to provide the financial services covered by the licence would not be significantly impaired: s 913B(3). It may be unlikely that the alternative test in s 913B(3)(b) would often be satisfied, since it would rarely be the case that a corporate licensee’s or partnership’s ability to provide financial services covered by its licence would not be significantly impaired by matters giving reason to believe that any of its officers, directors or partners were not of good fame or character. In considering whether there is reason to believe that a person is not of good fame or character, ASIC must have regard to any conviction of that person within 10 years before the application was made for an offence involving [page 527] dishonesty punishable by imprisonment for at least three months; whether the person has held an AFS licence that was suspended or cancelled; whether a banning order or disqualification order under Div 8 (see 13.56–13.63) has previously been made against that person; and any other matter that ASIC considers relevant: s 913B(4). Section 913B specifies criteria for the grant of a licence, and does not confer a discretion on ASIC whether to grant that licence if those criteria are satisfied. It appears that the reasons on which ASIC relies to deny a licence must be such as would reasonably support a belief in the disqualifying characteristics.19 ASIC may only refuse to grant a licence after giving the applicant an opportunity to appear, or be represented, at a hearing before ASIC which takes place in private, and to make submissions to ASIC in relation to the matter: s 913B(5). The approach of establishing a presumption that a licence should be granted to a person who meets the specified criteria in the absence of disqualifying factors is preferable to conferring a wider discretion on ASIC, and achieves an appropriate balance between the public policy supporting the imposition of licensing

standards, the desirability in principle of specifying openly the standards to be applied by ASIC in deciding whether applicants should be licensed, and the fact that withholding a licence may amount to denying the applicant a means of earning a living in the occupation of his or her choice. Each AFS licence is allocated a unique licence number when it is granted, and ASIC must notify the licensee of that number: s 913C. The scope of activities that a licensee will be authorised to undertake under its AFS licence depends on the scope of his or her business. For example, a licensee could be authorised to provide financial advice generally, so that it could provide personal and general financial product advice to both wholesale and retail clients. Alternatively, a licensee could be authorised to provide general financial product advice only, so that it could provide only general financial product advice to retail and wholesale clients, or to provide general financial product advice only to wholesale clients. A person who sought a licence to make a market for a financial product could be authorised to make a market in particular products; for example, foreign exchange contracts, or derivatives generally, or particular derivatives such as wool, electricity or grain derivatives. The class of persons who may be granted an AFS licence includes natural persons, bodies corporate and partnerships. Where Ch 7 would impose an obligation on a partnership, that obligation is instead imposed on each partner, but may be discharged by any of the partners; and a contravention of Ch 7 which would otherwise be a contravention by the partnership is taken to have been committed by each partner who aided, abetted, counselled or procured the relevant act or omission or was in any way knowingly concerned in or party to the relevant act or omission: s 761F. A corporate licensee could choose to obtain a single licence to cover the distribution of all products which it offers, or alternatively may establish separate subsidiaries directed to particular lines of business, each of which is licensed in respect of that line of business. [page 528]

OBLIGATIONS IMPOSED ON LICENSEES

Regulation of licensees’ conduct 13.17 The Corporations Act imposes financial requirements and requirements as to conduct upon financial services licensees. The conduct of business obligations imposed on a financial services licensee are in addition to any obligations imposed at general law. The relationship of securities dealer or investment adviser and client may be fiduciary in quality within an agency relationship20 or where such a duty arises in the particular circumstances: see 14.8–14.9. In a relationship of a fiduciary quality, a financial services licensee cannot place itself in a position where there is a real and sensible possibility of a conflict of interest between its interests and its duty to its client. A financial services licensee must also comply with statutory obligations imposed on all persons trading in the financial markets, such as the prohibitions upon market manipulation and the making of false or misleading statements in relation to trading in financial products: see Chapter 16. In this section, we consider the application of the ‘efficiently, honestly and fairly’ standard (13.18); a licensee’s obligation to manage conflicts of interest (13.21); and a licensee’s obligations as to compliance procedures, supervision, adequacy of resources and training (13.24–13.27).

‘Efficiently, honestly and fairly’ standard 13.18 A financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly: s 912A(1)(a).21 The meaning of the term ‘efficiently, honestly and fairly’ was considered in Story v National Companies and Securities Commission (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560. In that case, the appellant was a licensed dealer and was employed as a stockbroker. In attempting to interest a purchaser in shares in a mining company, he transmitted a study of the company to the prospective purchaser, asserting that there was ‘another active bidder in the wings’. In proceedings before the Sydney Stock Exchange, the appellant admitted that the reference to another bidder was inaccurate. After allowing the appellant a hearing, the National Companies and Securities Commission (NCSC) revoked his dealer’s licence pursuant to s 60(1)(b) of the Securities

Industry Code. The appellant sought review of that decision under s 537 of the Companies Code, and argued that the NCSC had erred in law as to his fitness to hold a licence. Young J observed that the words ‘efficiently, honestly and fairly’ should be read as a compendious requirement that a person goes about their duties efficiently having regard to the dictates of honesty and fairness; honesty having regard to the dictates of efficiency and fairness; and fairly having regard to the dictates of efficiency and honesty. His Honour held that a person was ‘efficient’ for the purposes of that standard if he or she ‘is adequate in performance, produces the desired effect, is capable, competent and adequate’. His Honour noted that the ultimate question was whether the appellant’s performance of his functions fell short of the reasonable standard of performance that the public was entitled to expect of a licensee. [page 529] In R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (1989) 1 ACSR 93, the court noted that the ‘efficiently, honestly and fairly’ standard could be breached by conduct which is not criminal but which is morally wrong in a commercial sense, and that the test of whether conduct failed the relevant standard required that the conduct be viewed objectively. In that case, the Corporate Affairs Commission had revoked a dealer’s licence on the ground of breach of conditions attaching to the licence, including conditions as to net tangible asset requirements and as to the persons to whom investment advice in relation to securities could be given, and on the ground of conflict of interest arising where the dealer gave investment advice in relation to securities in an associated company. The court held that an isolated breach of the net tangible asset condition and the dealer’s failure to notify that breach did not merit revocation of the licence. However, the conduct of the dealer in providing investment advice in relation to securities in an associated company put the dealer in a situation of conflict of interest amounting to a breach of the licence conditions and a breach of the dealer’s obligation to act ‘efficiently, honestly and fairly’ under s 60(1)(b) of the Securities Industries Codes. In Re Koala Hydrophonics Ltd and Australian Securities and

Investments Commission (2002) 40 ACSR 529; [2002] AATA 41, the Administrative Appeals Tribunal (AAT) held that the ‘efficiently, honestly and fairly’ standard was breached by a failure to diligently transition a prescribed interest scheme to comply with the managed investment requirements or properly inform investors of matters relating to that transition. There are also several examples where the ‘efficiently, honestly and fairly’ standard was breached by inappropriate conduct. For example, in Re Foster and Australian Securities and Investments Commission (1999) 57 ALD 779, that standard was breached by a representative’s failure to make any inquiries as to the merits of an investment promising absurdly high returns, and relying on the information he had been provided by others to promote that investment. In Re Campbell and Australian Securities and Investments Commission (2001) 37 ACSR 238; [2001] AATA 205, that standard was breached by a representative’s failure to have a reasonable basis for a securities recommendation. A breach of the ‘efficiently, honestly and fairly’ standard might also be established by a failure to disclose matters which might influence a recommendation to a licensee’s client, in breach of ss 942B(2)(e)–(f) and 942C(2)(f)–(g) (see 14.22–14.23), or by conduct in contravention of the Future of Financial Advice requirements (see 14.56ff). The application of the ‘efficiently, honestly and fairly’ standard to a corporate licensee was considered in Re Saxby Bridge Financial Planning Pty Ltd and Australian Securities and Investments Commission (2003) 46 ACSR 286; [2003] AATA 480; Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290; 47 ACSR 649; [2003] FCAFC 244 (Full Court of the Federal Court). In that case, the AAT considered an application for a review of ASIC’s decision revoking the securities dealer’s licence of Saxby Bridge and making a banning order, arising from, among other things: an alleged failure to disclose commissions in contravention of s 849 of the former Corporations Law; an alleged failure to have a reasonable basis for recommendations in contravention of s 851 of the former Corporations Law; and an alleged failure to supervise its representatives. The AAT found that there had been no breach of the ‘efficiently, [page 530]

honestly and fairly’ standard in the relevant circumstances. Importantly, the tribunal recognised that ‘any contraventions of the law must be considered in the context of the operation of the business as a whole’: at [306]. The Federal Court did not question that reasoning on appeal.

Obligation to manage conflicts of interest 13.19 This section deals with the statutory obligation on an AFS licensee to manage conflicts of interest.

Background 13.20 Some major Australian financial intermediaries perform multiple functions, including the provision of broking services and research to clients; proprietary trading on the institution’s own account; underwriting of public offerings and private placements; and the provision of investment banking services, including advice to corporate clients. In Australia, as in the United States, it is also common for research to be provided by analysts employed by financial intermediaries to clients of those intermediaries, and for the costs of that research to be recouped through trading commissions rather than being separately charged to the clients. In Australia, as in the United States, an analyst’s recommendation that resulted in trades could tend to increase commission revenues of the relevant intermediary, and an adverse report published by analysts could have the potential to adversely affect investment banking activities of that intermediary. In principle, there is scope within the Australian market for similar conflicts of interests as those that have generated controversies in the United States. Commission-based remuneration structures have been relatively common in Australian financial intermediaries, giving rise to a conflict between the institution’s or individual employee’s incentive to maximise his or her commission income by undertaking volume trading, and the client’s interest in maximising his or her return on his or her investment and minimising transaction costs. The recognition of this conflict has prompted a move away from commission-based arrangements in some financial intermediaries that primarily service institutional clients and, more recently, a move to fee for service remuneration by financial advisers

dealing with retail clients, which has been accelerated by the Future of Financial Advice reforms: see 14.53ff. ‘Soft dollar’ arrangements are another area of potential conflict of interest in Australia. Soft dollar benefits include benefits received by financial advisers and financial intermediaries if they recommend certain products, other than by way of fees paid by the client for their advice or commissions payable by the product issuer. A similar issue arises from the practice by which part of the brokerage payable by a fund manager to a financial intermediary is then paid by that intermediary to a third party at the fund manager’s direction. If undisclosed, such arrangements can conceal the full charges made by fund managers to investors, by presenting payments that are ultimately received from a manager or applied for its benefit as third party commissions. At general law, a fiduciary obligation owed by a financial services licensee or adviser to its client would require disclosure of such soft dollar benefits to the client, or alternatively that the adviser or licensee account to the [page 531] client for those benefits. The Corporations Act also requires that soft dollar benefits received by a fund manager should be disclosed in the Financial Services Guide and Statement of Advice provided to retail clients: ss 942B–942C, 947B and 947C and see 14.25–14.26 and 14.33–14.34. The disclosure of such arrangements is also required under codes of ethics adopted by relevant self-regulatory organisations. The conflict issues arising from remuneration structures and soft dollar benefits were addressed by the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth) which, among other things, prohibits conflicted remuneration (including product commissions) where licensees or their representatives provide financial product advice to retail clients, prohibits volume-based shelf-space fees from funds managers to platform operators and prohibits asset-based fees on geared investments: see 14.53ff.

Scope of the statutory conflicts management requirement

13.21 Section 912A(1)(aa) (introduced by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (Cth))22 requires a financial services licensee to have in place adequate arrangements for managing conflicts of interest that arise wholly, or partly, in their financial services business. The leading case as to that section is Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963, where ASIC alleged that Citigroup did not have in place adequate arrangements for the management of a conflict between its own interests and the interests of Toll Holdings Limited (Toll) in respect of Toll’s takeover offer for Patrick Corporation Limited (Patrick), and had contravened its obligation under s 912A(1)(aa) to manage that conflict of interest. Jacobson J rejected ASIC’s argument that managing that conflict of interest required eliminating it by express consent, and held that the concept of ‘managing’ conflicts of interest assumes that potential conflicts will exist which must be managed by adequate arrangements rather than totally eliminated. His Honour also held that Citigroup’s arrangements as to information barriers or Chinese walls (see 17.33) and for identification and management of conflicts were adequate: at [445], [452].

ASIC Regulatory Guide 181 13.22 ASIC Regulatory Guide 181 — Licensing: Managing Conflicts of Interest, 30 August 2004 (RG 181) indicates ASIC’s view that arrangements to manage conflicts of interest, in compliance with s 912A(1) (aa), need to include arrangements to control, avoid and disclose conflicts of interest as appropriate. That guide defines [page 532] a conflict of interest as ‘circumstances where some or all of the interests of people (clients) to whom a licensee (or its representatives) provides financial services are inconsistent with, or diverge from, some or all of the interests of the licensee or its representatives’ and notes that this includes actual, apparent and potential conflicts of interest.23 That guide gives examples of conflicts including a licensee which has an interest in

encouraging its clients to invest in a high-risk product which pays a high commission when the client’s interest would be served by a low-risk product; a licensee which benefits from maximising trading volume by its clients where the client wishes to minimise investment costs; and a licensee which has an interest in maximising management fees in a fund when investors have an interest in minimising those fees.24 RG 181 acknowledges that a licensee may provide financial services although a conflict of interest exists, if it takes proper steps to manage that conflict. In particular, the Regulatory Guide notes that: The conflicts management obligation does not prohibit all conflicts of interest. It does not provide that a licensee can never provide financial services if a conflict of interest exists. Rather, the conflicts management obligation requires that all conflicts of interest be adequately managed.25

RG 181 indicates that the conflict management obligation requires that a licensee ensure that the quality of its financial services ‘is not significantly compromised by conflicts of interest’ and those services are not ‘of materially lesser quality than the licensee would have been likely to provide if they were not subject to the relevant conflict of interest’.26 That guide indicates that, to control a conflict of interest, the licensee must identify relevant conflicts; assess and evaluate those conflicts; and decide upon and implement an appropriate response to them.27 The guide also identifies conflict management arrangements as possibly including measures such as meetings with affected staff or clients; periodic reviews of business operations by an internal or external auditor or other independent person; or periodic review of client files and the record of services provided.28 RG 181 also indicates the need to make appropriate disclosures to the client as part of arrangements to manage conflicts of interest. The Regulatory Guide notes that ‘adequate disclosure means providing enough detail in a clear, concise and effective form to allow clients to make an informed decision about how the conflict may affect the service provided to them’.29 ASIC expresses the view that disclosure of a conflict should be timely, prominent, specific and meaningful to the client; should occur before or when the financial service is provided, and at a time that allows the client a reasonable time to assess the effect of any conflict; and should refer to the

[page 533] specific service to which the conflict relates.30 RG 181 also expresses the view that generic disclosures are unlikely to satisfy the conflicts management obligation,31 and acknowledges that disclosure obligations may be qualified by Chinese walls, noting that: … where the relevant people do not have actual or constructive knowledge about a given matter owing to the operation of effective information barriers, the conflicts management obligation will not necessarily require them to make disclosures about the matter.32

ASIC also notes that some conflicts of interest are such that the only way to manage them will be to avoid them, and that disclosure and the imposition of internal controls would not be adequate.33 RG 181 also expresses the view that conflict management arrangements are unlikely to be adequate unless compliance monitoring records are kept; and indicates that ASIC expects licensees to keep, for at least seven years, records of conflicts identified and actions taken; any reports given to the licensee’s owners or senior management about conflict of interest matters; and copies of written conflict of interest disclosures given to clients or to the public as a whole. ASIC Regulatory Guide 79 — Research Report Providers: Improving the Quality of Investment Research, December 2012 identifies a number of steps which should be taken by research providers in developing and implementing arrangements for controlling and avoiding conflicts of interest.

Other requirements under s 912A 13.23 In this section, we deal with a licensee’s obligations in relation to compliance procedures, supervision, adequacy of resources and competence and training requirements.

Compliance procedures 13.24 A financial services licensee must comply with the conditions on the licence and with the financial services laws, as defined: s 912A(1)(b)– (c); for an example of a contravention of s 912A(1)(b) arising from a

failure to comply with conditions on the licence, see Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; 23 ACLC 929; [2005] NSWSC 267. It will be necessary for a licensee to adopt formal compliance procedures to assist [page 534] in meeting that requirement.34 ASIC Pro Forma 209, Australian Financial Services Licence Conditions, reissued July 2015, indicates (at condition 4) that ASIC will impose a condition on AFS licensees requiring that licensees establish and maintain compliance measures that ensure, as far as is reasonably practicable, that the licensee complies with the provisions of the financial services laws. ASIC has indicated that it expects a licensee to document its compliance measures; fully implement them and report on their use; and regularly review the effectiveness of those measures and ensure they are up to date.35 ASIC also notes that a licensee’s compliance measures should take into account the specific compliance risks of its business, especially those that may materially affect consumers or market integrity; and enable the licensee to communicate to its representatives what they need to do to comply, to monitor compliance with all of its obligations, and to address and report any compliance breaches.36 ASIC also indicates that it expects that a licensee will allocate responsibility to a director or senior manager for overseeing its compliance measures and reporting to the governing body; that the licensee should ensure that its compliance functions are independent enough to do their job properly and have adequate staff resources and systems and access to relevant records; and that senior management’s involvement in overseeing compliance measures might extend to communicating those measures to those responsible for implementing them and other stakeholders; ensuring that the compliance area has adequate staff and resources; ensuring staff education and awareness of the compliance measures; implementing clear reporting lines for the manager(s) responsible for the compliance measures and receiving regular reports on them.37

Supervision requirements 13.25 A financial services licensee must also take reasonable steps to ensure that its representatives comply with the financial services laws: s 912A(1)(ca). ASIC has noted that the level of a licensee’s monitoring and supervision of representatives will depend on the nature, scale and complexity of a licensee’s business, but expresses the view that a licensee should have measures that allow it to determine whether its representatives are complying with the financial services laws (including licence conditions) which include a robust mechanism for remedying any breaches.38 A licensee’s procedures for monitoring and supervision should include carrying out appropriate background checks before appointing new representatives; and a licensee should also keep track of its representatives, the role they perform and whether they are appropriately authorised; ensure its representatives act within the scope of what it has authorised them to do; ensure its representatives understand its [page 535] compliance arrangements; monitor its representatives’ compliance and respond to compliance failures.39 In order to establish an adequate supervision system, it may be necessary for a financial services licensee to implement a formalised compliance program; designate a particular person or persons as having compliance responsibility; and establish procedures for review of representatives’ activity by supervisory personnel. A compliance officer should be given overall responsibility for establishing policies and procedures relating to supervision of representatives, and for investigating any transactions involving potential breaches of the Corporations Act, licence conditions or other applicable legislation. Supervisory personnel and/or the compliance officer should also review trading activity to detect suspect transactions, preferably including review of customer account statements on a random basis. If an improper transaction is identified, management should give consideration to reversing that transaction, where it is possible to do so. The compliance officer should also interview any employee or representative involved in a suspect transaction, and should give

consideration to cautioning or otherwise disciplining that employee or representative, and (at least in the case of a serious matter) to imposing restrictions or additional supervision requirements on the employee’s or representative’s trading activity. The compliance officer should also consider whether a suspect transaction has disclosed weaknesses in the financial services licensee’s compliance systems, and take steps to remedy those weaknesses.

Adequacy of licensee’s resources 13.26 Unless a financial services licensee is subject to regulation by APRA, it must have adequate financial resources to properly provide the financial services covered by the licence and carry out supervisory arrangements: s 912A(1)(d).40 The imposition of requirements seeking to secure licensees’ ability to meet their financial commitments is desirable, given the financial risks involved in dealing in financial products. For example, securities dealers are faced with credit risks arising from the possibility of default by a client where the dealer has acquired securities for the client from another dealer; from market risk where the dealer trades in the market as principal; and from underwriting risk if the dealer may be required to commit funds to a float because of a shortfall in the issue.41 There is a substantial risk that, if an AFS licensee fails, moneys or securities entrusted to that licensee by clients would not be applied for the purpose intended by the client, and that moneys or securities held by the financial services licensee on a client’s account could be lost. Financial requirements imposed upon financial services licensees will tend to reduce that risk. [page 536] ASIC Regulatory Guide 166 — Licensing: Financial Requirements, July 2015 sets out financial requirements imposed on licensees, which vary depending on the financial products and services offered by the relevant licensees. Financial conditions imposed on a financial services licensee need not be limited to the licensee’s financial position in relation to its business of dealing in financial products. For example, the decision in RWG Management Ltd v Commr for Corporate Affairs (Vic) [1985] VR 385;

(1984) 9 ACLR 739 indicates that ASIC could properly impose liquidity requirements upon a financial services licence issued to a company proposing to conduct its business as trustee of a trading trust. In that case, a stockbroking business was to be carried out by a company as trustee of a unit trust. The regulations provide, among other things, that it is a condition of an AFS licence that, if a financial services licensee is not a body regulated by APRA and an event occurs which may make a material adverse change to its financial position, by comparison with its position at the time of its application for an AFS licence or as described in documents subsequently lodged with ASIC, the financial services licensee must lodge notice with ASIC in a prescribed form setting out particulars of that event as soon as practicable and not later than three business days after the day on which it becomes aware of that event: reg 7.6.04(1)(a). Section 912A(1)(d) also requires that, unless a financial services licensee is subject to regulation by APRA, it must have adequate technological and human resources to properly provide the financial services covered by the licence and carry out supervisory arrangements. ASIC has indicated that it expects a licensee to have enough people to enable it to comply with all of its obligations under the law, carry out monitoring and supervision and meet its current and anticipated future operational needs, and noted that key indicators of inadequacy in human resources would include customer complaints about the quality of customer service or financial product advice; a low ratio of compliance staff to representatives; not enough compliance staff to conduct a periodic review of representatives who give personal advice to retail clients; client accounts and interest not being monitored when staff are absent; a large number of inexperienced staff or a large number of vacant positions.42 ASIC has also expressed the view that a licensee should have enough technological resources to enable it to comply with all of its obligations under the law; maintain client records and data integrity; protect confidential and other information; and meet its current and anticipated future operational needs.43

Training requirements for licensees 13.27 A financial services licensee must maintain its competence to provide relevant financial services: s 912A(1)(e). The requirements as to

organisational competence are intended to ensure the licensee has enough persons within its business with appropriate knowledge and skills to ensure the licensee is competent to provide its financial services efficiently, honestly and fairly.44 ASIC assesses a licensee’s compliance with this obligation by looking at the knowledge and skills of persons [page 537] who manage the licensee’s financial services business (‘responsible managers’); and that a licensee must, at a minimum, nominate responsible managers who are directly responsible for significant day-to-day decisions about the ongoing provision of its financial services; together have appropriate knowledge and skills for all of its financial services and products; and, individually, meet one of five specified options for demonstrating appropriate knowledge and skills.45 ASIC has also observed that a licensee also needs to have measures in place to ensure it maintains its organisational competence at all times, and ASIC expects a licensee to: review its organisational competence on a regular basis and whenever its responsible managers or business activities change; maintain and update the knowledge and skills of its responsible managers; and keep records of that review and of steps taken to maintain its organisational competence.46 A licensee must notify ASIC when it changes any of its responsible managers, since ASIC maintains details of the licensee’s responsible managers as part of its register of licensees under s 922A and reg 7.6.05, triggering the notification obligation for changes in the register under reg 7.6.04(1)(b). A licensee must also ensure that its representatives are adequately trained and are competent to provide the relevant financial services: s 912A(1)(f). The licensee must maintain a record of training which each of its representatives has undertaken, relevant to the provision of financial services, including training undertaken after he or she became a representative of the licensee, and any training undertaken before he or she became such a representative, to the extent that the licensee is able to obtain information about it by reasonable inquiry: reg 7.6.04(1)(d). ASIC imposes licence conditions relating to training of representatives if a licence

authorises the provision of retail product advice.47 ASIC also expects a licensee to identify the knowledge and skills its representatives need to competently provide the relevant financial services; ensure that they have the necessary knowledge and skills; ensure that they undertake continuing training programs to maintain and update their knowledge and skills; and maintain a record of the training they have undertaken.48 ASIC Regulatory Guide 146 — Licensing: Training of Financial Product Advisers, July 2012 (RG 146) sets out minimum standards for the training of financial product advisers. ASIC notes that these standards are intended, among other things, to protect consumers of financial advice by ensuring that those who provide the advice are competent to do so and to help licensees to comply with their obligation to ensure that they and their representatives are adequately trained and competent to provide the services covered by the licence; and that all natural persons who provide financial product advice to retail clients must meet those standards, unless they fall within limited exceptions.49 RG 146 specifies knowledge and skill requirements which must be satisfied, at either a Tier 1 or Tier 2 level,50 which vary depending on whether the [page 538] adviser gives general or personal advice and what products the adviser gives advice on.51 Advisers can meet the relevant standards by completing training courses listed on the ASIC Training Register or, alternatively, experienced advisers can demonstrate their competence through individual assessment against the training standards by an authorised assessor.52 Persons who provide advice only on basic deposit products and related non-cash payment products are able to meet the training standards by completing a training course which is not on the ASIC Training Register but has been assessed as meeting the training standards by the licensee.53 ASIC notes that licensees must also implement policies and procedures to ensure that their advisers (and natural person licensees) undertake continuing training to maintain and update their knowledge and skills.54 Customer service representatives, para-planners and trainee advisers need not meet training standards in specified circumstances.55

Other requirements for licensees 13.28 A licensee that provides financial services to retail clients, as defined, must have a dispute resolution procedure complying with s 912A(2): s 912A(1)(g); and see 13.29. Unless a licensee is regulated by APRA, it must have adequate risk management systems: s 912A(1)(h). ASIC has indicated that it expects that a licensee’s risk management systems will be based on a structured and systematic process which takes into account the licensee’s obligations under the Corporations Act, identifies and evaluates risks faced by the licensee’s business, focuses on risks that adversely affect consumers or market integrity, establishes and maintains controls designed to manage or mitigate those risks and fully implements and monitors those controls to ensure they are effective.56 A licensee must also comply with any other obligations prescribed in the regulations: s 912A(1)(j). Conduct of business obligations of financial services licensees, whether imposed as statutory obligations or as licence obligations, may be enforced in proceedings taken by ASIC under s 1101B: see 13.64. That section authorises the court to make specified orders on the application of ASIC where a person has contravened the conditions or restrictions of an AFS licence. In the case of persistent or continuing contraventions of, among other things, the conditions or restrictions of a licence, the court may make an order under s 1101B restraining a person from carrying on a business or doing an act or class or classes of act in relation to financial products or financial services. [page 539]

Additional requirements applicable to dealings with retail clients 13.29 Additional requirements apply in relation to dealings between financial services licensees and retail clients. The additional requirements applicable to retail clients reflect an assumption that, in general, retail clients are less well informed and less able to assess the risks of dealing in

financial products than wholesale clients, and therefore need a higher level of protection than wholesale clients: see 14.20. A financial services licensee must have a dispute resolution system comprising internal and external dispute resolution procedures and must have compensation arrangements in relation to dealings with such clients.

Who is a retail client? 13.30 The term ‘retail client’ is defined in s 761G, which provides that a financial product or financial service is provided to a person as a retail client unless s 761G(5), s 761G(6), s 761G(6A), s 761G(7) or s 761GA provides otherwise. These sections specify when particular categories of products or services are provided to persons as retail clients as noted below; see also 6.17ff.

General insurance products 13.31 Section 761G(5) deals with general insurance products and provides that a financial product or financial service which is or relates to a general insurance product is only provided to a person as a retail client if: either the person is an individual or the insurance product is or would be for use in connection with a small business (s 761G(12)); and the product is a motor vehicle insurance product, home building insurance product, home contents insurance product, sickness and accident insurance product, consumer credit insurance product, travel insurance product, personal and domestic property insurance product or a kind of general insurance product prescribed by the regulations for the purposes of s 761G(5).

Superannuation and RSA products 13.32 A financial service relating to a superannuation product or a Retirement Savings Account (RSA) product is also treated as provided to a person as a retail client, unless that service is provided to the trustee of a superannuation fund, an approved deposit fund, pooled superannuation trust or public sector superannuation scheme (within the meaning of the

Superannuation Industry (Supervision) Act 1993 (Cth)) which has net assets of at least $10 million, or to an RSA provider (within the meaning of the Retirement Savings Accounts Act 1997 (Cth)): s 761G(6).

Other products 13.33 Section 761G(7) provides that a financial product or financial service which does not relate to a general insurance product, superannuation product or RSA product is provided to a person as a retail client unless certain matters are satisfied, as follows: [page 540] Price or value: First, such a financial product or financial service is not provided to a person as a retail client if the price for the provision of the financial product, or the value of the financial product to which a financial service relates, equals or exceeds the amount specified in the regulations: s 761G(7)(a). The regulations may deal with how a price or value referred to in s 716G(7)(a) is to be calculated, either generally or in relation to a specified class of financial product, and modify the way in which that paragraph applies in particular circumstances: s 761G(10); and regs 7.1.18– 7.1.27. Use in connection with a business: Second, a financial product or financial service which does not relate to a general insurance product, superannuation product or RSA product is not provided to a person as a retail client if the financial product or financial service is provided for use in connection with a business that is not a small business: s 761G(7)(b). The term ‘small business’ is defined in s 761G(12) as a business employing less than 100 people if that business is, or includes, the manufacture of goods, or otherwise a business employing less than 20 people. There may be difficulties in determining which business activities fall within the concept of ‘manufacture’ and in determining the number of employees of a company, if that company engages staff as independent contractors. It is also possible that subsidiaries of large public companies will be

treated as ‘retail investors’ under s 761G, since the test relating to the number of employees appears to apply to the particular company rather than to the corporate group as a whole. Assets or income: Third, a financial product or financial service which does not relate to a general insurance product, superannuation product or RSA product is not provided to a person as a retail client if the financial product or financial service is not provided for use in connection with a business, and the person who acquires the product or service gives the provider of that product or service, before it is provided, a copy of a certificate given within the preceding six months57 by a qualified accountant which states that the person has net assets of at least an amount specified in the regulations or has a gross income for each of the last two financial years of at least an amount specified in the regulations: s 761G(7)(c). The limitation of this exception to circumstances where the financial product or financial service is not provided for use ‘in connection with a business’ may require a person who would otherwise fall within this exception to be treated as a retail client if its acquisition of financial products or services is part of its core business or is connected with that business, or if that person regularly buys or sells financial products such that his or her trading in them could be said to be a ‘business’. The amount of $2.5 million is specified for the purposes of the net assets test and the amount of $250,000 is specified for the gross income test under s 761G(7)(c): reg 7.1.28. Regulation 7.6.02AC (introduced by the [page 541] Corporations Amendment Regulations 2005 (No 5) (Cth)) modifies s 761G for the purposes of ss 926B(1)(c), 951C(1)(c), 992C(1)(c) and 1020G(1)(c); and introduces s 761G(7A)–(7B) which permits assets and income of controlled companies or trusts to be taken into account in determining whether a person meets the asset and income tests referred to in s 761G(7). Extension to related entities: Fourth, reg 7.6.02AB (introduced by the Corporations Amendment Regulations 2005 (No 5)) modifies s

761G for the purposes of ss 926B(1)(c), 951C(1)(c), 992C(1)(c) and 1020G(1)(c) by inserting s 761G(7)(ca), which provides that companies or trusts controlled by persons who are wholesale clients (because they meet the assets and/or income tests set out in s 761G(7)(c)(i)–(ii)) are also considered wholesale clients. Professional investors: Fifth, a financial product or financial service which does not relate to a general insurance product, superannuation product or RSA product is not provided to a person as a retail client if the person is a professional investor: s 761G(7)(d). The term ‘professional investor’ is defined in s 9 and includes: financial services licensees; bodies registered under the Financial Corporations Act 1974 (Cth); a trustee of a regulated superannuation fund, approved deposit fund, pooled superannuation trust or public sector superannuation scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) if the fund, trust or scheme has net assets of at least $10 million; or a person who controls at least $10 million (including any amount held by an associate or under a trust that the person manages). There is a presumption that a product or service was provided to a retail client in specified circumstances: s 761G(9). That presumption shifts to the issuer the burden of establishing that a product was not provided to a person as a retail client, but does not avoid the need to prove other elements of a client’s claim.58 We note several issues in respect of the regulation of the provision of financial services to retail clients in 14.20, 14.53 and Chapter 15. A financial product or financial service is provided to a person as a ‘wholesale client’ if it is not provided to them as a retail client: s 761G(4). Regulation 7.6.02AD (introduced by the Corporations Amendment Regulations 2005 (No 5)) modifies s 761G for the purposes of ss 926B(1) (c), 951C(1)(c), 992C(1)(c) and 1020G(1)(c) by introducing s 761G(4A) which provides that, if a body corporate is a wholesale client in respect of a particular financial service or product, related bodies corporate are also treated as wholesale clients in respect of that financial product or service. Section 761GA (inserted by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 (Cth)) also permits an investor to be treated as a wholesale client if the financial services licensee is satisfied on

reasonable grounds that the client has adequate experience to be so treated.59 [page 542]

Dispute resolution systems in respect of dealings with retail clients 13.34 A licensee that provides financial services to retail clients must have a dispute resolution procedure complying with s 912A(2): s 912A(1) (g). In order to comply with that requirement, a dispute resolution system must consist of an internal dispute resolution procedure that complies with standards and requirements made or approved by ASIC in accordance with the regulations, and covers complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence: s 912A(2)(a); and see reg 7.6.02(1)–(2). That dispute resolution system must also comprise membership of one or more external dispute resolution schemes approved by ASIC in accordance with the regulations, which cover complaints against the licensee made by retail clients in connection with the provision of all financial services covered by the licence, other than complaints that may be dealt with by the Superannuation Complaints Tribunal: s 912A(2)(b); and see reg 7.6.02(3)– (4). ASIC Regulatory Guide 165 — Licensing: Internal and External Dispute Resolution, July 2015 (RG 165) indicates that ASIC will require internal dispute resolution procedures to adopt the definition of complaint in AS ISO 10002-2006 issued by Standards Australia; satisfy specified requirements of that standard; and have a system for informing complainants about the availability and accessibility of the relevant external dispute resolution scheme.60 ASIC will require a financial services provider to provide a final response to complaints within specified timeframes.61 That Regulatory Guide requires a licensee to document its internal dispute resolution procedures, including its procedures and policies for receiving complaints, investigating them, responding to them within appropriate time limits and referring unresolved complaints to the

external dispute resolution scheme; recording information about complaints and identifying and recording systemic issues; the types of remedies available for resolving complaints; and internal structures and reporting requirements for complaint handling.62 RG 165 also requires a licensee to provide ASIC with a written report as soon as practicable (and no later than three days) after becoming aware of a change in the status of its membership of an external dispute resolution scheme.63 The Financial Ombudsman Service, formed by a merger of the Australian Banking Industry [page 543] Ombudsman, Financial Industry Complaints Service and Insurance Ombudsman Service, is presently the only approved external dispute resolution mechanism.

Compensation arrangements in respect of dealings with retail clients 13.35 A financial services licensee that provides a financial service to retail clients must have adequate arrangements for compensating those persons for pecuniary losses suffered because of breaches of the relevant obligations under Ch 7 by the licensee or its representatives: s 912B(1). An arrangement for compensating such persons must satisfy the requirements specified by the regulations, or be approved in writing by ASIC: s 912B(2). Before approving such arrangements, ASIC must have regard to the financial services covered by the licence; whether the arrangements will continue to cover persons after the licensee ceases carrying on the business of providing financial services, and the length of time for which that cover will continue; and any additional matters prescribed by regulation: s 912B(3). Regulation 7.6.02AAA requires a licensee to obtain professional indemnity insurance cover that is adequate having regard to the nature of the licensee’s business and its potential liability for compensation claims. The factors used to assess the adequacy of professional indemnity insurance are set out in reg 7.6.02AAA(1), including the licensee’s

membership of an external dispute resolution scheme or schemes and the maximum liability that has, realistically, some potential to arise; the volume of the licensee’s business; the number and kind of its clients; and the kind or kinds of its business and the number of its representatives. General insurance companies, life insurance companies and authorised deposit-taking institutions (ADIs) regulated by APRA are exempt from the requirement to maintain compensation arrangements, and licensees which are related to the specified APRA-regulated entities are also exempt from those requirements if the APRA-regulated entity has provided a guarantee approved by ASIC: reg 7.6.02AAA(1), (3). ASIC Regulatory Guide 126 — Compensation and Insurance Arrangements for AFS Licensees outlines ASIC’s policy for administering compensation and professional indemnity requirements for AFS licensees who provide financial services to retail clients.

Licensee’s obligation to provide information to ASIC 13.36 ASIC may, by written notice to a financial services licensee, direct the licensee to provide ASIC with a written statement containing specified information in relation to the financial services provided by the licensee or its representatives or the financial services business carried on by the licensee: s 912C(1). ASIC may also, by written notice to the licensee, direct it to obtain an audit report on that statement, prepared by a suitably qualified person, before it is given to ASIC: s 912C(2). The licensee must comply with a direction given under s 912C within the time specified in the direction, if that is a reasonable time, or otherwise within a reasonable time: s 912C(3). ASIC may extend the time within which the licensee must comply with a direction by giving written notice to the licensee. If a financial services licensee becomes aware that it can no longer meet, or has breached, an obligation under s 912A (see 13.17–13.34) or s 912B (see 13.35), and that breach is significant, it must give a written report to ASIC as soon as [page 544]

practicable after becoming aware of that matter, and in any case within 10 business days: s 912D(1B). It is likely that the concept of ‘aware’ in s 912D requires that the licensee have actual knowledge of the relevant matter, although such knowledge could be established if it had willfully closed its eyes to that matter in a manner that equated to actual knowledge.64 Whether a breach or likely breach is significant is to be determined by reference to the matters specified in s 912D(1)(b), namely the number or frequency of similar previous breaches; the impact of the breach or likely breach on the licensee’s ability to provide the financial services covered by its licence; the extent to which the breach or likely breach indicates that the licensee’s compliance arrangements are inadequate; and the actual or potential financial loss to clients or the licensee arising from the breach or likely breach.65 A financial services licensee must also give written notice to ASIC, as soon as practicable, if it becomes a participant in a licensed market or licensed CS facility, or ceases to be such a participant, identifying the market or facility and stating when the licensee became or ceased to be a participant: s 912D(2). A financial services licensee and its representatives must also give such assistance to ASIC, or a person authorised by ASIC, as ASIC reasonably requests in relation to whether the licensee and its representatives are complying with the financial services laws and in relation to the performance of ASIC’s other functions: s 912E(1). Such assistance may include showing the licensee’s books to ASIC or giving other information to ASIC: s 912E(2).

Licence conditions imposed under the Corporations Act 13.37 ASIC may, by giving written notice to a financial services licensee, impose conditions or additional conditions on a licence and vary or revoke conditions imposed on the licence: s 914A(1). Before imposing conditions or additional conditions on a licence, or varying the conditions on the licence, ASIC must give the licensee an opportunity to appear or be represented at a hearing before ASIC in private, and to make submissions to ASIC in relation to the matter: s 914A(3). If the licensee or a related body corporate is a body regulated by APRA (other than an ADI within the meaning of the Banking Act 1959 (Cth)),

ASIC must consult with APRA before imposing, varying or revoking a condition on the licence which, in ASIC’s opinion, has or would have the result of preventing that licensee from being able to carry on all or any of its usual activities, in relation to which APRA has regulatory or supervisory responsibilities: s 914A(4). If a licensee or related body corporate is an ADI, ASIC may not impose a condition or an additional condition on the licence that, in ASIC’s opinion, would have the result of preventing the ADI from being able to carry on all or any of its banking business within the meaning of the Banking Act 1959, and the powers which ASIC would otherwise have to impose, vary or revoke a condition of the licence are instead vested in the Minister: s 914A(5)(a)–(b). The procedures for the imposition of a licence condition, or the [page 545] variation or revocation of a condition, are otherwise the same, except that the Minister must only impose, vary or revoke a condition on advice from ASIC (after ASIC has consulted APRA about the proposed action) and ASIC must conduct any hearing required to be afforded to the licensee and receive any submissions from the licensee. A failure to comply with the requirements to consult with or inform APRA about, or consider advice from ASIC about, the imposition, variation or revocation of a licence condition does not invalidate the relevant action: s 914A(5A). The licence conditions must include a condition that specifies the particular financial services or class of financial services that the licensee is authorised to provide, which may be specified by reference to particular financial products or classes of financial products: s 914A(6)–(7). The licence is also subject to such other conditions as are prescribed by regulations, and ASIC cannot vary or revoke those conditions: s 914A(8). Regulation 7.6.04 imposes a series of conditions on AFS licences, relating to matters such as notification to ASIC of any material adverse change in the licensee’s financial position, of changes in particulars on the register of licencees or authorised representatives and of any change of control of the licensee; authorisation of representatives; maintaining a record of training

of representatives; and making a copy of the licensee’s financial services licence available for inspection.

AUTHORISED REPRESENTATIVES Regulation of representatives 13.38 The Corporations Act also regulates the conduct of a person (‘representative’) who provides a financial service on behalf of a financial services licensee (‘principal’). Generally, a representative’s conduct must be monitored and supervised by its principal; a representative’s conduct will be covered by the compensation arrangements maintained by its principal; client assets will be held in the name of the principal, rather than in the name of the representative; and the principal rather than the representative will have ownership of client information. A representative must, in dealing with clients, make clear that it is acting as representative of a licensee and not as principal, and must clearly disclose the principal for whom it acts. A representative is prohibited from providing a financial service in the jurisdiction, on behalf of a principal who carries on a financial services business, unless one of several conditions is satisfied: The principal holds an AFS licence covering the provision of the service and the representative is an employee or director of the principal or of a related body corporate of the principal; but not an employee or director or authorised representative of any other person who carries on a financial services business which is not a related body corporate of the principal, or an employee or director or authorised representative of a related body corporate of such a person: s 911B(1)(a). This provision avoids the necessity for financial services licensees to grant separate authorities to each employee of the licensee who is involved in the provision of the services. The principal holds an AFS licence covering the provision of the service and the representative is an authorised representative of the principal and the

[page 546] authorisation covers the provision of that service by the representative; and, if the representative is an employee or director of another person (‘second principal’) who carries on a financial services business or of a related body corporate of that second principal, and provides any financial services in the jurisdiction on behalf of that second principal, it does so as an authorised representative of the second principal: s 911B(1)(b). The principal holds an AFS licence covering the provision of the service and the representative is an employee of an authorised representative of the principal; and the authorisation covers the provision of a basic deposit product or a facility for making noncash payments related to a basic deposit product, or the provision of a financial product of a kind prescribed by regulations made for the purposes of the paragraph: s 911B(1)(c). The prohibition under s 911B does not apply where the provider holds its own AFS licence covering the provision of the service: s 911B(1)(d). This provision avoids any need for a service provider under an arm’s length arrangement between two AFS licensees to be appointed as authorised representative for the first licensee. This exclusion would apply, for example, where a funds manager appointed a futures broker to act on its behalf in entering into derivative transactions, where the futures broker would be dealing in financial products on behalf of the funds manager and therefore ‘providing a financial service’ on behalf of the funds manager. There is no policy basis for extending an authorisation requirement to that situation. The prohibition on providing a financial service as representative also does not apply if the principal would not have needed an AFS licence by reason of an exemption under s 911A(2) (see 13.10) if the principal (rather than the representative) had provided the service: s 911B(1)(e).

Prohibition on holding out 13.39 A person is prohibited from holding out that he or she has an AFS licence unless that person has such a licence: s 911C(a). A person is also

prohibited from holding out that a financial service provided by the person or by someone else is exempt from the requirement to hold an AFS licence unless the service is so exempt: s 911C(b). A person is also prohibited from holding out that he or she acts on behalf of another person in providing a financial service, if that is not the case; or that his or her proposed conduct is within authority (within the meaning of Div 6) (see 13.47) in relation to a particular financial services licensee, if that is not the case: s 911C(c)–(d); and see Australian Securities and Investments Commission v IPLUS Risk Management Pty Ltd [2006] FCA 583; Re Vault Market Pty Ltd [2014] NSWSC 1641 at [25]ff.

Appointment of representatives 13.40 Part 7.6 Div 5 deals with the appointment of authorised representatives, and Pt 7.6 Div 6 deals with the liability of financial services licensees for conduct of their representatives. A financial services licensee may appoint a person as authorised representative by giving that person a written notice authorising that person, for the purposes of Ch 7, to provide a specified financial service or financial services on behalf of the licensee, [page 547] which may be some or all of the financial services covered by the principal’s licence: s 916A(1)–(2). While this section requires a written notice of authority to be given, it does not invalidate an oral authority.66 An authorisation to a representative given by a licensee is void to the extent that it purports to authorise that person to provide a financial service which is not covered by the licence held by that financial services licensee, or is contrary to a banning order or disqualification order under Div 8 (see 13.56–13.63): s 916A(3). An authorisation may be revoked at any time by the licensee giving written notice to the authorised representative: s 916A(4).

Sub-authorisation of representatives

13.41 Section 916B deals with sub-authorisation of representatives, and was significantly modified by reg 7.6.08(1) so as to permit an authorised representative of a financial services licensee to appoint (‘sub-authorise’) individuals to provide financial services on behalf of the licensee. An authorised representative may give a written notice to an individual authorising that individual to provide a specified financial service or financial services on behalf of the licensee, if that licensee consents in writing given to the authorising representative. An individual who is subauthorised in this way may not sub-authorise other individuals. The financial services covered by such a sub-authorisation may be some or all of the financial services covered by the licensee’s licence, and the licensee may give such consent in respect of a specified individual or a specified class of individuals, the membership of which might change from time to time: s 916B(4)–(5). A licensee that gives a consent to a representative to sub-authorise an individual as its representative must keep a copy of that consent for five years after it ceases to have effect: s 916B(5A). An individual who is subauthorised by an authorised representative is itself an authorised representative of the relevant licensee, which will be liable for his or her conduct under Pt 7.6 Div 6 (see 13.47): s 916B(6). The sub-authorisation of an individual as representative of a licensee may be revoked either by the licensee, or by the representative which sub-authorised that individual, by giving written notice to that individual: s 916B(7). A person who revokes the sub-authorisation of such an individual as representative must inform, in writing, the other person who could have revoked that authorisation: s 916B(8).

Authorised representative may act for two or more financial services licensees 13.42 An authorised representative may act for two or more financial services licensees, if each of the licensees has consented to that person also being the authorised representative of each of the other licensees, or each of the licensees is a related body corporate of each of the other licensees: s 916C(1). An authorisation given in breach of that requirement is void: s 916C(2). A person must not give a purported authorisation of a representative if it would breach that requirement: s 916C(3).

[page 548]

Limit on appointment of licensee as representative of another licensee 13.43 Generally, a financial services licensee cannot be appointed as the authorised representative of another financial services licensee: s 916D(1). An authorisation given in breach of that requirement is void and a person must not give a purported authorisation if it would breach that requirement: s 916D(2)–(2A). An authorisation which starts to breach that requirement, because the person authorised is subsequently granted an AFS licence, is also void: s 916D(3). That prohibition applies even where the agency relates to financial services other than those which the first licensee is authorised to provide under its licence, or relates to financial services other than those which constitute part of the second licensee’s financial services business. Presumably, this prohibition reflects a policy that clients who obtain services from a licensee should be able to look to that licensee for responsibility for adequate delivery of those services, and a concern that a licensee which appointed another licensee as its representative would tend to rely on the other licensee’s supervision of the conduct of its representatives rather than directly supervising those representatives. The prohibition on a licensee authorising another licensee as representative will have an effect, for example, where a financial services licensee sells the products of another financial services licensee. Since the former will not be permitted to be an authorised representative of the latter, employees or individual representatives of the former will need to be appointed as authorised representatives of the latter. An exception to the prohibition on appointing a financial services licensee as authorised representative of another financial services licensee applies where a licensee acts under a ‘binder’ given by an insurer, to accommodate existing industry practice. A financial services licensee that acts under a binder given by an insurer may be the authorised representative of that insurer: s 916E(1). The term ‘binder’ is defined in s 761A as an authorisation given to a person by a financial services licensee who is an insurer, to either enter into risk insurance contracts on behalf of the insurer as insurer, or deal with and settle risk insurance claims against

the insurer as insurer. Where an authorised licensee acts under a binder, it is taken to act on behalf of the insurer and not the insured for all purposes connected with the relevant insurance contracts, or with claims against the insurer; and is taken to have acted on behalf of the insurer, if the insured in fact relied in good faith on its conduct, even if it did not act within the scope of the binder: s 916E(2).

Notification of appointment of authorised representative 13.44 Section 916F specifies various notification requirements as to the appointment of authorised representatives as follows: A financial services licensee must give written notice to ASIC within 15 business days of authorising a representative to provide a financial service, providing specified information: s 916F(1)–(2). A person who sub-authorises an individual to provide a financial service on behalf of a financial services licensee, pursuant to s 916B, must give written notice to the licensee within 15 business days of that individual being authorised to provide that service, if the licensee’s consent to the [page 549] authorisation was given in respect of a specified class of individuals, rather than that particular individual: s 916F(1A). A licensee or person who authorises or sub-authorises a representative must lodge a written notice with ASIC, within 10 business days, if there is any change in those details or that person revokes the authorisation of that representative: s 916F(3). Failure to give notification of revocation of the authorisation or a change in those details is an offence, and strict liability applies for a failure to ratify a change of an authorised representative’s details: s 916F(4). The Explanatory Memorandum to the Financial Services Reform Bill supports this provision as placing a greater onus on licensees to keep track of changes in the details of authorised representatives and allowing for effective enforcement of the provision.67

ASIC can give information about a representative to a licensee 13.45 ASIC may give specified information to a financial services licensee about a person whom ASIC believes is, or will be, an authorised representative of the licensee, but may only take that course if it believes, on reasonable grounds, that the information is true: s 916G(1). For example, ASIC might properly form the view that it should inform a licensee that a particular person, to whom that licensee had issued a proper authority, was dismissed for misconduct by a previous employer or that that person’s conduct was under investigation by ASIC. In these circumstances, the licensee would have a legitimate interest in being informed of those matters so as to reach a decision as to whether to revoke the authorisation given to that person, or to place that person under particularly strict supervision. Restrictions are imposed upon the licensee’s use and publication of the information, allowing the licensee to use that information only for the purposes of making a decision about any action to take in relation to the representative or taking action pursuant to such a decision: s 916G(2). A person to whom information is given in accordance with s 916G must not give any of the information to a court, or produce a document that sets out some or all of the information to a court, except for specified purposes or in proceedings relating to specified matters: s 916G(5).

Additional requirements as to appointment of authorised representative 13.46 Additional requirements as to the appointment of representatives are imposed as conditions of an AFS licence issued to a licensee, as follows: Before a financial services licensee appoints an authorised representative, it must make reasonable inquiries to satisfy itself as to the representative’s identity and whether the representative has already been allocated a number by ASIC as an authorised representative: reg 7.6.04(1)(e). If ASIC has allocated a number to that authorised representative, the financial services licensee must refer to that number in any document it lodges with ASIC that refers to the authorised representative: reg 7.6.04(1)(f).

[page 550] A financial services licensee must provide a copy of its authorisation of any of its authorised representatives on request by any person, free of charge and as soon as practicable after receiving that request and, in any event, within 10 business days after the day on which it received that request: reg 7.6.04(1)(g). A financial services licensee must also take reasonable steps to ensure that each of its authorised representatives supplies a copy of its authorisation by that licensee on request by any person, free of charge and as soon as practicable after receiving the request and, in any event, within 10 business days after the day on which it received the request: reg 7.6.04(1)(h). As noted above, a licensee must undertake responsibility for the training and education of and the supervision of its representatives: see 13.25 and 13.27. Financial services licensees are also liable for the actions of their representatives even where those actions are outside the scope of the representative’s authority: see 13.47. If a representative acts for more than one principal, each of the principals for which the representative acts is potentially liable for that representative’s conduct if the representative fails to identify the principal for which it acted on a particular occasion: see 13.48.

Liability of financial services licensees for conduct of authorised representatives 13.47 Part 7.6 Div 6 imposes liability on a financial services licensee for conduct of its representative which relates to the provision of a financial service on which a third person (‘client’) could reasonably be expected to rely, and on which the client in fact relied in good faith: s 917A(1). Where a representative acts for only one financial services licensee, that licensee is responsible, as between itself and a client, for the representative’s conduct, whether or not that conduct is ‘within authority’: s 917B. A representative’s conduct is ‘within authority’, in the case of an

employee of the licensee or of a related body corporate, if it is within the scope of the employee’s employment; in the case of a director of the licensee or a related body corporate, if it is within the scope of the director’s duties as director; and, in any other case, if it is within the scope of the authority given by the licensee: s 917A(2). If a representative is the representative of more than one financial services licensee in respect of a particular class of financial service, and engages in conduct relating to that class of service, and one or more of the licensees issues or transfers a financial product as a result of that conduct, then the representative is taken to have acted ‘within authority’ in relation to each licensee who issued or transferred that financial product as a result of the conduct, and not to have acted within authority in relation to any licensee which did not do so: s 917A(3). The financial services licensee is made liable to the client in respect of any loss or damage suffered by the client as a result of its representative’s conduct: s 917E. In Casaclang v Wealthsure Pty Ltd (2015) 107 ACSR 274; [2015] FCA 761 at [199], Buchanan J observed that: … the provisions in Div 6 apply according to their plain terms to give effect to an evident statutory intent that for all purposes (but without extending liability)

[page 551] conduct of a representative within or without authority is also the responsibility of a licensee for which a licensee is directly liable to a client. A licensee retains rights of action against the representative (s 917F(4)). The purpose is to provide protection for clients.

A licensee may be held liable for conduct of its representatives under Div 6 even if the representative is on a ‘frolic’ of his or her own, and the client had no relationship with the licensee, provided the client could reasonably be expected to rely on the representative’s conduct for the purposes of s 917A(1): Zhang v Minos Securities Pty Ltd [2008] NSWSC 689; Casaclang v Wealthsure Pty Ltd, above at [204]–[206]. The application of this Division may allow a client to bring the same claim, for example, for misleading conduct under s 1041E of the Corporations Act or for negligence, against the licensee as it could have brought against the representative: Casaclang v Wealthsure Pty Ltd, above at [255]ff, [315]ff.

A licensee may be held liable for conduct of its representatives under Div 6 in circumstances in which it may not have been liable for that conduct at common law, under the principles considered in, for example, Clayton Robard Management Ltd v Siu (1988) 6 ACLC 57.

Representative acting for multiple principals 13.48 Multiple representation is common in the financial services industry, and may lead to difficulty in determining which financial services licensee should take responsibility if an authorised representative makes an unsuitable recommendation which does not involve the client entering the contract with a particular principal, or retains moneys rather than passing them on to the principal for investment. This difficulty is addressed by the rules for attribution of responsibility in the case of multiple licensees, as set out in s 917C(3)–(4). If a person is an authorised representative of more than one financial services licensee, but only represents one such licensee in respect of a particular class of financial service, then that licensee is treated as responsible for the representative’s conduct relating to that class of service, whether or not that conduct is within authority, and any other licensees for whom the representative acts are not responsible for that conduct: s 917C(2). If a person is an authorised representative of more than one licensee in respect of a particular class of financial service, that representative’s conduct relates to that class of service, the conduct relates to a particular kind of financial product prescribed by the regulations and that representative’s conduct is within authority in relation to one of those licensees, then that licensee is treated as responsible for the representative’s conduct as between it and the client: s 917C(3)(c)(i), (d). If a person is an authorised representative of more than one licensee in respect of a particular class of financial service, that representative’s conduct relates to that class of service, and the conduct is within authority in relation to two or more of the licensees, then those licensees are jointly and severally responsible for the conduct, as between themselves and the client: s 917C(3)(c)(ii), (e). In any other case in which an authorised representative acts for more than one licensee, then all the licensees for which the representative acts

are jointly and severally responsible for its conduct, as between themselves and a client, whether or not that conduct is within authority in relation to any of those licensees: s 917C(4). [page 552] That section will apply where a person is the authorised representative of multiple licensees and his or her conduct is not within authority in relation to any of those licensees, or does not relate to a class of service for which that person is a representative of the licensee. However, that liability does not arise where conduct of the representative was not within authority in relation to the licensee or licensees, and the representative disclosed that fact to the client before the client relied on the conduct, with the clarity and prominence which a person would reasonably require for the purpose of deciding whether to acquire the relevant financial service: s 917D. Liability is also not imposed on a financial services licensee for conduct of a person who is not in fact its representative, even if that person holds himself or herself out to the public as being a representative of that licensee, in contravention of s 911C.

Effect of Div 6 13.49 Where Div 6 makes a financial services licensee responsible for the conduct of its authorised representative, then the client has the same remedies against the licensee as it has against the representative; and the licensee and that representative, as well as any other licensees who are also responsible, are jointly and severally liable to the client in respect of those remedies: s 917F(1)–(2). Division 6 does not impose criminal responsibility or criminal liability under a provision of the Corporations Act other than that Division, where the licensee would not otherwise be subject to that liability: s 917F(3). The effect of that subsection is that Div 6 does not extend the scope of criminal responsibility or civil liability imposed elsewhere in the Corporations Act to imposes a liability which would not otherwise be imposed, and that subsection also preserves the operation of Pt 7.7 which specifically deals

with attribution of responsibility to a licensee for disclosure in respect of financial services guides and statements of advice (see 14.17ff) and Pt 7.10 which allows a licensee to seek a reduction in liability by way of contribution or apportionment: Casaclang v Wealthsure Pty Ltd, above at [199]–[200]. Division 6 does not relieve a representative of any liability which it may have to the client or the licensee: s 917F(4). An agreement is void so far as it purports to alter or restrict the operation of ss 917B–917E: s 917F(5). However, that provision does not invalidate an agreement which provides for a representative of a financial services licensee to indemnify that licensee for a liability in respect of that representative, or which provides for one financial services licensee to indemnify another for liability in respect of a representative: s 917F(6). A financial services licensee must not make, or offer to make, an agreement which would be invalidated by that section: s 917F(7).

Civil liability of licensees for the conduct of their representatives under other provisions of the Corporations Act 13.50 The general civil liability provisions contained in the Corporations Act, particularly s 1041H, are also capable of imposing civil liability on financial services licensees in relation to conduct undertaken in connection with dealings in financial products or the provision of financial services. Section 1041H is contravened by conduct that is misleading or deceptive or likely to mislead or deceive in connection [page 553] with any dealing in financial products. Section 1041H may give rise to liability where conduct is misleading in fact, even if that conduct is neither intentionally misleading nor negligent: see 8.37ff.

EXCLUSION FROM THE FINANCIAL

SERVICES INDUSTRY Variation, suspension or cancellation of a licence 13.51 Sections 915A–915G set out the circumstances in which ASIC may vary, suspend or cancel an AFS licence. ASIC may vary a licence to take account of a change in the licensee’s name if the licensee lodges an application for the variation with ASIC, accompanied by any documents required by the regulations, and must give written notice of the variation to the licensee: s 915A. ASIC may also suspend or cancel an AFS licence on certain grounds without allowing the licensee an opportunity to be heard. ASIC has the power to suspend or cancel a licence under other circumstances after allowing the licensee an opportunity to be heard. ASIC may also make a banning order against a licensee: see 13.58.

Suspension or cancellation of licence without a hearing 13.52 ASIC may suspend or cancel an AFS licence held by a natural person without a hearing, by giving written notice to that person, if he or she: ceases to carry on a financial services business; becomes an insolvent under administration; is convicted of serious fraud, defined in s 9 as an offence involving fraud or dishonesty and punishable by imprisonment for a period or maximum period of at least three months; becomes incapable, through mental or physical capacity, of managing his or her affairs; or lodges an application for ASIC to suspend or cancel the licence, accompanied by any documents required by the regulations: s 915B(1). ASIC may suspend or cancel an AFS licence held by a partnership without a hearing, by giving written notice to the partnership, if: the partnership ceases to carry on a financial services business; a creditor’s petition or debtor’s petition is presented under Pt IV

Divs 2 or 3 of the Bankruptcy Act 1966 (Cth) against the partnership; one or more of the partners is convicted of serious fraud; or the partnership lodges an application for ASIC to do so, accompanied by any documents required by regulations: s 915B(2). ASIC may also suspend or cancel an AFS licence held by a body corporate without a hearing, by giving written notice to the body corporate, if it ceases to carry on a financial services business: s 915B(3)(a). The licence of a body corporate may also be suspended or cancelled if it becomes an externally-administered body corporate, as defined in s 9: s 915B(3)(b). That power would be available if an incorporated licensee was being wound up; a receiver, or receiver and manager, had [page 554] been appointed to property of the body corporate; it was under administration or had executed a deed of company arrangement which had not yet terminated, or had entered into a compromise or arrangement with another person, the administration of which had not been concluded. ASIC may also suspend or cancel the licence held by a body corporate if it is a responsible entity of a registered scheme whose members have suffered, or are likely to suffer, loss or damage because the body has breached the Corporations Act, or it lodges an application for ASIC to do so, accompanied by any documents required by the regulations: s 915B(3)(c)– (d). ASIC may suspend or cancel an AFS licence held by the trustees of a trust, by giving written notice to the trustees, if the trustees of the trust cease to carry on the financial services business; or a trustee who is a natural person becomes insolvent under administration, is convicted of serious fraud or becomes incapable of managing his or her affairs because of physical or mental incapacity; or a trustee that is a body corporate becomes an externally-administered body corporate; or the trustees lodge an application for ASIC to do so, accompanied by any documents required by the regulations: s 915B(4).

Suspension or cancellation of licence after a hearing

13.53 ASIC may suspend or cancel an AFS licence on certain grounds provided it has first allowed the licensee the opportunity for a hearing: s 915C. ASIC has indicated that it is likely to suspend, cancel or vary an AFS licence if it has serious concerns about the licensee or the way its business is being or has been conducted, particularly where there is a need to protect the public and where conduct may result in investor detriment.68 Examples of misconduct that may result in cancellation of a licence include: dishonesty; systemic or persistent breaches of the licensee’s obligations; the licensee lacking the organisational capacity to continue to meet its obligations where there is actual or potential significant risk to clients or investors; or the licensee having misled or hindered ASIC, including concealing or deliberately destroying records required to be kept.69 ASIC recognises that, in appropriate cases, the public may be protected by suspending rather than cancelling an AFS licence, to enable necessary remedial or compliance measures to be put in place by the licensee.70 ASIC also notes that factors relevant to whether it will take action to suspend or vary a licence include the nature and seriousness of the suspected misconduct; the licensee’s internal controls; the licensee’s conduct after the misconduct occurs; and the licensee’s previous regulatory record.71 In particular, ASIC may suspend or cancel an AFS licence after a hearing if the licensee has not complied with its obligations under s 912A (see 13.17–13.31) or ASIC has reason to believe that the licensee is likely to contravene its obligations under that [page 555] section: s 915C(1)(a)–(aa). The proper exercise of this power by ASIC would require it to consider whether the circumstances are such as to justify cancellation of the licence, having regard to the principles established by Story v National Companies and Securities Commission (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560. That decision indicates that there is no punitive element in ASIC’s power to cancel a financial services licence and the power to cancel a licence must be

exercised by ASIC having regard to the protection of the public interest. Young J held that it was necessary to weigh various matters in determining whether a dealer’s licence should be cancelled on the basis of a finding that a dealer had not acted efficiently, honestly and fairly, including the public interest that qualified persons should be permitted to follow a profession. On the other hand, it was necessary to consider the public expectation that persons falling short of minimum standards will be removed from a profession, at least until the regulatory body is satisfied that they can efficiently perform their function. His Honour noted that ‘the jurisdiction to revoke was not meant to punish the broker, but to protect the public’ and that the decision to revoke a licence should only be made ‘if, for the public’s protection, the dealer should not be permitted to trade’. A licence may only be suspended or cancelled under s 915C if it is necessary to do so to accomplish the objectives of the legislative scheme, and a suspension will ordinarily be preferable if there is a reasonable prospect that the licensee can remedy relevant defects.72 See also the discussion of the purpose of banning orders at 13.56. ASIC may also suspend or cancel a licence after a hearing if it is no longer satisfied of the matter in whichever of s 913B(2) or (3) applied at the time the licence was granted, about whether the licensee or its representatives are of good fame and character: s 915C(1)(b). The effect of s 915C(1)(b) is to expose the licensee to suspension or cancellation of its licence not only if it ceases to be of good fame or character, but also if its representatives cease to be so. ASIC may also suspend a licence if a banning order or disqualification order under Div 8 (see 13.56–13.63) is made against the licensee; or a banning order or disqualification order under Div 8 is made against a representative of the licensee, and ASIC considers the representative’s involvement in the provision of the licensee’s financial services will significantly impair the licensee’s ability to meet its obligations under Ch 7: s 915C(1)(c)–(d). ASIC may also cancel an AFS licence after a hearing if the application for the licence was false in a material particular or materially misleading, or there was an omission of a material matter from the application: s 915C(2). Before suspending or cancelling a financial services licence under s 915C, ASIC must allow the licensee an opportunity to appear or be represented at a hearing before ASIC which takes place in private, and to make

submissions to ASIC on the matter: s 915C(4). ASIC is required to conduct any hearing with the aim of establishing the facts which will allow it to form a view as to whether the licence should be suspended or cancelled, rather than merely to allow an opportunity to [page 556] the licensee to seek to dissuade it from a view which it had previously formed.73 In determining whether a matter alleged against the licensee has been established and whether the licence should be cancelled, ASIC is obliged to consider and evaluate the whole of the material obtained at the hearing together with any material it has considered prior to calling the hearing. Notwithstanding the statutory privilege against self-incrimination under ASIC Act s 68(3), evidence given by a licensee in a compulsory examination conducted under the ASIC Act is admissible in a hearing prior to suspending or cancelling its licence under s 915B or s 915C: s 1349.74 ASIC may revoke a suspension of an AFS licence by giving written notice to the licensee: s 915E. A variation, suspension, revocation of a suspension or cancellation of a licence takes place when the written notice of that action is given to the licensee: s 915F(1). As soon as practicable after that notice is given to the licensee, ASIC must publish a notice of the action in the Gazette and, if the licensee is a participant in a licensed market or licensed CS facility, give written notice of the action to the operator of the market or facility: s 915F(2). A notice of suspension or cancellation given to a licensee must be accompanied by a statement of the reasons for the action taken: s 915G. In that written notice of suspension or cancellation given to a licensee, ASIC may also specify that a licence continues in effect as though a suspension or cancellation had not happened, for the purposes of specified provisions of the Act in relation to specified matters, a specified period, or both: s 915H.

Suspension or cancellation of licence of bodies regulated by APRA 13.54 If a financial services licensee or related body corporate is regulated by APRA, and is not an ADI within the meaning of the Banking

Act 1959 (Cth), ASIC may not suspend or cancel that entity’s licence if doing so would, in ASIC’s opinion, have the result of preventing that entity from being able to carry on all or any of its usual activities, in relation to which APRA has regulatory or supervisory responsibilities, unless ASIC has first consulted APRA about the proposed action: s 915I(1)(a). If ASIC suspends or cancels that licence, on the basis that doing so will not prevent that body from being able to carry on those activities, it must, within one week, inform APRA of the action taken: s 915I(1)(b). If a financial services licensee or related body corporate is an ADI within the meaning of the Banking Act 1959 (Cth), and cancellation or suspension of the licensee’s licence would, in ASIC’s opinion have the result of preventing the ADI from being able to carry on all or any of its banking business within the meaning of that Act, then ASIC’s powers to cancel, suspend or revoke a suspension of the licence are instead taken to be powers of the Minister: s 915I(2). In that case, the Minister may only act on advice from ASIC given after it has consulted APRA about the proposed action, and ASIC (rather than the Minister) must conduct any hearing [page 557] and receive any submissions required under s 915C(4). A failure to comply with the requirements to consult with or inform APRA about, or consider advice from ASIC about, the cancellation or suspension, or revocation of a suspension, of a licence does not invalidate that action: s 915I(3).

Administrative review of ASIC’s decision to suspend or cancel a licence 13.55 The AAT may review ASIC’s decision to suspend or cancel an AFS licence under s 1317B. The Federal Court also has jurisdiction to review a decision of ASIC to make a banning order on the more limited grounds available under the Administrative Decisions (Judicial Review) Act 1977 (Cth).

Banning orders 13.56 Sections 920A–920F provide ASIC with powers to ban a person from providing financial services.75 A banning order is defined as a written order which prohibits a person from providing any financial services or specified financial services or specified financial services in specified circumstances or capacities: s 920B(1). A banning order may permit the person against whom it was made to do specified acts, or to do specified acts in specified circumstances, subject to specified conditions: s 920B(3). A person against whom a banning order is made cannot be granted an AFS licence: s 920C(1). However, a banning order does not otherwise prevent a person from being involved in the management of a financial services business, if he or she does not provide financial services in respect of that business, and leaves open the possibility that a banned person may establish a new financial services business or move to another business in a management capacity. A person contravenes s 920C if he or she engages in conduct which breaches a banning order made against him or her: s 920C(2). The power to issue a banning order is intended to ensure that a person whose licence has been cancelled or suspended on the specified grounds cannot act as a financial services licensee or representative in the financial services industry. The power to make a banning order is not limited to a person who already holds a licence, and could also be exercised if there was a likelihood that an unlicensed person satisfying the specified criteria would seek to act as a representative of a financial services licensee although he or she had not previously held a licence. In Re Jungstedt and ASIC (2003) 73 ALD 105 at 147; [2003] AATA 159. Forgie DP noted that a banning order: … ensures that the public can be certain that a particular person, who has been found to have breached a statutory standard applicable to him or her, is no longer entrusted with giving investment advice.

[page 558] In Seagrim v Australian Securities and Investments Commission [2012] AATA 583 at [88], Jarvis DP noted that the discretion to make a banning

order should be exercised to promote the objects of Ch 7 set out in s 760A and also observed that: … a principal consideration is that the power to make a banning order should be to protect the public from persons who do not comply with the requirements of the Act when providing financial products and services, and also to deter the persons whose conduct is in question and other persons in the industry from contravening the Act. The imposition of banning orders will have a punitive effect on the persons banned, but the discretion should not be exercised by reference to that consequence, but rather by reference to the need to protect the public, and the deterrent effect of banning orders, which are the overriding considerations.

A banning order is protective in character but may also be made to secure deterrence, even if the relevant person would not repeat the conduct.76

Grounds for a banning order 13.57 ASIC may make a banning order against a person on specified grounds: s 920A(1). Such an order may be made if ASIC suspends or cancels an AFS licence held by the person; or that person has not complied with, or ASIC has reason to believe that person is likely to contravene, his or her obligations under s 912A, which include a licensee’s obligation to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly (see 13.18): s 920A(1) (a)–(ba). ASIC has indicated that it is likely to make a banning order if it has serious concerns about a person, or the way his or her business is being or has been conducted, particularly where there is a need to protect the public and where conduct may result in consumer detriment.77 Conduct which may give rise to banning orders would include matters such as breach of an intermediary’s duties to his or her clients, misuse of clients’ moneys and acting in breach of limits to the adviser’s authority, breach of an authorised representative’s duties to his or her principal or the creation of false accounts.78 [page 559] Banning orders may also be made for market misconduct such as market manipulation or insider trading. For example, banning orders were made

against a trader who purchased securities at higher prices than the previous trading price in order to manipulate the securities price upwards; against a broker who assisted a client in placing orders to maintain an artificial price for trading in company shares; against a broker who circulated an email stating that there was a run on a cash management trust operated by a major financial institution and, once the market became aware of it, that institution’s share price could halve.79 A banning order was also made and upheld on appeal against a broker who was found to have communicated inside information concerning a potential takeover to several clients.80 On the other hand, a banning order made in respect of off-market crossings was overturned by the AAT on the basis that those transactions did not give rise to a false or misleading appearance of active trading on a financial market where they were executed off-market, and did not give rise to a misleading appearance as to price where persons who had access to information concerning the trades would know that special crossings could properly be executed at prices other than current market prices.81 ASIC may also make a banning order if a person becomes an insolvent under administration or is convicted of fraud: s 920A(1)(bb)–(c). ASIC may also make a banning order where ASIC has reason to believe that a person is not of good fame and character, and ASIC is required take into account specified matters in determining whether a person is not of good fame or character, which are consistent with those applicable in respect of licensing: s 920A(1)(d), (1A). ASIC may also make a banning order if it has reason to believe that a person is not adequately trained or is not competent to provide a financial service; or the person has not complied with, or ASIC has reason to believe that he or she is likely to contravene, a financial services law: s 920A(1)(da)–(f). A breach of the financial services law need not be material to establish non-compliance for the purposes of s 920A(1)(e), although whether a breach was material will be relevant to whether a banning order should be made.82 ASIC may also make a banning order if a person has been involved in, or ASIC has reason to believe the person is likely to become involved in, a contravention of a financial services law by another person: s 920A(1)(g)–(h). The concept of ‘involved’ [page 560]

in s 920A(1)(g)–(h) is defined in s 79, which extends to a person who aided and abetted, induced, counselled or procured or is knowingly concerned in or party to or conspired with others to effect a contravention of the Corporations Act. This provision may apply where a person such as a director or employee caused a licensee to contravene such a law.83 It appears that the court will not restrain the conduct of proceedings to impose a banning order under this section, although criminal proceedings are ongoing in relation to the same facts.84

ASIC must give a hearing before making a banning order 13.58 Before making a banning order against a person, ASIC must give that person an opportunity to appear, or be represented, at a hearing before ASIC which takes place in private, and to make submissions to ASIC on the matter: s 920A(2). That provision does not expressly require that person be allowed the opportunity to lead evidence before ASIC, although the ability to do so may be implicit in the opportunity to be heard in respect of the matter. The requirement for hearing does not apply if ASIC’s grounds for making the banning order are or include a suspension or cancellation of the relevant licence under s 915B (see 13.52) or that the person has been convicted of serious fraud: s 920A(3). In conducting a hearing under s 920A(2), ASIC is performing an administrative function and is not bound by curial procedures, but must adopt procedures which are fair in all the circumstances of the case.85 Notwithstanding the statutory privilege against self-incrimination under ASIC Act s 68(3), evidence given by a person who is subject to an application for a banning order, in a compulsory examination conducted under the ASIC Act, is admissible in the banning order proceedings: s 1349. Prior to convening a hearing under s 920A(2) as to whether a banning order should be issued on the basis that the person has not complied, or will not comply, with his or her obligations under s 912A (see 13.17–13.31), ASIC’s delegate should first determine whether or not the material before the delegate might well warrant the conclusion that he or she had ‘reason to believe’ that the person had not complied or will not comply with those obligations. If he or she determines that the material might well warrant that conclusion, the delegate is then required to give

the relevant person an opportunity to be heard in accordance with s 920A(2). The rules of procedural fairness do not require that the person be first notified that a hearing is under consideration, or be given an opportunity to be heard as to the need for such a hearing, and any material relevant to the making of the banning order which fairness requires to be made available to that person may appropriately be provided at or prior to the hearing.86 At such a hearing, procedural fairness requires [page 561] that the critical issues on which the decision to make a banning order is likely to turn be brought to the attention of the relevant person, including matters adverse to that person which the delegate is considering taking into account in making his or her decision.87 However, procedural fairness does not require that other material in ASIC’s possession, which may touch on the subject matter of the hearing, be disclosed if that matter is not relied on as adverse to the interests of the relevant person.88 After the hearing has been conducted under s 920A(2), the delegate is required to decide whether he or she has ‘reason to believe’ the relevant person has not complied, or will not comply, with his or her obligations under s 912A and, if he or she has that belief, decide whether it is proper to make a banning order.89

Duration of a banning order 13.59 A banning order may prohibit the person against whom it is made from providing a financial service either permanently or for a specified period, unless ASIC has reason to believe that the person is not of good fame or character, when a permanent banning order is to be made: s 920B(2). ASIC has expressed the view that factors which may support a permanent banning order include dishonesty and intent to defraud; disregard for the law and compliance with regulations; a large financial loss; previous contraventions of the law; serious incompetence or irresponsibility; and a likelihood that the person will engage in similar contravening conduct in the future.90 A banning order given to a person must be accompanied by a statement of reasons for the order: s 920F(1).

Variation or cancellation of banning orders 13.60 ASIC may vary or cancel a banning order, if it is satisfied that it is appropriate to do so because of a change in any of the circumstances on which ASIC made the order, either on its own initiative or on application by the person against whom the order was made: s 920D(1)–(2). If ASIC proposes not to vary or cancel a banning order in accordance with an application lodged by such a person, it must give that person an opportunity to appear, or be represented, at a hearing before ASIC that takes place in private and to make submissions to ASIC on the matter: s 920B(3). If ASIC varies a banning order made against a person, it must give a statement of reasons for the variation, on that person’s request: s 920F(2). ASIC has noted that factors which may be relevant to its decision whether to vary or cancel a banning order include the seriousness of the misconduct that resulted in the order; the [page 562] period that has elapsed since the order was made and whether the person continues to pose a risk to consumers or to confidence in the financial system by reason of the conduct based on which ASIC had made the banning order; any action taken by the person to remedy the misconduct or its cause; and any information which, if it had been known to ASIC at the time, would have been relevant to its decision to make the banning order.91

Alternatives to banning orders 13.61 ASIC may accept an enforceable undertaking as an alternative to making a banning order, and ASIC Regulatory Guide 100 — Enforceable Undertakings, February 2015 deals with the circumstances in which ASIC would accept such an undertaking. However, an undertaking offered by a person to a court not to undertake financial services may not be an adequate alternative to a banning order.92

Administrative review of ASIC’s decision to make a banning

order 13.62 The AAT may review ASIC’s decision to issue a banning order under s 1317B, and may enter into an enforceable undertaking on behalf of ASIC and revoke a banning order on that basis.93 The Federal Court also has jurisdiction to review a decision of ASIC to make a banning order on the more limited grounds available under the Administrative Decisions (Judicial Review) Act 1977 (Cth).

Disqualification by the court 13.63 ASIC may apply to the court for a disqualification order under s 921A if it cancels an AFS licence held by a person or makes a banning order against that person that is to operate permanently. The court may make an order disqualifying that person, permanently or for a specified period, from providing any financial services, or specified financial services, in specified circumstances or capacities and any other order which it considers appropriate: s 921A(1)–(2). A person against whom a disqualification order is made cannot be granted an AFS licence: s 921A(4). In determining whether to make an order under s 921A, particularly an order in the nature of a permanent disqualification, it is likely that the court would have regard to the factors identified in Story v National Companies and Securities Commission (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560; and see 13.53. Those factors include the public interest in permitting qualified persons to follow a profession, balanced against the public interest that persons unwilling or unable to satisfy minimum standards of competence and honesty be removed from a profession. In Re Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs (2013) 93 ACSR 421; [2013] NSWSC 106 at [104]–[105], Ward JA noted that factors corresponding to those identified in Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80, in the context of disqualification [page 563] from managing a corporation, would be relevant to making a financial

services disqualification order. Her Honour noted that such orders are imposed in the public interest, have a protective and punitive function, and are to be imposed ‘having regard to the objects of personal and general deterrence’ and having regard to the enforcement and efficacy of the Corporations Act.

Orders that may be made by the court under ss 1101B and 1324 13.64 The court may make orders under s 1101B on the application of ASIC, if it appears to the court that a person has contravened a provision of Ch 7, or any other law relating to dealings in financial products or providing financial services; has contravened a condition of, relevantly, an AFS licence; or has contravened a provision of the operating rules or the compensation rules (if any) of a licensed market or the operating rules of a licensed clearing and settlement facility; or is about to do an act with respect to dealing in financial products or providing a financial service that, if done, would be such a contravention. The court is also empowered to make orders in relation to a contravention of the operating rules or compensation rules of a licensed market, on the application of a market licensee or a person aggrieved by the contravention of those rules. However, s 1101B does not allow standing to a client who is affected by a particular contravention of Ch 7 or a breach of the conditions imposed on a financial services licence to take enforcement proceedings in his or her own right. In the case of persistent or continuing contraventions of Ch 7 or a provision of any other law relating to dealing in financial products or providing financial services, or a condition on an Australian market licence, or a provision of the operating rules or compensation rules of a licensed market, the court may make an order restraining a person from carrying on business, or doing an act or classes of acts, in relation to financial products or financial services: s 1101B(4)(a). Orders have been made under this section and its predecessors restraining unlicensed persons from carrying out a financial services business and restraining the conduct of unregistered managed investment schemes.94 The majority of the case law indicates that it is appropriate to have regard to the factors

summarised in Australian Securities and Investments Commission v Adler, above (at [56]), to determine whether a financial services disqualification order should be made, and for what period.95 Section 1101B does not operate as a code, so as to prevent ASIC claiming injunctive relief under s 1324 with the same substantive effect of a financial services disqualification order, in respect of a contravention to which s 1101B would not apply.96 [page 564] The court may also make an order restraining a person from acquiring, disposing of or otherwise dealing with any financial products that are specified in the order, or restraining a person from providing any financial services specified in the order: s 1101B(4)(e)–(f). The court may make an order appointing a receiver of property of a financial services licensee: s 1101B(4)(g). The term ‘property’, in relation to a financial services licensee, includes money, financial products, documents of title to financial products or other property entrusted to, or received on behalf of, any other person by the financial services licensee or by another person in the course of, or in connection with, a financial services business carried on by the financial services licensee: s 1101B(12). A receiver appointed to the property of a financial services licensee may require that licensee to deliver any property to which he or she has been appointed receiver to him or her; and to give the receiver all information concerning that property that may reasonably be required. The receiver may acquire and take possession of any property of which he or she has been appointed receiver; may deal with any property which he or she has acquired or of which he or she has taken possession in any way in which the financial services licensee might lawfully have dealt with that property; and has such other powers in respect of the property as the court specifies in the order appointing the receiver: s 1101B(8). The court has power to make an order declaring a contract relating to financial products or financial services to be void or voidable: s 1101B(4) (h). The court also has power to make orders directing a person to do or refrain from doing a specified act, for the purpose of securing compliance

with any other order under s 1101B, or any ancillary order considered to be just and reasonable in consequence of the making of an order under s 1101B: s 1101B(4)(i)–(j). Section 1324 allows a person whose interests have been, are or would be affected by actions in contravention of the Corporations Act to apply for an injunction, or damages in lieu of the grant of an injunction. Proceedings under s 1324 could be brought by a person whose interests have been, are or would be affected by conduct of an unlicensed person who provided financial services in contravention of Pt 7.6, or by a financial services licensee’s failure to comply with conduct of business requirements imposed under Pts 7.7, 7.7A and 7.8 (see Chapter 14); or by a financial services licensee’s failure to do an act required by the Corporations Act.97 The principles applicable to disqualification orders in Australian Securities and Investments Commission v Adler, above (at [56]), have been applied to orders made under s 1324 to restrain the conduct of a financial services business.98 Orders in the nature of permanent injunctions have been granted in several cases.99 [page 565]

REGISTERS AND RESTRICTIONS ON USE OF TERMINOLOGY Registers relating to financial services 13.65 ASIC must establish and maintain a register of financial services licensees, authorised representatives of financial services licensees, persons against whom a banning order or disqualification order is made under Pt 7.6 Div 8 (see 13.56–13.63) and any other persons or bodies prescribed by regulation: s 922A. It is a condition of an AFS licence that a licensee must lodge particulars of a change in a matter entered in the register of licensees, which is not a direct consequence of an act by ASIC, with ASIC in a prescribed form within 10 business days after that change: reg 7.6.04(1) (b). It is also a condition of a licence that the licensee must lodge

particulars of a change in a matter which is entered in the register of authorised representatives, and which is not required to be reported in accordance with s 916F (see 13.44) and which is not a direct consequence of an act by ASIC, in the prescribed form within 30 days after that change: reg 7.6.04(1)(c). The requirement that ASIC maintain a register of authorised representatives differs from the approach formerly adopted under the Corporations Act, which was for ASIC to maintain a register of licence holders and for licensees to maintain a register of proper authority holders. The intention of the new procedure is to consolidate information about licensees and authorised representatives, and streamline access for people who seek information about those persons.100 A person may inspect the register or registers relating to financial services and make copies of, or take extracts from, the register or registers on payment of a prescribed fee: s 922B(1)–(2). The Corporations Amendment (Register of Relevant Providers) Regulation 2015 inserts ss 922C–922P into Pt 7.6 Div 9 of the Corporations Act, providing for a register of financial advisers. The purpose of that register is to allow consumers to obtain information about financial advisers; give employers greater ability to assess the suitability of advisers; improve ASIC’s ability to identify and monitor such advisers; and more widely, to provide support for the improvement of professional standards in the financial services industry. The register does not extend to representatives who provide only general advice to either retail or wholesale clients, or provide personal advice only to wholesale clients or only as to excluded products. The obligation to obtain the necessary information for inclusion in the register is placed on licensees.

Restrictions on use of terminology 13.66 Part 7.6 Div 10 imposes restrictions on the use of certain words or expressions by financial services providers, in relation to carrying on a financial services business or providing a financial service. First, the restricted terms ‘independent’, ‘impartial’ or ‘unbiased’ or similar words or expressions may only be used if a person, his or her

employer, or a person on behalf of whom he or she provides financial services, does not receive commissions (other than commissions fully rebated to his or her clients), volume-based remuneration or other gifts or benefits from an issuer of financial products which may reasonably be [page 566] expected to influence that person; and operates free from direct or indirect restrictions relating to the financial products in respect of which they provide financial services; and operates without any conflict of interest which might arise from associations or relationships with issuers of financial products and which might reasonably be expected to influence the person in carrying on that business or providing those services: s 923A(2). It is also an offence under s 923B for a person to use the words ‘stockbroker’ or ‘sharebroker’, ‘futures broker’, ‘insurance broker’ or ‘insurance broking’, ‘general insurance broker’, ‘life insurance broker’ or any other expression prescribed by the regulations, in relation to a financial services business or provision of financial services, unless the user of that word is authorised to assume or use that word or expression under the conditions on its AFS licence or by a person for whom they are a representative: s 923B(1). ASIC may only impose a condition on an AFS licence authorising a person to assume or use the expression ‘stockbroker’ or ‘sharebroker’ if that person can, under its licence, provide a financial service relating to securities and is a participant in a licensed market whose licence covers dealings in securities: s 923B(3)(a). ASIC may only impose a condition authorising the use of the term ‘futures broker’ if a person can, under its licence, provide a financial service relating to derivatives and is a participant in a licensed market whose licence covers dealings in derivatives: s 923B(3)(b). ASIC can only impose a condition authorising the use of the expressions ‘insurance broker’ or ‘insurance broking’, ‘general insurance broker’ or ‘life insurance broker’ if the person can, under its licence, provide a financial service relating to contracts of insurance, contracts of general insurance or contracts of life insurance

respectively and, in providing that service, the person acts on behalf of intending insureds: s 923B(3)(c)–(e).

DEALINGS WITH UNLICENSED PERSONS Agreements with unlicensed persons 13.67 Part 7.6 Div 11 addresses the position of a client who enters into an agreement with a person who should hold a financial services licence but does not do so. Division 11 allows a client dealing with an unlicensed person to rescind the contract, subject to provisions protecting the rights of third parties, and places the onus upon an unlicensed person who seeks to establish that an agreement is enforceable. Division 11 Subdiv B defines the manner and effect of rescission by a client of an agreement with a non-licensee and the extent to which such an agreement is rendered unenforceable by the non-licensee. Division 11 Subdiv B applies to an agreement entered into by a person who does not hold an AFS licence covering the provision of the financial service and is not exempt from the requirement to hold such a licence (‘non-licensee’) and a client, which constitutes or relates to the provision of a financial service by the non-licensee, and is entered into in the course of a financial services business carried on by the non-licensee: s 924A. By contrast with former Corporations Act Pt 7.3 Div 2, the right of rescission extends to clients who are themselves licensed persons. It might be argued that such an extension is unnecessary, since licensed persons have the experience and expertise to protect their [page 567] own interests in dealing in financial products, whether or not the other party to the transaction holds a financial services licence.

Client’s right to rescind agreement with a non-licensee 13.68 If Div 11 Subdiv B applies, a client who dealt with a non-licensee

may give a written notice to that non-licensee of its wish to rescind the agreement with the non-licensee: s 925A(1). That notice must be given within a reasonable time after the client became aware of the facts entitling the giving of the notice: s 925A(2). The client’s right to rescind is lost if the client affirms the contract, for example, by paying moneys due under the contract or acting as though the contract were still on foot so as to affirm the contract by conduct: s 925A(3). For example, in International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50; (2011) 248 FLR 149; 82 ACSR 517, the Court of Appeal of the Supreme Court of New South Wales held that a litigation funding agreement (which it held to be a facility for managing risk for the purposes of s 763C (see 3.46) and therefore a financial product for the purposes of s 763A (see 3.43) could be rescinded under this section where the funder did not hold an AFS licence. That decision was reversed by the High Court in International Litigation Partners Pte Ltd v Chameleon Mining NL (recs & mgs apptd) (2012) 246 CLR 455; [2012] HCA 45 on the basis that the relevant agreement was a credit facility and therefore excluded from the definition of financial product under s 765A. The client’s right to rescind is lost if the client affirms the contract, for example, by paying moneys due under the contract or acting as though the contract were still on foot so as to affirm the contract by conduct: s 925A(3). In ABN Amro Bank NV v Bathurst Regional Council (2014) 309 ALR 445; 99 ACSR 336; [2014] FCAFC 65 at [1425], the Full Court of the Federal Court held that cases concerning the loss of a contractual right to rescind101 were not applicable in respect of the statutory right to rescind under s 925A, and noted that the statutory right to rescind required that the client had become aware of the facts entitling the client to give the notice. On the other hand, in Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd (2014) 102 ACSR 636; [2014] NSWSC 1503, the New South Wales Supreme Court held that the right of rescission in respect of dealings with an unlicensed investment manager was lost by delay and by affirmation for the purposes of s 925A(3), where a client did not take action to rescind the contract for several months after being made aware of the relevant facts; that result was upheld, albeit the basis of a somewhat different view of the inferences to be drawn from the evidence, on appeal.102

A client is not entitled to give a notice under s 925A if the non-licensee had informed the client that it did not hold an AFS licence within a reasonable period before the agreement between the client and the nonlicensee was made: s 925A(4). For example, this provision would limit the right of rescission that might otherwise be available to a person who entered an agreement with an unlicensed offshore financial services provider under ASIC class action relief (see 13.14), if the conditions of that relief were not satisfied but the offshore provider had made the specified [page 568] disclosure. If a person whose AFS licence is suspended informs the client that that licence is suspended, it is taken to have informed the client at that time that it did not hold the relevant licence so as to fall within the exception under s 925A(4): s 925A(5). A notice of rescission given by the client under s 925A is effective to rescind the contract with the non-licensee, unless rescission would prejudice a right or an estate in property acquired by a third party in good faith, for valuable consideration and without notice of the facts which gave rise to the client’s right of rescission: s 925B. It appears that rescission occurs under s 925B at the time at which the client gives notice under s 925A, and that it will be for the non-licensee to show that third party rights had intervened in order to establish that notice under s 925A is ineffective to rescind the agreement. Although Div 11 Subdiv B does not specify the consequences of rescission under s 925B, it seems that rescission of the agreement will be ab initio, subject to the requirement that the client makes substantial restitution of any benefits received under the agreement.

Partial rescission of agreement with a non-licensee 13.69 If the intervention of third party rights prevents rescission of the agreement as a whole, a client who has dealt with a non-licensee may apply to the court to obtain partial rescission of the transaction to the extent that rescission does not prejudice third party rights: s 925C. For example, if an agreement between a non-licensee and a client related to a number of transactions and one of those transactions could not be

rescinded because of the intervention of third party rights, s 925C would allow the client to seek a court order for partial rescission of those transactions where third party rights would not be prejudiced. In the absence of s 925C, it could have been argued that an agreement between a client and a non-licensee relating to a number of transactions could not have been rescinded if the existence of third party rights prevented rescission of any one of the transactions. In such an application, the court may make an order varying the agreement in such a way as to put the client in the same position, as nearly as can be done without prejudicing a right or estate of a third party acquired before the order is made, as if the agreement had not been entered into, and declaring the agreement to have had effect as so varied at the time when it was originally made: s 925C(4).

Court’s power to make orders where client rescinds agreement 13.70 If an agreement with a non-licensee is rescinded under s 925B, the court is empowered to make orders which it would have had power to make on rescission of the contract for misrepresentation by the nonlicensee, provided that those orders do not prejudice a right or estate in property acquired by a third party in good faith, for valuable consideration and without notice of the facts giving rise to the client’s right to give the notice of rescission: s 925D. An order under s 925D may be made on the application of the non-licensee as well as on the application of the client. The rights and remedies available to a client against a non-licensee are additional to the rights and remedies available to the client at general law: s 925I. For example, equity allows rescission of a contract for innocent misrepresentation without requiring the exact restoration of the status quo ante, provided that it is possible [page 569] to achieve ‘practical justice’ between the parties.103 In determining whether to allow rescission, the court looks to ‘whether restitutio in integrum is substantially possible and whether rescission is timely and just and fair’.104 The court is more likely to grant rescission at the suit of an innocent party

where a contract has been induced by fraud, in order to deny the defendant the benefit of the fraud at the expense of the innocent party.105

Unenforceability of agreement formed with a nonlicensee against the client 13.71 If a client is entitled to give a notice under s 925A which would result in rescission of an agreement with a non-licensee under s 925B, or has given such a notice, that non-licensee may not enforce the agreement against the client and may not rely on the agreement to establish a defence or otherwise: s 925E. The intervention of third party rights which would deny rescission under s 925B also preserves the right of the non-licensee to enforce the agreement against the client, subject to the court’s power to make orders for the partial rescission of the agreement under s 925C and subject to the prohibition under s 925F upon the non-licensee recovering commission in relation to the transaction. There is a statutory presumption that s 925E applies to prevent a non-licensee enforcing the agreement with the client: s 925G. In order to enforce an agreement with a client, the nonlicensee would therefore have to prove that the client was not entitled to give a notice under s 925A, either because an AFS licence was held by the licensee or because the client had affirmed the agreement, or that third party rights had intervened so that the notice under s 925A would not lead to rescission under s 925B. It would also be open to the non-licensee to rely upon s 925A(4) to establish that the client was not entitled to give notice of rescission under s 925A, if the non-licensee had informed the client that it did not hold a licence within a reasonable period before the agreement was formed. A non-licensee is prohibited from recovering any brokerage or commission under an agreement with a client if the client is entitled to give a notice under s 925A or has given such a notice: s 925F. The bar to recovery of commission by a non-licensee applies even if the notice given by the client under s 925A would not lead to rescission of the agreement, for example, because of the intervention of third party rights. There is a statutory presumption that s 925F applies to prohibit a non-licensee recovering brokerage, commission or any other fee under the agreement: s 925G. Accordingly, in order to recover such brokerage, commission or

other fee against a client, the claimant would have to prove that the client was not entitled to give a notice under s 925A, either because it in fact held an AFS licence or because the client had affirmed the agreement. If a nonlicensee had informed the client that it did not hold a licence within a reasonable time before the agreement was formed, the non-licensee could rely upon s 925A(4) to establish the client was not entitled to give notice of rescission under s 925A. In that case, the non-licensee would not be prohibited from recovering any brokerage, commission or other fee under s 925F. [page 570] A client is entitled to recover any brokerage, commission or other fee paid to the non-licensee on giving a notice of rescission under s 925A: s 925H. A client is entitled to recover that brokerage, commission or other fee under s 925H even if the notice of rescission was not effective to rescind the contract as a result of the intervention of third party rights. Section 925H also empowers ASIC to bring an action to recover commission payments for the benefit of a client of a non-licensee, if ASIC considers that it doing so is in the public interest.

Other remedies in respect of dealings with unlicensed persons 13.72 Remedies under s 1101B may also be available in respect of dealings with unlicensed persons: see 13.64. That section authorises the court to make orders on the application of ASIC, if it appears to the court that a person has contravened Ch 7 or any other law relating to dealings in financial products or providing financial services; or is about to do an act with respect to dealing in financial products or providing a financial service that, if done, will be such a contravention. However, s 1101B is of limited utility for a party to a contract with an unlicensed person, since that party does not have standing to seek an order under that section in relation to a contravention of the licensing provisions, and may or may not be able to persuade ASIC to take proceedings on his or her behalf. In an

appropriate case, a person who does not have standing under s 1101B may be entitled to a remedy under s 1324, which authorises the court to grant an injunction to restrain conduct which contravenes the Corporations Act, on the application of a person whose interests have been or would be affected by that conduct. The court has power to order a person to pay damages under s 1324, if it would have had power to grant an injunction under that section. ___________________________ 1.

Cairnsmore Holdings Pty Ltd v Bearsden Holdings Pty Ltd [2007] FCA 1822 at [32]; Australian Securities and Investments Commission v Activesuper Pty Ltd (in liq) (No 2) (2015) 106 ACSR 302; [2015] FCA 527 at [28]

2.

See Discussion Paper, A Review of the Licensing Provisions of the Securities Industry and Act and Codes, Australian Government Publishing Service, 1985; G Pearson, ‘Risk and the Consumer in Australian Financial Services Reform’ (2006) 28 Syd LR 99 at 116–17. In ASIC Regulatory Guide 104 — Licensing: Meeting the General Obligations, July 2015, ASIC notes that the primary goals of the licensing regime are to promote consumer confidence in using financial services and the provision of efficient, honest and fair financial services by licensees and their representatives: [104.11].

3.

Australian Securities Commission Licensing Review Task Force, Issues Paper, February 1995, p 9.

4.

ASIC Policy Paper, Licensing and Disclosure: Making the Transition to the FSR Regime, October 2001, [1.1.2].

5.

For example, Australian Securities and Investments Commission v McDougall (2006) 229 ALR 158; 57 ACSR 175; [2006] FCA 427; Australian Securities and Investments Commission v IPLUS Risk Management Pty Ltd [2006] FCA 583; Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2006] QSC 132; Australian Securities and Investments Commission v Intertax Holdings Pty Ltd [2006] QSC 276; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192; Australian Securities and Investments Commission v Liban Net Pty Ltd (2006) 59 ACSR 571; [2006] FCA 1308; Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224; Australian Securities and Investments Commission v Oxford Investments (Tas) Pty Ltd (2008) 169 FCR 522; [2008] FCA 980 at [17]–[24]; Matthews v Australian Securities and Investments Commission [2009] NSWCA 155; Australian Securities and Investments Commission v Stone Assets Management Pty Ltd (2012) 205 FCR 120; 90 ACSR 523; [2012] FCA 630; Australian Securities and Investments Commission v Monarch FX Group Pty Ltd (2014) 103 ACSR 453; [2014] FCA 1387; Australian Securities and Investments Commission v Activesuper Pty Ltd (in liq) (2015) 105 ACSR 116; [2015] FCA 342; Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527.

6.

The exemptions in regs 7.1.29–7.1.33H are considered in ASIC Regulatory Guide 36 — Licensing: Financial Product Advice and Dealing, August 2013, [36. 34].

7.

ASIC Regulatory Guide 36 — Licensing: Financial Product Advice and Dealing, [36.28]–[36.29].

8.

ASIC Regulatory Guide 36 — Licensing: Financial Product Advice and Dealing, [36.42]–[36.44]. ASIC there notes that indications of ‘arranging’ are that a person’s involvement in the chain of events leading to the relevant dealing is of sufficient importance that without his or her involvement the transaction would probably not take place; his or her involvement significantly ‘adds value’ for the

person for whom he or she is acting; and he or she receives benefits depending on the decisions made by the person for whom he or she is acting: [36.43]. For example, ASIC expresses the view that the activities of an order router will generally involve arranging; on the other hand, the operator of a business introduction service will probably not be arranging where it does not play a significant role and does not benefit from investment decisions made by consumers: [36.44]. 9.

Smith v Anderson (1880) 15 Ch D 247 at 260–1 per Jessel MR; at 277–8 per Brett LJ; Ballantyne v Raphael (1889) 15 VLR 538; Edgelow v MacElwee [1918] 1 KB 205 at 206 per McCardie J.

10.

Ballantyne v Raphael above; United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 15 per Dawson J; [1985] HCA 49.

11.

Jones v Leeming [1930] All ER Rep 584; Martin v Federal Commr of Taxation (1953) 90 CLR 470; Federal Commr of Taxation v St Hubert’s Island Pty Ltd (1978) 138 CLR 210 at 237 per Jacobs J; [1978] HCA 10.

12.

Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 71 ACSR 1; 224 FLR 50; [2009] QSC 058.

13.

ASIC Regulatory Guide 36 — Licensing: Financial Product and Dealing, [36.94].

14.

Supplementary Explanatory Memorandum to the Financial Services Reform Bill 2001, [3.61].

15.

See class orders [CO03/1099]–[CO03/1103], [CO04/829] and [CO04/1313]; and ASIC Regulatory Guide 176 — Foreign Financial Services Providers, June 2012.

16.

T A Bunjevac, ‘Credit Rating Agencies: A Regulatory Challenge for Australia’ (2009) 33 MULR 39; D Darcy, ‘Credit Rating Agencies and the Credit Crisis: How the “Issuer Pays” Conflict Contributed and What Regulators Might Do about It’ (2009) 2 Columbia Bus LR 605; T E Lynch, ‘Deeply and Persistently Conflicted: Credit Rating Agencies in the Current Regulatory Environment’ (2009) 59 Case W Res L Rev 227; T Fitzpatrick IV and C Sagers, ‘Faith-based Financial Regulation: A Primer on Oversight of Credit Rating Organizations’ (2009) 61 Admin L Rev 557; S Ellis et al, ‘Conflicts of Interest in the Credit Rating Industry After Dodd–Frank: Continued Business as Usual?’ (2012) 7 Va L and Bus Rev 1; I MacNeil, An Introduction to the Law on Financial Investment, 2nd ed, Hart Publishing, Oxford, 2012, p 438; N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, Oxford, 2014, pp 635, 640.

17.

I MacNeil, An Introduction to the Law on Financial Investment, above, p 437.

18.

Kippe v Australian Securities Commission (1997) 16 ACLC 190 at [221]; Fraser v Australian Securities and Investments Commission [2011] AATA 944 at [31]; George v Australian Securities and Investments Commission [2014] AATA 167 at [66], [80].

19.

Green v Daniels (1977) 13 ALR 1 at 9 per Stephen J; [1977] HCA 18; WA Pines v Bannerman (1980) 30 ALR 559 at 570–2 per Lockhart J; [1980] FCA 79.

20.

Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 386 per Brennan J; [1986] HCA 25.

21.

See P Latimer, ‘Providing Financial Services “Efficiently, Honestly and Fairly”’ (2006) 24 C&SLJ 382.

22.

See generally A Black et al, ‘Australia’ in K Clark (ed), Conflicts of Interest: Jurisdictional Comparisons in the Law and Regulation for the Financial Services, Auditing and Legal Professions, London, European Lawyer Reference, 2005, pp 7–24; T Ciro and M Fox, ‘Financial Service Providers in Australia: Managing Conflicts of Interest’ (2006) 17(1) ICCLR 6; A Tuch, ‘Investment Banks as Fiduciaries: Implications for Conflicts of Interest’ (2005) 29 Melb U L Rev 478; ‘Contemporary Challenges in Takeovers: Avoiding Conflicts, Preserving Confidences and Taming the Commercial Imperative’ (2006) 24 C&SLJ 107; ‘Obligations of Financial Advisors in Change-of-Control Transactions: Fiduciary and Other Questions’ (2006) 24 C&SLJ 488; ‘Securities Underwriters in Public Capital Markets: The

Existence, Parameters and Consequences of the Fiduciary Obligation to Avoid Conflicts’ (2007) 7 JCLS 51. 23.

ASIC Regulatory Guide 181 — Licensing: Managing Conflicts of Interest, [181.15].

24.

Above, [181.15].

25.

Above, [181.27].

26.

Above, [181.14].

27.

Above, [181.28].

28.

Above, [181.32].

29.

Above, [181.50].

30.

Above, [181.52].

31.

Above, [181.53].

32.

Above, [181.62].

33.

Above, [181.42]. ASIC gives several examples of such conflicts, for example: a licensee permitting staff to publish or give positive advice about a particular financial product issuer, or including its product in a recommended list, solely in return for benefits or continuing business from the issuer; a licensee disclosing pending client orders to third parties associated with the licensee, to enable those third parties to trade ahead of its clients; a fund manager permitting ‘late trading’ by some of its clients (that is, allowing clients to buy and sell interests in a fund at a particular day’s price based on information that comes to light only after general trading in that fund for the day has closed); and the giving of advice by an adviser who is significantly affected by a conflict of interest in a particular product.

34.

See C Parker, ‘The Emergence of the Australian Compliance Industry: Trends and Accomplishments’ (1999) 27 ABLR 178; P Carroll and M McGregor-Lowndes, ‘A Standard for Regulatory Compliance’ Industry Self-regulation, the Courts and AS 3806-1998’ (2001) 60 AJPA 80.

35.

ASIC Regulatory Guide 104 — Licensing: Meeting the General Obligations, [104.21].

36.

Above, [104.39].

37.

Above, [104.46]–[104.49].

38.

Above, [104.69]–[104.70].

39.

Above, [104.71]–[104.72].

40.

Under the Australian Prudential Regulation Authority Act 1998 (Cth), APRA is responsible for prudential regulation of banks, life insurers, general insurers, superannuation trustees, building societies, credit unions and friendly societies. While a financial services licensee regulated by APRA is excluded from this requirement, it applies in relation to financial services licensees which are subsidiaries or related body corporates of bodies regulated by APRA.

41.

NCSC Discussion Paper, A Review of the Licensing Provisions of the Securities Industry Act and Codes, 1985, [5.19].

42.

ASIC Regulatory Guide 104 — Licensing: Meeting the General Obligations, [104.86], [104.89].

43.

Above, [104.90].

44.

ASIC Regulatory Guide 105 — Licensing: Organisational Competence, October 2007, [105.16]ff.

45.

Above, [105.2], [105.5].

46.

Above, [105.7].

47.

ASIC Pro Forma 209: Australian Financial Services Licence Conditions, conditions 6 and 7.

48.

ASIC Regulatory Guide 104 — Licensing: Meeting the General Obligations, [104.74].

49.

ASIC Regulatory Guide 146 — Licensing: Training of Financial Product Advisers, [146.1], [146.4].

50.

Tier 2 products are general insurance products (except for personal sickness and accident insurance), consumer credit insurance, basic deposit products, non-cash payment products, FHSA deposits (as defined) and Tier 1 products are all other products.

51.

ASIC Regulatory Guide 146 — Licensing: Training of Financial Product Advisers, [146.6]–[146.7].

52.

Above, [146.8].

53.

Above, [146.9].

54.

Above, [146.14].

55.

Above, [146.22]–[146.29].

56.

ASIC Regulatory Guide 104 — Licensing: Meeting the General Obligations, [104.38], [104.58]–[104.59].

57.

Reg 7.6.02AF, introduced by the Corporations Amendment Regulations 2005 (No 5), modifies s 761G for the purposes of ss 926B(1)(c), 951C(1)(c), 992C(1)(c) and 1020G(1)(c) to increase the life of an accountant’s certificate from six to 24 months.

58.

Re Willmott Forests Ltd (in liq) and Willmott Finance Pty Ltd (in liq) (2011) 85 ACSR 71; [2011] VSC 348.

59.

An Options Paper issued by Treasury in January 2011 identified several options for reform of the distinction between wholesale and retail clients. The first was to ‘update’ the existing classification by increasing the specified monetary thresholds, with a suggested increase of the product value test from $500,000 to $1 million and a possible indexing mechanism; and/or excluding illiquid assets in applying the classification; and/or introducing a requirement for client acknowledgment of their classification as a wholesale client; or limiting the classification of a client as wholesale to the position where the client satisfies two out of three of the income, net assets or product value tests; and/or introducing additional requirements for complex products. A second option was to remove the distinction between wholesale and retail clients, so that the same requirements would apply to dealings with all clients; a third option was to use the alternative ‘sophisticated investor’ test applicable to disclosure documents under s 708 as the sole basis for wholesale classification; and a fourth option was to make no change to the existing classification.

60.

ASIC Regulatory Guide 165 — Licensing: Internal and External Dispute Resolution, [165.62]; see also CO 09/339.

61.

Above, [165.88]ff.

62.

Above, [165.126]ff.

63.

Above, [165.159].

64.

Pereira v Director of Public Prosecutions (1988) 82 ALR 217; 63 ALJR 1; [1988] HCA 57; Mercedes Holdings Pty Ltd v Waters (No 2) (2010) 186 FCR 450; [2010] FCA 472 at [70]; and see A Eastwood, ‘Breach Reporting: Some Difficult Issues to Consider’ (2014) 32 C&SLJ 251.

65.

See ASIC Regulatory Guide 78 — Breach Reporting by AFS Licensees, February 2014; and, for commentary, M Vrisakis, ‘Breach Reporting — ASIC Do’s and Don’ts’ (2004) 23 BCLB [619].

66.

Aon Risk Services Australia Ltd v Lumley General Insurance Ltd (2005) 13 ANZ Ins Cas 61-652; [2005] FCA 133.

67.

Explanatory Memorandum to the Financial Services Reform Bill, [11.28].

68.

ASIC Regulatory Guide 98 — Licensing: Administrative Action against Financial Services Providers, July 2013, [98.44].

69.

Above, [98.47]–[98.48].

70.

Above, [98.49].

71.

Above, Table 1. ASIC may accept an enforceable undertaking as an alternative to taking steps to revoke or impose conditions on a licence. ASIC Regulatory Guide 100 — Enforceable Undertakings, February 2015 deals with the circumstances in which ASIC will accept such an undertaking.

72.

Re Sovereign Capital Ltd and Australian Securities and Investments Commission (2008) 109 ALD 398; [2008] AATA 901.

73.

Nam Bee (Aust) Pty Ltd v Corporate Affairs Commission (NSW) (1987) 12 ACLR 391; (1988) 6 ACLC 79; Story v National Companies and Securities Commission (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560.

74.

This section was introduced by the Corporations Amendment (Insolvency) Act 2007 and restores the position under Australian Securities Commission v Kippe (1996) 137 ALR 423; 20 ACSR 679, reversing the application of the High Court’s decision in Rich & Silbermann v Australian Securities and Investments Commission (2004) 220 CLR 129; 50 ACSR 242; [2004] HCA 42 in this context.

75.

For commentary, see T Middleton, ‘ASIC’s Regulatory Powers — Interception and Search Warrants, Credit and Financial Services Licences and Banning Orders, Financial Advisers and Superannuation: Problems and Suggested Reforms’ (2013) 31 C&SLJ 208; M Nehme, ‘Latest Changes to the Banning Order Regime: Were the Amendments Really Needed’ (2013) 31 C&SLJ 341; T Middleton, ‘Banning, Disqualification and Licensing Powers: ACCC, APRA, ASIC and the ATO — Regulatory Overlap, Penalty Privilege and Law Reform’ (2015) 33 C&SLJ 555.

76.

Australian Securities Commission v Kippe (1996) 137 ALR 423; 20 ACSR 679 at 687–8; see also Farley v Australian Securities Commission (1998) 16 ACLC 1502 at 1521; Re Hayes and Australian Securities and Investment Commission (2006) 93 ALD 494; [2006] AATA 1506; Re Dollas-Ford and Australian Securities and Investments Commission (2006) 91 ALD 747; [2006] AATA 704; Re Howarth and Australian Securities and Investments Commission (2008) 101 ALD 602; 48 AAR 10; [2008] AATA 278; Musumeci and Australian Securities and Investments Commission (2009) 109 ALD 677; [2009] AATA 524 at [78]; Re Caines and Australian Securities and Investments Commission [2012] AATA 289 at [4]; Frugtniet v Australian Securities and Investments Commission [2015] AATA 128 at [55]ff; T Middleton, ‘Banning, Disqualification and Licensing Powers: ACCC, APRA, ASIC and the ATO — Regulatory Overlap, Penalty Privilege and Law Reform’ (2015) 33 C&SLJ 555 at 578.

77.

ASIC Regulatory Guide 98 — Licensing: Administrative Action against Financial Services Providers, [98.44].

78.

See, for example, Re Quinn & Australian Securities Commission (1994) 12 ACLC 412; 19 AAR 321; Boucher v Australian Securities Commission (1996) 71 FCR 122; 22 ACSR 503; McLachlan v Australian Securities Commission (1998) 28 ACSR 473; appeal dismissed (1999) 85 FCR 286; 30 ACSR 418; [1999] FCA 244; Farley v Australian Securities Commission (1998) 16 ACLC 1502; Donald v Australian Securities and Investments Commission (2000) 104 FCR 126; 35 ACSR 383; [2000] FCA 1142; Re Cardillo and Australian Securities and Investments Commission (2000) 35 ACSR 731; 61 ALD 757; [2000] AATA 1053; Re Campbell and Australian Securities and Investments Commission (2001) 37 ACSR 238; [2001] AATA 205; Felden and Australian Securities and Investments Commission (2003) 45 ACSR 111; 73 ALD 149; [2003] AATA 301; Re Jungstedt and Australian Securities and Investments Commission above; Re Hayes and Australian Securities and Investments Commission above; Re Dollas-Ford and Australian Securities and Investments Commission above; Re Howarth and Australian Securities and

Investments Commission above. 79.

Donald v Australian Securities and Investments Commission above; Musumeci v Australian Securities and Investments Commission above; ASIC AD09-48, ‘ASIC Bans Broker for Spreading Misleading Information’, 23 March 2009; see also Australian Securities and Investments Commission v Administrative Appeals Tribunal (2010) 187 FCR 334; [2010] FCA 807; Re Klusman and Australian Securities and Investments Commission (2010) 53 AAR 375; 117 ALD 617; [2010] AATA 709.

80.

YFFM v Australian Securities and Investments Commission [2010] AATA 340; on appeal as Catena v Australian Securities and Investments Commission (2011) 276 ALR 25; [2011] FCAFC 32.

81.

Rosenberg v Australian Securities and Investments Commission (2010) 117 ALD 582; [2010] AATA 654.

82.

Tweed v Australian Securities and Investments Commission (2008) 47 AAR 518; [2008] AATA 514; Re Turner and Australian Securities and Investments Commission [2009] AATA 417 at [36].

83.

Explanatory Memorandum to the Corporations Amendment (Future of Financial Advice) Bill 2011 [2.37]; and see Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206; [2012] FCA 414 at [56]–[58].

84.

Sage v Australian Securities and Investments Commission [2005] FCA 1043.

85.

Boucher v Australian Securities Commission (1996) 71 FCR 122; 22 ACSR 503.

86.

McLachlan v Australian Securities and Investments Commission (1999) 85 FCR 286; 30 ACSR 418 at 427; [1999] FCA 244.

87.

McLachlan v Australian Securities and Investments Commission, above at 428.

88.

McLachlan v Australian Securities and Investments Commission, above at 430.

89.

McLachlan v Australian Securities and Investments Commission, above at 427.

90.

ASIC Regulatory Guide 98 — Licensing: Administrative Action Against Financial Services Providers, Table 2; see also Re Quinn and Australian Securities Commission (1994) 12 ACLC 412; Farley v Australian Securities Commission (1998) 16 ACLC 1502 at 1524; Tarrant v Australian Securities and Investments Commission (2015) 104 ACSR 275; [2015] FCAFC 8 (holding that there was no error in banning a financial adviser for seven years, where his conduct involved serious breaches of financial services laws, including non-disclosure of marketing allowances and misrepresentations as to his independence and lack of conflict of interest, and treating the factors in Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 at [56] as relevant to the period for which a banning order should be made).

91.

ASIC Regulatory Guide 98 — Licensing: Administrative Action Against Financial Services Providers, [98.52].

92.

Sage v Australian Securities and Investments Commission [2005] FCA 1043.

93.

Donald and Australian Securities and Investments Commission (2001) 38 ACSR 661; [2001] AATA 622; on appeal Australian Securities and Investments Commission v Donald (2003) 136 FCR 7; 48 ACSR 394; [2003] FCAFC 318; Re Daws and Australian Securities and Investments Commission (2006) 91 ALD 138; [2006] AATA 246.

94.

For example, Waldron v MG Securities (A’asia) Ltd [1975] VR 508; Waldron v Auer [1977] VR 236; (1977) 2 ACLR 514; Commr for Corporate Affairs v Nut Farms of Australia Pty Ltd [1980] CLC 40-642; Australian Securities and Investments Commission v McDougall, above; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192.

95.

Re Idylic Solutions; Australian Securities and Investments Commission v Hobbs above at [54]–[56], [92]–

[106]; Re Melinda Scott & Roach Graham Scott Pty Ltd [2012] NSWSC 1643; Australian Securities and Investments Commission v Monarch FX Group Pty Ltd (2014) 103 ACSR 453; [2014] FCA 1387 at [98]; a somewhat different view was taken by Brereton J in Re Vault Market Pty Ltd [2014] NSWSC 1641. 96.

Re Idylic Solutions, above at [82]–[91]; Australian Securities and Investments Commission v Monarch FX Group Pty Ltd, above at [104].

97.

See, for example, Re Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs, above at [72]–[91]; Australian Securities and Investments Commission v Monarch FX Group Pty Ltd, above at [97].

98.

Re Idylic Solutions; Australian Securities and Investments Commission v Hobbs, above at [92]–[105].

99.

Re Idylic Solutions Pty Ltd; Australian Securities and Investments Commission v Hobbs, above at [247]– [248]; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553; [2006] VSC 192 at [396]–[399] and by consent in Australian Securities and Investments Commission v Elm Financial Services Pty Ltd (2005) 55 ACSR 544; [2005] NSWSC 1065 and Re Melinda Scott & Roach Graham Scott Pty Ltd [2012] NSWSC 1643 at [18]–[19], [25].

100. Explanatory Memorandum to the Financial Services Reform Bill, [11.51]. 101. For example, Ellison v Lutre Pty Ltd (1999) 88 FCR 116; [1999] FCA 399. 102. Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28. 103. Alati v Kruger (1955) 94 CLR 216 at 223–4 per Dixon CJ, Webb, Kitto and Taylor JJ; [1955] HCA 64. 104. Senanayake v Cheng [1966] AC 63 at 83. 105. Spence v Crawford [1939] 3 All ER 271 at 288–9 per Lord Wright; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83.

[page 571]

Chapter 14 FINANCIAL SERVICES LICENSEES and THEIR CLIENTS Introduction Relationship Between Financial Services Licensees and Their Clients at General Law Terms of the contract between a financial services licensee and its client Financial services licensee’s duty to use reasonable care and skill Agency Fiduciary duties of financial services licensees Remedies for breach of fiduciary duty On-market Securities Transactions Nature of on-market securities transactions Incorporation of ASIC Market Integrity Rules into the contract between a financial services licensee and its client Broker’s right of indemnity Loss of right of indemnity Broker’s right to a lien Disclosure and Conduct of Business Requirements Disclosure and conduct of business requirements generally Obligation to provide a Financial Services Guide to retail clients When a Financial Services Guide must be given to the client Currency of information in a Financial Services Guide Content of a Financial Services Guide provided by financial services licensee

14.1 14.2 14.2 14.3 14.8 14.9 14.14 14.15 14.15 14.16

14.17 14.18 14.19 14.20 14.20 14.21 14.23 14.24 14.25



Content of a Financial Services Guide provided by authorised representative

14.26

[page 572]

Alteration to Financial Services Guide Supplementary Financial Services Guides Statement of Advice When a Statement of Advice must be given Content of Statement of Advice provided by financial services licensee Content of Statement of Advice provided by authorised representative Additional requirements when advice recommends replacement of one product with another Warnings in relation to general advice to retail clients Part 7.7 cannot be contracted out of Exemptions and modifications by ASIC Offences Civil liability Future of Financial Advice requirements Background Statutory best interests obligation Ongoing fee arrangements Anti-avoidance and civil penalty provisions Adviser remuneration Dealing with Clients’ Money and Property Dealing with clients’ money When Pt 7.8 Div 2 applies Treatment of loan moneys Powers of the court Dealing with other property Treatment of funds held by insurance brokers Accounting and Auditing Obligations of Financial Services

14.27 14.28 14.30 14.32 14.33 14.34 14.35 14.36 14.37 14.38 14.39 14.47 14.53 14.53 14.54 14.60 14.63 14.64 14.65 14.65 14.66 14.71 14.72 14.73 14.74 14.75

Licensees Obligation to keep financial records Audit requirements Other Conduct of Business Requirements Prohibition on unconscionable conduct Priority to clients’ orders Execution of instructions Allocation of financial products Disclosure of instructions Records of instructions to deal on licensed markets and foreign markets Dealings with non-licensees as principal Dealings involving employees of financial services licensees Prohibition on hawking of financial products Enforcement of conduct of business obligations

14.76 14.77 14.78 14.78 14.79 14.80 14.81 14.82 14.83 14.84 14.85 14.86 14.87 [page 573]

INTRODUCTION 14.1 This chapter deals with the legal incidents of the relationship between financial services licensees and their clients. We first consider the contractual relationship between financial services licensees and their clients (14.2), the duty to use reasonable care and skill (14.3–14.6) and the role of agency and fiduciary obligations (14.8–14.14). We then identify a number of specific principles applicable to on-market securities transactions: 14.15–14.19. We next review the disclosure requirements under the Corporations Act 2001 (Cth) (Corporations Act) Pt 7.7 (see 14.20–14.52) and the Future of Financial Advice requirements (14.53–14.64). We then consider requirements as to dealings with client property

(14.65–14.74) and accounting and audit obligations of financial service licensees under Corporations Act Pt 7.8 (14.75–14.77). Finally, we consider other conduct of business requirements under Corporations Act Pt 7.8, including the prohibition on unconscionable conduct (14.78); requirements as to priority to clients’ orders (14.79); execution of instructions (14.80); allocation of financial products (14.84); disclosure of instructions (14.85); dealings by financial services licensees as principal (14.84); dealings involving employees of financial services licensees (14.85); and the prohibition on ‘hawking’ of financial products (14.86). We also review the enforcement of conduct of business requirements: 14.87. These provisions, together with the licensing requirements addressed in Chapter 13, address the risks of conflict of interest and misconduct within the relationship between a licensee, particularly acting in the capacity of intermediary, and its client.

RELATIONSHIP BETWEEN FINANCIAL SERVICES LICENSEES AND THEIR CLIENTS AT GENERAL LAW Terms of the contract between a financial services licensee and its client 14.2 The scope of a financial services licensee’s duties to its client will depend upon the terms of the contract between the licensee and that client.1 If there is a written contract between a financial intermediary and its client, its terms may be supplemented by terms implied under general contractual principles.2 Any contractual obligation, beyond the express terms of the financial services licensee’s contract with its client, can only be implied if it is so obvious that it goes without saying; is necessary to give business efficacy to the contract between the financial services licensee and its client; is reasonable and equitable; is capable of clear expression; and does not contradict

[page 574] the express terms of the contract between the licensee and its client.3 Generally, if a stockbroker is simply instructed by its client to execute a particular transaction, it is unlikely that a contractual term would be implied requiring that stockbroker also to offer investment advice, since such a term is not necessary for the business efficacy of the contract. If there is no written contract or a partly written contract between a financial services licensee and its client, the terms governing any agreement between them may more readily be implied.4 On the other hand, the English courts have held that regulatory requirements will not generally be implied into the contractual relationship between an intermediary and its clients unless the parties expressly incorporate them.5 A financial services licensee may also be subject to duties and obligations arising from the nature of its particular role. For example, a stockbroker or futures broker is under an obligation strictly to carry out its client’s instructions, so long as it can lawfully do so. If a stockbroker or futures broker acts in accordance with its client’s instructions and its legal obligations, it is entitled to be indemnified by its client for liability arising out of the transaction. If a stockbroker or futures broker fails to do so, it may lose its entitlement to commission on a transaction undertaken on the client’s behalf, and may not be entitled to be indemnified by the client against liabilities which it incurred on behalf of the client. A failure to carry out the client’s instructions may also amount to a breach of the terms of the contract between the stockbroker or futures broker and its client, for which the broker may be held liable in damages. A stockbroker is also under an obligation, arising from the custom and usage of the exchange and from the broker’s capacity as agent for its client (see 14.8) to undertake a transaction at the best possible price for the client, within the limits set by its client’s instructions. The broker is under an obligation to purchase securities at a lower price than the price specified by its client, if it is able to do so.6 Conversely, a broker must sell securities at a higher price than that specified by its client if it is possible to do so. However, the broker’s authority to undertake the transaction lapses at the point at which the market price at which the securities are available for

purchase exceeds the buying price specified by the client. Similarly, the broker’s authority lapses if the price for which purchasers are prepared to buy the securities falls below the selling price specified by the client. A broker has no duty, and no general authority, to initiate transactions such as the sale or purchase of securities without its client’s instruction.7 At general law, a stockbroker may be under further duties to make a valid and enforceable contract; act honestly and observe the rules, usages and market [page 575] practices of the exchange; keep its client’s property separate from its own property; and keep proper accounts to enable its client’s property to be accurately recorded. A stockbroker or futures broker is not under a duty to give advice, but if it gives such advice it must do so honestly and with appropriate skill and ability.8 A stockbroker or futures broker has no positive duty to advise its client to close out its position if the broker considers that the client may suffer loss, and has no duty itself to close out its client’s position if the broker considers it would be in the client’s interest to do so.9 A futures broker is not obliged to close out a client’s position immediately after the client has failed to meet a margin call or repudiated its contractual obligations.10 A futures broker is, however, under an obligation to act in good faith in the manner of closing out a client’s position, although it will usually be able to satisfy that duty by closing out that position by an on-market dealing.11 In Berndale Securities Ltd v How Trading Pty Ltd (2010) 78 ACSR 218; [2010] VSC 216, the Supreme Court of Victoria held that a clearing participant was subject to an implied obligation of good faith in exercising its rights to liquidate a trader’s portfolio, which was breached by failing to act reasonably in liquidating that portfolio. An insurance broker is under an obligation to ensure that effective cover is arranged by the insurer.12 An insurance broker must either arrange insurance within a reasonable time, or advise the insured if it is unable to do so.13 An insurance broker must take reasonable care to ensure that the

cover which it arranges is appropriate and in accordance with the insured’s instructions.14

Financial services licensee’s duty to use reasonable care and skill 14.3 A financial services licensee may be held liable for loss suffered by its client under negligence principles. In order to succeed in a claim in negligence, that client must establish that the licensee owed the client a duty of care; that the licensee breached that duty of care; and that the client suffered loss or damage as a result of that breach, which was not too remote.

Duty of care in respect of advice 14.4 A financial services licensee which holds itself out as having special skill and expertise in offering advisory services to clients or potential clients may be held liable in negligence for losses resulting from a client’s reliance on advice given by that licensee without reasonable care. In Hedley Byrne & Co Ltd v Heller & Partners [page 576] Ltd [1964] AC 465 at 503, Lord Reid observed that a person who offered advice in circumstances where that person knew that his or her advice would be relied upon, and did so without a qualification that he or she accepted no responsibility for the advice, must be held to have accepted some responsibility for his or her answers being given carefully, or to have accepted a relationship with the inquirer which requires him or her to exercise such care as the circumstances require. In Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556; 42 ALJR 316 at 321; [1968] HCA 74, Barwick CJ expressed the view that liability for negligent misrepresentation could arise from the making of a representation by a person who possessed particular expertise in circumstances that the information could reasonably be acted upon by another person, who might

suffer financial loss as a result. Although the Privy Council took a narrower view in Mutual Life & Citizens Assurance Co Ltd v Evatt [1971] AC 793, the reasoning of Barwick CJ was adopted by the High Court in Shaddock v Parramatta City Council (1981) 150 CLR 225; [1981] HCA 59 and in San Sebastian Pty Ltd v Minister Administering Environmental and Planning Assessment Act 1979 (1986) 162 CLR 340; [1986] HCA 68. That principle has been formulated as having the effect that a duty to exercise reasonable care in making a statement or giving advice exists where the speaker realises, or ought to have realised, that the recipient of information or advice intended to act on that information or advice in connection with a matter of business or serious consequence, and it was reasonable in all the circumstances for the recipient to accept and rely on the speaker’s statement, having regard to the nature of its subject matter, the occasion on which the statement is made, the identity and relevant positions of the parties, including their knowledge and capacity to exercise judgment.15 Proof of the matters giving rise to a duty to exercise reasonable care in respect of the giving of advice is sufficient to establish an assumption of responsibility and relevant vulnerability on the part of the person who received the advice.16 Those factors are also sufficient, where expert information and advice is provided, to establish that a reasonable person would have foreseen that its conduct involved a risk of injury to a class including the plaintiff.17 To the extent that a financial services licensee’s liability for advice arises under Hedley Byrne above, it is generally able to avoid that liability by use of a disclaimer which makes it clear that it does not accept responsibility for any advice that it offers.

Duty of care in other circumstances 14.5 In circumstances that do not involve the giving of negligent advice, a duty of care may arise from a client’s inability to protect itself from the licensee’s failure to exercise reasonable care, either entirely or so as to place the consequences of loss on the licensee, and the licensee’s assumption of responsibility combined with known reliance.18 It is also relevant whether the imposition of liability for the losses [page 577]

of others would be disproportionate to the defendant’s conduct and culpability.19 A duty to exercise reasonable care in the provision of financial or advisory services can arise as a contractual duty by implication of law, concurrently with such a duty in negligence, and the terms of any contract between the licensee and its client and the general law and statutory context, including the allocation of responsibilities and the availability of remedies at general law and under statute, will be relevant to whether that duty of care arises.20 The existence of a professional relationship between a financial services licensee and its client, combined with the client’s reliance on the financial services licensee’s exercise of its professional skills and the foreseeability of economic loss to the client if the financial services licensee fails to exercise due care and skill, will generally be sufficient to give rise to a duty of care owed by a financial services licensee which offers investment advice to a client who may suffer economic loss by acting on that advice. The extent of responsibility assumed by the financial services licensee and of the client’s reliance on that licensee will generally determine the scope of its duty owed to the client.21 The duty owed by a stockbroker or futures broker will extend to using reasonable skill and care in carrying out instructions given to it, but does not extend further to require it to use reasonable skill and care ‘to ensure so far as possible that [the client is] protected from losses’.22 A financial services licensee that deals with a counterparty, particularly a sophisticated counterparty, is not obliged to explain the nature or effect of the proposed arrangement to the other party, but, if it does offer such an explanation or advice, that explanation or advice must fully, accurately and properly explain the proposed transaction and, if it comments as to the risks involved in a proposed transaction, it must present the advantages and disadvantages of the transaction in a balanced fashion.23 A financial services licensee may be under a duty to do more than simply perform the task defined by its instructions, if the circumstances give rise to a real and foreseeable risk of economic loss by the client.24 A financial services licensee may be obliged to warn a client of a material risk associated with a particular course of action, and a risk would be material if a reasonable person in the client’s position, if warned of the risk, would attach particular significance to it or if the financial services licensee is or should be aware that the particular client, if warned of the risk, would attach significance to it.25

[page 578] The English Courts have also had occasion to consider the scope of a duty of care and factors identified in English case law may also be relevant under Australian law. In particular, the English courts have held that an advisory duty is unlikely to arise in contract or tort in the absence of an express contractual duty, at least in respect of experienced and sophisticated investors, and that a lesser duty of care may arise where advice is of a limited character.26

Breach of a duty of care 14.6 Whether a financial services licensee has breached a duty of care owed to its client is a question of fact, which must be answered in a particular case by reference to the standard or measure of care which is reasonable in the circumstances. Although a financial services licensee is not required to have an extraordinary level of skill or the highest professional attainments, it must exercise due care, skill and diligence, and must bring to its task the competence which is usual among persons practising as financial services licensees and, if the financial services licensee has a special skill or competence, then the applicable standard of care is that of the ordinary skilled person exercising and professing to have that special skill.27 The extent of advice which a financial services licensee is required to offer its client, in exercising a reasonable degree of care and skill, will depend in part on the extent of the client’s existing understanding of the relevant financial products or market.28 Evidence of the practice of financial services licensees of the relevant class will not necessarily be determinative of the conduct necessary to discharge a financial services licensee’s obligations under the duty of care owed to its client, whether in tort or in contract, although it may provide a sound guide to what is reasonable.29 For example, a financial services licensee may be held liable in negligence if it offers advice as to a mix of investments which is inappropriate to the investment objectives identified by the client.30 A financial services licensee will be at greatest risk

[page 579] of liability for negligent investment advice in the case of an unsophisticated client.31 A claim for negligence against a stockbroker was successful in Ali v Hartley Poynton Ltd (2002) 20 ACLC 1006; [2002] VSC 113 in respect of discretionary trading by a broker on a client’s behalf. On the other hand, in Eric Preston Pty Ltd v Euroz Securities Ltd (2010) 77 ACSR 135; [2010] FCA 97, aff’d (2011) 274 ALR 705; [2011] FCAFC 11, the court held that the plaintiff had not established any duty of care extending to the provision of financial advice where a stockbroker’s retainer did not extend to giving such advice and no breach of duty had otherwise been established in respect of its functions as broker. It appears that the principle of res ipsa loquitur will not generally be available in an action against a financial services licensee alleging negligence in relation to the provision of advisory services, at least in relation to dealings on-market. In Stafford v Conti Commodity Services Ltd [1981] 1 All ER 691, the plaintiff brought an action in negligence against a commodities broker. Mocatta J treated the duties owed by a commodities broker as analogous to those owed by a stockbroker. His Honour noted that a broker was not under any duty to offer advice or recommendations to his or her client, but was under a duty to exercise reasonable care and skill if it did so. However, the fact that a client suffered loss as a result of relying on advice given by a broker did not in itself give rise to an inference of negligence on the part of the broker; his Honour noted that it would require evidence from expert brokers in relation to individual transactions to establish negligence in a volatile market. Although the market for listed securities is generally less volatile than the commodities market, a fall in the value of securities is not necessarily predictable by a person who exercises due care, skill and diligence. It follows that the principle of res ipsa loquitur should not be applied in an action against a financial services licensee for negligent investment advice, at least in relation to investments in securities, so as to require the financial services licensee to prove the absence of negligence. The common law duty to exercise reasonable care and skill owed by a financial services licensee to its client is reinforced by s 12ED(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC

Act), which implies a term in contracts for the supply of financial services to a consumer that those financial services will be rendered with due care and skill. If the purpose of seeking services or the result that is desired from those financial services is made known to the financial services licensee providing the services, then ASIC Act s 12ED(2) implies a warranty that those financial services will be reasonably fit for their purpose and of such a nature and quality that might reasonably be expected to achieve that result, unless the circumstances show that the consumer does not rely, or that it is unreasonable for it to rely, on the skill and judgment of the financial services provider. Such reliance may not be reasonable if the financial services provider qualifies or limits its advice.

Liability for misleading conduct 14.7 A client which suffers loss as a result of a misleading or deceptive representation made by a financial services licensee, or as a result of misleading or deceptive conduct [page 580] of that financial services licensee, may also have an action against that licensee under Corporations Act s 1041H or ASIC Act s 12DA: see 8.37ff.

Agency 14.8 A financial services licensee may act as its client’s agent in aspects of its business. For example, a stockbroker that is instructed to buy and sell shares on behalf of a client acts as agent for that client. A broker will not, of course, always act in an agency capacity. In particular, a relationship of agency would ordinarily not arise where a broker trades as counterparty to its client, for example, where it assembles a parcel of securities as principal which it then sells to a client or client as principal in a facilitation trade. The traditional function of a stockbroker, acting in an agency capacity, was described in Christopher Barker & Sons v IRC [1919] 2 KB 222 at 229, where Rowlatt J observed that:

It seems to me that what a stockbroker does is to buy and sell a commodity on the market. It is true he does not expect to have to pay for it himself or to be responsible ultimately to satisfy the contract himself, as he is a buyer and seller in the market for an undisclosed principal to whom he looks to indemnify him from liability … The stockbroker is remunerated by a commission which he receives from his principal, the person who takes the liability off his shoulders.

The scope of an agency relationship between a stockbroker and its client is modified by the fact that such a broker typically trades in a competitive market, where the price of the commodity is set by a large number of individual trades and where the stockbroker has limited ability to influence that price by negotiations with the other party to the transaction. In Jones v Canavan [1972] 2 NSWLR 236 at 245, Jacobs JA observed that: The limited function of the stock and sharebroker makes him an intermediary rather than a negotiating agent. He has the privilege of operating upon a very special kind of market where the commodity is in more or less large supply and the trends of price are governed by a conjunction of factors depending upon the actual buying and selling orders held by brokers. Although no doubt each broker on each order has an obligation to obtain the best price he can, the lowest for the buyer and the highest for the seller, he accomplishes this by nothing which could be described as a negotiation in the ordinary sense of an agent negotiating a sale or a purchase.

An insurance broker typically also acts as agent, either for the insurer or the insured. An insurance broker usually acts on behalf of the insured in arranging insurance or in settling a claim.32 An exception to that principle exists where a broker acts under a binder, which is an agreement with an insurer by which the broker is given authority to make certain decisions that would otherwise be made by [page 581] the insurer, usually including the authority to grant final cover and often extending to the settlement of claims. At general law, a client is not bound by, and is also unable to ratify, an unauthorised transaction undertaken by a broker if the broker did not disclose the client as its principal at the time of the transaction so as to hold the other broker or its client to the transaction; however, it appears that a client is entitled to ratify the contract in circumstances where the other party knew that the broker was acting as an agent, although it did

not know the identity of the particular client for which the broker was acting.33 The analysis of transactions undertaken by stockbrokers may be complicated by the fact that a broker may enter the one transaction on behalf of several clients. In that situation, it will be difficult to identify which of the broker’s clients is its principal in the transaction, until the point at which the broker allocates a parcel of securities to satisfy a particular client’s order.

Fiduciary duties of financial services licensees 14.9 The Australian and English authorities treat stockbrokers, futures brokers and insurance brokers, where they are acting as agent for their clients, as having fiduciary relationships with their clients. The nature of fiduciary obligations owed by a financial services licensee that was acting as agent for its client was considered in Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371; [1986] HCA 25. In that case, the appellant’s husband had placed money with a broking firm as a loan, after an employee of the firm advised him not to invest immediately in the stock market. The High Court had to consider s 58(1)(b) of the Securities Industry Act 1970 (NSW) and s 97(1)(b) of the Securities Industry Act 1975 (NSW), which restricted the availability of compensation from the fidelity fund of the Sydney Stock Exchange Ltd to persons who had suffered pecuniary loss incurred in connection with money entrusted to or received by a partner or employee of a broking firm or on behalf of another person, or by reason that the firm or a partner in the firm was a trustee of the money, where that loss resulted from a defalcation committed by partners or employees of the firm. The court held that the relationship of the appellant and the broking firm was that of debtor and creditor, and that no constructive trust arose in relation to the money deposited with the firm. Since the firm’s failure to repay the loan was not a defalcation, the appellant was unable to recover her loss from the fidelity fund. Gibbs CJ (with whom Wilson and Dawson JJ agreed) observed (at 377): Normally, the relation between a stockbroker and his client will be one of a fiduciary nature and such as to place on the broker an obligation to make to the client a full and accurate disclosure of the broker’s own interest in the transaction.

Brennan J (at 385) placed greater emphasis on the incidents of the dealings between the broker and its client, holding that a broker that holds itself out as having [page 582] expertise in advising as to investments, and which undertakes to give advice, stands in a fiduciary relationship to the person whom it advises. His Honour noted that, as a fiduciary, a broker was under a particularly demanding duty if it proposed to offer the client an investment in which it has a financial interest and, in that situation, was required to furnish the client with all relevant knowledge possessed by the broker, concealing nothing that might reasonably be regarded as relevant to the making of an investment decision; reveal the identity of the buyer or seller of the investment when that identity was relevant; give the best advice which the broker could give if it did not have, and a third party had, a financial interest in the investment offered to the client; reveal fully the broker’s financial interest; and ‘obtain for the client the best terms which the client would obtain from a third party if the adviser were to exercise due diligence on behalf of his client in such a transaction’. However, Brennan J’s description of the fiduciary duties of a financial adviser as including positive obligations conflicts with the view expressed by the majority in the High Court’s later decision in Breen v Williams (1996) 186 CLR 71; [1996] HCA 57, that fiduciary obligations are proscriptive (so that the fiduciary must not obtain any unauthorised benefit from the relationship and must not be in a position of conflict) rather than prescriptive and do not impose positive duties on the fiduciary to act in the interests of the person to whom the duty was owed. In Aequitas v Sparad No 100 Ltd (formerly Australian European Finance Corporation Ltd) (2001) 19 ACLC 1006; [2001] NSWSC 14, Austin J sought to reconcile the two views by treating the positive duties identified in Daly v Sydney Stock Exchange above as arising in that case due to implied terms of the contractual relationship between the parties rather than as being fiduciary in character.

Fiduciary obligations arising outside traditional categories 14.10 The relationship between a financial services licensee and its client may also be fiduciary in character, even where that licensee does not act as agent for its client. Such a relationship may be fiduciary in character if the financial services licensee undertakes or agrees to act for or on behalf of or in the interests of its client in the exercise of a power or discretion which will affect the interests of the client in either a legal or practical sense, so that the financial services licensee has a special opportunity to exercise that power or discretion to the detriment of its client, who is therefore vulnerable to abuse by the financial services licensee of its position.34 In John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [87], a unanimous High Court identified the ‘critical feature’ of fiduciary relationships as being that: … the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. From this power or discretion comes the duty to exercise it in the interests of the person to whom it is owed. [emphasis in original]

[page 583] In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6, the Full Court of the Federal Court (Finn, Stone and Perram JJ) similarly observed (at [177]) that a fiduciary duty may exist: [W]hen and insofar as that person has undertaken to perform such a function for, or has assumed such a responsibility to, another as would thereby reasonably entitle that other to expect that he or she will act in that other’s interest to the exclusion of his or her own or a third party’s interest …

Their Honours also noted (at [174]) that the relevant fiduciary duties were: … concerned with the setting of standards of conduct for persons in fiduciary positions. Its burden, put shortly, is with exacting disinterested and undivided loyalty from a fiduciary — hence, for example, its focus on conflicts between duty and undisclosed personal interest, conflicts between duty and duty and misuse of a fiduciary position for personal gain or benefit.

A fiduciary relationship may arise between a financial adviser and a

client where the adviser holds itself out as an expert on financial matters and undertakes to act in the client’s interests and not solely in its own interests.35 In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) above, the Federal Court of Australia considered the questions whether the relationship between an investment bank providing takeovers advice and a takeover bidder could be fiduciary in character, whether any fiduciary relationship had been excluded by contract and whether proprietary trading by the investment bank in the target’s shares, without the use of confidential information which was protected by an information barrier (or ‘chinese wall’) would have breached the no conflicts rule. Jacobson J reviewed (at [282]–[286]) the basis on which a fiduciary relationship would arise outside the traditional categories and observed (at [325]) that, apart from the terms of the mandate letter in that case, pre-contractual dealings between Citigroup as an adviser in respect of takeovers and its client would have pointed strongly towards the existence of a fiduciary relationship. His Honour noted (at [326]–[330]) that indicia of a fiduciary relationship in those dealings included that Citigroup was providing advice as to the wisdom and merits of the transaction; was using its financial acumen, judgment and expertise to further the client’s interests; had a close working relationship with the client and had emphasised its abilities and its commitment to the transaction in its pitch to be retained by the client; and the size of its fees. On the other hand, in Berndale Securities Ltd v How Trading Pty Ltd (2010) 78 ACSR 218; [2010] VSC 216, the Supreme Court of Victoria held that a clearing participant was not subject to fiduciary obligations in relation to the liquidation of a trader’s portfolio, on the basis that the power given to a clearing participant in the case of contractual default was intended to permit it to protect its own interests. [page 584] In Wingecarribee Shire Council v Lehman Bros Australia Ltd (in liq) (2012) 301 ALR 1; [2012] FCA 1028, a group of municipal councils brought representative proceedings against the defendant (formerly known

as Grange Securities Ltd (Grange)) in respect of the sale of synthetic collateralised debt obligations (SCDOs). In broad summary, the councils alleged that Grange had represented to them that the SCDOs were suitable investments within a conservative investment strategy, were prudent and capital-protected and complied with statutory requirements and the councils’ investment policies and were easily tradeable on an established secondary market. Rares J recognised (at [719]) that the central feature of the relationships between each council and Grange was a contract, either to buy or sell a particular financial product or, in the case of portfolio agreements with two councils, authorising Grange to undertake such sales and purchases on their behalf. Relevantly, the councils claimed that Grange acted in breach of fiduciary duty as an investment adviser or portfolio manager. His Honour observed (at [732]) that a fiduciary ‘such as a financial adviser’ will be under two proscriptive duties: the no conflict and no profit rule. His Honour did not there specifically distinguish between the fiduciary duty applicable in a traditional fiduciary relationship such as agency, and the ad hoc fiduciary duty which may arise in nontraditional arrangements. In Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200, Jagot J in turn dealt with claims and cross claims arising from the sale of complex structured financial products known as ‘Constant Proportion Debt Obligations’ (CPDOs). The defendants were Local Government Financial Services Pty Ltd (LGFS), an Australian financial services licensee that had acquired the CPDOs and onsold them to local councils; ABN Amro Bank NV (ABN Amro), an investment bank that had designed and distributed the products; and Standard & Poor’s (S&P), a credit rating agency that had been retained by ABN Amro to rate the products. The councils brought, among other things, claims for breach of fiduciary duty against LGFS. Jagot J held that a fiduciary relationship existed and that LGFS breached the prohibition on conflict of interest by reason of the undisclosed commercial pressures upon it to distribute the products in order restore the success of its business. That finding should arguably be treated as confined to an interest in the sale of the products which is out of the ordinary course, here because of the extent of the then pressures on LGFS’s business. On appeal in ABN Amro Bank NV v Bathurst Regional Council (2014) 309 ALR 445; [2014]

FCAFC 65, the Full Court of the Federal Court (Jacobson, Gilmour and Gordon JJ) largely dismissed an appeal from that decision. Caution should be exercised before a relationship between a financial services licensee and its client is too readily characterised as fiduciary, since that relationship arises in a business context in which customers may be expected to understand that financial services licensees are seeking to promote the sale of their financial products or financial services, and to expect honesty rather than a lack of self-interest in that context.36 By way of comparison, United States and Canadian authorities generally do not treat the relationship of a stockbroker or futures broker and its client as [page 585] fiduciary per se,37 but have held that fiduciary obligations may arise if the client is unsophisticated38 or the financial intermediary conducts a discretionary account on behalf of the client,39 or where the client relies on the intermediary’s expertise and judgment in entering the market or making trading decisions.40

Content of fiduciary obligations 14.11 Where the relationship between a financial services licensee and its client is fiduciary in character, then that licensee is obliged to avoid situations where there is a real and serious conflict between its interests and the interests of the client within the scope of its engagement, or between its duties owed to different clients.41 Thus, in Armstrong v Jackson [1917] 2 KB 822 at 824, McCardie J observed that, irrespective of whether a stockbroker sells at market price or acts without fraudulent intent, it will not be permitted ‘to place [itself] in a situation which, under ordinary circumstances, would tempt a man to do that which is not best for his principal’. In Hewson v Sydney Stock Exchange Ltd [1968] 2 NSWR 224 at 231, Street J criticised the conduct of a broker that placed itself in a position of competing with its client in relation to certain orders in carrying on a business as a share trader. His Honour noted that:

[page 586] The primary function of a stock broker is to advise clients and to act on their behalf in the purchase and sale of shares. He occupies a position which imposes on him certain obligations towards his client. This is recognised by the Stock Exchange itself, within whose articles and by-laws are provisions directed toward requiring proper standards of integrity to be observed by brokers. A fundamental principle of commercial morality will be gravely compromised if brokers are permitted to enter the market and to trade not for their clients but in competition with them.

Street J expressed a similar view in Bonds & Securities (Trading) Pty Ltd v Glomex Mines NL [1971] 1 NSWLR 879 at 891, where his Honour was critical of the conduct of a broking firm that acted as a broker for a purchaser of securities in circumstances where an employee of the firm had an interest in the company that was the seller of the securities. His Honour observed that: The occupation of share broking demands high standards of integrity. In carrying out his occupation a share broker acts, not for himself, but for his client. His remuneration is his brokerage, or commission. Clients, some with great, others with little, business acumen and ability to protect themselves, seek and act on his advice and permit him to handle their money and their shares. Those clients are entitled to expect from a broker not only competence, but also integrity and absence of conflicting personal interest. His position is one of trust and responsibility. By the recognition and pursuit of the high standards of their occupation, brokers have aspired to a status of an honourable profession. The price they must pay for this status is that they forswear or compromise of their integrity, and that they repudiate the creation of personal interests which could bring them into conflict with their duty to clients.

An insurance broker also must not put itself in a position where it undertakes obligations to the insurer that conflict with its obligations to the insured, without obtaining the fully informed consent of the insured.42

Restriction of scope of fiduciary duty 14.12 The scope of a financial services licensee’s fiduciary duty to its client may be restricted to coincide with any limits to the scope of the licensee’s engagement by its client.43 In particular, where a fiduciary relationship arises out of the terms of the contract between a financial services licensee and its client, the terms of that contract will determine the scope of the fiduciary’s obligations.44

[page 587] It is therefore necessary to take into account the nature of the obligations accepted by a financial services licensee in dealing with its client in determining the scope of the fiduciary duty owed by the licensee to the client. The extent of a stockbroker’s or futures broker’s duty may depend on whether the client depends on that broker for information about investment strategies and the performance of the market; whether the client typically acts on the broker’s recommendations; the number of dealings between the broker and the particular client; and the scope of the broker’s retainer. That retainer may be limited to executing trades in accordance with the client’s instructions, or it may extend to offering advice as to trading decisions or to operating a discretionary account on behalf of the client. By contrast, the scope of the broker’s fiduciary duty would be wider if a client regularly sought investment advice from the broker and typically acted on the broker’s recommendations. For example, in Eric Preston Pty Ltd v Euroz Securities Ltd (2010) 77 ACSR 135; [2010] FCA 97, aff’d (2011) 274 ALR 705; [2011] FCAFC 11, the court held that any fiduciary relationship between a stockbroker and its client must accommodate itself to the terms of the contract between the parties and, since it was not a term of the retainer in that case that the stockbroker would act as the client’s financial adviser, there could be no fiduciary obligation requiring it to do so. The court also held that, even if the client had established that it was a term of the retainer that the broker would act as its financial adviser, any fiduciary obligation owed by the broker would not give rise to positive duties of investigation and advice, since fiduciary obligations are proscriptive rather than prescriptive in nature: see 14.9. Similarly, American authorities suggest that the scope of a broker’s fiduciary duty to its client will be narrowed if the broker’s role is merely to undertake a purchase or sale of securities on market and the client does not rely on the broker’s advice.45 In that case, it may be that the broker’s duty would extend no further than to define the manner in which the trade is to be executed. That fiduciary duty will also be narrowed if the broker executes transactions for the account of a sophisticated investor which does not seek the broker’s advice or allow the broker to make trading decisions on its behalf.46

The scope of a fiduciary’s obligations may also be modified by market custom. In SCF Finance Co Ltd v Masri (No 2) [1986] 1 All ER 40, in the context of futures markets, Leggatt J held that the practice by which a futures broker traded for its own account at the same time as trading for its client as agent was well known and accepted in the futures industry, and did not involve a breach of the rule against conflict of interest by a futures broker.47 Similarly, the principle that an agent may not generally act for both parties in a transaction without their informed consent is modified by the usages of the stock exchange, which allow a broker to cross an order to buy and an order to sell securities at a particular price.48 That exception originates in the role of the broker as a market intermediary.49 Crossings are regulated by Ch 4 [page 588] of the ASIC Market Integrity Rules (Competition in Exchange Markets) (2011) and the Australian Securities Exchange (ASX) Operating Rules.

Contractual exclusion of fiduciary duty and ratification 14.13 The contract between a financial services licensee may also exclude a fiduciary relationship, although full and frank disclosure is likely to be required to achieve the client’s informed consent to the exclusion of such a duty in a pre-existing fiduciary relationship.50 A financial services licensee may also avoid breaching its fiduciary duty by obtaining its client’s ratification of the breach after full disclosure of the breach, either in anticipation or after the event.51 The contractual exclusion of a fiduciary duty by a financial intermediary was considered in Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) above. In that case Citigroup’s internal structure was typical of integrated financial intermediaries, in that its Corporate and Investment Bank division provided investment banking services to wholesale investors on the private side of an information barrier or Chinese wall (see 17.33); and it also undertook equities trading on its own behalf and for clients on the public side of the wall. ASIC alleged that Citigroup had breached a fiduciary duty

to a takeover bidder (Toll) by allowing its proprietary trading desk to continue trading in shares in the target (Patrick) after being mandated as adviser to Toll in the Patrick takeover. Jacobson J held that the mandate letter between Citigroup and Toll, which provided that Citigroup was engaged ‘as an independent contractor and not in any other capacity including as a fiduciary’, was sufficient to exclude a fiduciary duty in the circumstances, and Citigroup was not under an obligation to obtain Toll’s informed consent to that exclusion, at least in the absence of any allegation of a pre-existing fiduciary duty. His Honour also observed that informed consent to any conflict of interest arising from Citigroup’s proprietary trading would also have been implied from Toll’s knowledge of Citigroup’s structure and method of operation. Alternatively, the contract may authorise an act that would otherwise be a breach of fiduciary duty, so as to narrow the scope of that duty, or amount to informed consent or ratification. For example, in National Nominees Ltd v Agora Asset Management Pty Ltd (No 2) [2011] VSC 425, a fund manager’s determination to charge a withdrawal fee, which was permitted by the terms of the constitution of the relevant fund, did not breach the no conflict rule. That decision is perhaps best seen as involving a narrowing of the scope of the relevant duties by contract or an advance ratification of the relevant conduct. [page 589] In principle, a disclosure of matters in a financial services guide issued under ss 942B–942C of the Corporations Act (see 14.23–14.29) or a statement of advice issued under ss 947B–947C of the Corporations Act (see 14.30–14.35), if accepted by the relevant client, may give rise to fully informed consent to conduct that would otherwise amount to a breach of the conflict rule. However, there may be difficulties in achieving sufficient disclosure to give rise to a narrowing of the scope of the duty or informed consent to the relevant conduct, in the context of some forms of financial advice. There may also be practical limits to the exclusion of fiduciary duties (including the no conflict rule) in the context of providing financial advice to retail clients, particularly at the point the scope of the advice to

be given is determined, and compliance regimes directed only to the statutory obligations may not be sufficient to ensure that fiduciary obligations in equity are discharged.52 A financial services licensee must also have in place adequate arrangements for managing conflicts of interest that arise wholly, or partly, in its financial services business: s 912A(1)(aa); and see 13.21.

Remedies for breach of fiduciary duty 14.14 Breach of a fiduciary duty owed by a financial services licensee to its client may render voidable a contract between that licensee and its client. Breach of fiduciary duty may also prevent the financial services licensee from recovering commission on the transaction or require it to account to its client for any profit which it made from the breach of duty.53 Where a financial services licensee’s breach of fiduciary duty causes loss to its client, the client may recover equitable compensation for its loss.54 Equitable compensation will extend to the amount of any loss which the client would not have suffered in the absence of the financial services licensee’s breach of its fiduciary duty, and is not strictly limited by requirements of foreseeability and remoteness of damage.55 A defence of contributory negligence is not available in an action for equitable compensation, nor can a client’s responsibility for any loss that it has suffered properly be taken into account in determining the amount of the client’s loss that was fairly attributable to the financial services licensee’s breach of fiduciary duty.56 In appropriate circumstances, the existence of a fiduciary relationship between a financial services licensee and its client may also allow relief by way of the imposition of a constructive trust over the property involved in the breach of duty, allowing the client to follow or trace that property on the insolvency of that licensee, even if the licensee has mixed the client’s funds with its own funds.57 However, a client that operates a running account with a financial services licensee may be limited to [page 590]

proving as an unsecured creditor on the insolvency of that licensee, and not as a person for whom those funds are held in a fiduciary capacity.58 Where insufficient moneys are available to pay all proved claims on the insolvency of a financial services licensee, the court is authorised to direct apportionment of the moneys among the claimants in proportion to their proved claims: s 983E(1)(c); and see 14.72. Such an order may be made notwithstanding any rule of law or equity to the contrary. Accordingly, the court would be entitled to apportion the available funds among claimants, notwithstanding the rule in Clayton’s case.59

ON-MARKET SECURITIES TRANSACTIONS Nature of on-market securities transactions 14.15 We now turn to consider additional legal issues arising in respect of on-market securities transactions. The first step in an on-market securities transaction undertaken by a stockbroker is likely to be the placing of an order to buy securities by a buying client with the buying broker. A ‘market’ order requires the broker to execute the order promptly at the best available price. A ‘limit’ order requires the broker to buy at or below, or sell at or above, a stated limit price. The buying broker makes a contract with the selling broker by means of the ASX trading platform without either broker disclosing the identity of its client. Orders are automatically executed against bids or offers within parameters defined by the best bid and best offer, and trading occurs according to predetermined rules as to priority. The best bid on an order book is the current highest price at which a market participant is prepared to buy shares, representing the best price available to a seller on an immediate sale. The best offer is the current lowest price at which a market participant is willing to sell shares, being the best price available for immediate purchase. The difference between the best bid price and the best offer price is the spread. A passive order is placed at a price that will not trade immediately (for example, a sell order at a price higher than the best bid or a buy order at a price lower than the best offer) and will be displayed until traded or cancelled, but a trader may trade more aggressively by accepting the best offer or the best bid. If the buying broker

holds orders to purchase a particular security from several clients, the broker will generally need to allocate the securities acquired to the particular client trades: see 14.81. The buying and selling brokers will then send confirmations to their respective clients, that contain detail of the securities purchased or sold, the price and applicable brokerage charges. Under the contract between the buying broker and the buyer, the buyer is obliged to indemnify the buying broker for the purchase price of the securities. Under the contract between the selling broker and the seller, the seller is [page 591] obliged to deliver the securities so that the selling broker can in turn make timely delivery of the securities. According to the conventional analysis of a transaction by which a broker buys securities on a stock market for a client, there are four contracts involved in the transaction: 1.

the contract between the selling broker and the buying broker;

2.

the contract between the buying broker and the buyer;

3.

the contract between the selling broker and the seller; and

4.

the contract between the seller and the buyer.

The ‘four contracts’ analysis was implicitly adopted in Bell Group Ltd v The Herald and Weekly Times Ltd [1985] VR 613 at 617–18; (1985) 9 ACLR 697 where Kaye J observed that the consequences of a client giving instructions to a stockbroker for the purpose of buying or selling a security: … include the creation of two separate contracts. The first contract so created is one of agency between the client and his broker for the sale or purchase of a designated security, and which might properly be referred to as ‘the agency contract’. The second contract is one for the sale and purchase of the security, being made by the broker, in the performance of his agency contract, with a broker for the other contracting party, acting under a similar agency contract.

The ‘four contracts’ analysis was also adopted by the Supreme Court of

Victoria in R v Evans [1999] VSC 488, where McDonald J referred to Bell Group Ltd v The Herald & Weekly Times Ltd above and to the fifth edition of this work in support of that analysis. This analysis is complicated further by the novation of buying and selling contracts for transactions undertaken on the ASX to the clearing house, Australian Clearing House Pty Limited (ACH). That complication is not addressed here.

Incorporation of ASIC Market Integrity Rules into the contract between a financial services licensee and its client 14.16 Where a financial services licensee (for example, a stockbroker or futures broker) trades on-market on behalf of its client, the rules of the relevant market may be expressly incorporated into the contract between the intermediary and its client. For example, r 3.4.1 of the ASIC Market Integrity Rules (ASX Market) 2010 requires a market participant to send a confirmation to its client in respect of the purchase or sale of securities executed on behalf of that client, which must state, among other things, that it is issued subject to the market integrity rules, directions, decisions and requirements of ASX and the Clearing Rules and, where relevant, the Settlement Rules and the customs and usages of the market. The rules of the relevant market may also be incorporated into the contract between the intermediary and its client by implication or because they are usages of the relevant market.60 [page 592] Where a client instructs a stockbroker to buy or sell securities on a stock exchange, it is also an implied term of the agency contract between client and broker that the client will be bound by the business rules of that stock exchange to the extent that they establish the manner in which a contract for the sale and purchase of securities is formed upon the exchange and the incidents of such a contract: Bell Group Ltd v The Herald and Weekly Times Ltd above. In that case, Kaye J held that to give business efficacy to

a transaction between a stockbroker and its client, there could be implied into the contract a term that the client is bound by all the articles, rules and regulations of the exchange which prescribe the manner of formation of a contract for the sale and purchase of securities and that, in instructing the broker to conduct a transaction on the exchange, the client authorises that broker to conduct the transaction according to the rules and regulations of the exchange, thereby submitting himself or herself to those rules and regulations. Similarly, in Nevitts Ltd v Cooper (1988) 10 Qld Lawyer Reps 40, an agreement between a broker and its client relating to trading in options on the Sydney Stock Exchange imposed an obligation to be bound by the rules and regulations of the exchange. Boulton DCJ relied on Bell Group Ltd v Herald and Weekly Times Ltd above as authority that the agency contract between the broker and its client impliedly contained the relevant rules and regulations of the exchange, and observed that if the client impliedly bound itself to observe the relevant articles, rules and regulations of the exchange as part of the contract, it was a necessary corollary that the broker bound itself to do likewise. These decisions were followed in Tag Pacific Ltd v Bos Stockbroking Ltd (1989) 15 ACLR 337, where Cole J held that the former ASX Business Rules were incorporated into a contract between a broker and its client, since the standard form contract note had been issued by the broker in prior transactions with that client. Canadian courts have also held that a client who engages a broker to do business on a stock exchange does so subject to the rules and customs of the exchange.61 The customs and usages of the relevant exchange may also be incorporated into the contract between a market intermediary and its client as a matter of market custom, if those customs and usages are notorious, certain and reasonable. In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 236–8; [1986] HCA 14, the High Court held that the existence of a custom or usage is a question of fact. There must be evidence that the custom is notorious, although not necessarily universal, in the sense that it is so well known and accepted that everyone making a contract in the relevant market can reasonably be presumed to have imported that term into the contract. The custom cannot contravene the express terms of the agreement. A person may be bound by the custom although he or she was

not personally aware of it, since knowledge of the custom will be imputed to that person if the custom is sufficiently notorious. For example, a stockbroker’s right to cross orders, without seeking the specific consent of its client to do so, is incorporated into the relationship between a stockbroker and its client as a custom and usage of the exchange. In Jones v Canavan [page 593] [1972] 2 NSWLR 236, a buying client argued that a broker lacked authority to cross her order for the purchase of shares with an order for the sale of shares in the same company which had been placed with the same broker by another client. The buying client denied the existence of a usage in the stock market allowing orders to be crossed and also argued that, if the usage existed, it was unreasonable and would not bind the client. Jacobs JA concluded that the custom and usage which permitted a broker to cross orders without the specific consent of its client was reasonable and should be recognised by the court, and also that the custom of crossing transactions did not create any realistic prospect of a conflict of duty and interest, since prices at which shares were sold in the market depended upon the actual buying and selling orders held by brokers. In FAI Traders Insurance Co Ltd v ANZ McCaughan Securities Ltd (1990) 3 ACSR 279 at 306, Cole J observed that the incorporation of a custom into a contract between a stockbroker and its client required that ‘repetitive acts demonstrating the usage must be proved by instance or generality; the usage must be notorious; and it must be uniform and reasonable’.

Broker’s right of indemnity 14.17 At general law, a broker had an implied right of indemnity against its client for all reasonable expenses incurred by the broker.62 In W Noall & Son v Wan [1970] VR 683 at 684, Menhennitt J held that the broker’s right to indemnity extended to payments already made for shares purchased by a broker, and also to payments that the broker had not yet made but was liable to make in respect of such shares. His Honour treated

that right as a specific application of the principle that an agent has a right against its principal to be indemnified against losses and liabilities incurred in the course of the agency. In Shapowloff v Dunn (1981) 148 CLR 72; [1981] HCA 21, Stephen J held that a buying client was obliged to indemnify the buying broker against liabilities incurred by the broker on the client’s behalf, and that the buying client’s liability to indemnify the buying broker for the purchase price of shares arose on the date on which the client’s buying order was executed.

Loss of right of indemnity 14.18 The broker’s right of indemnity at general law is lost if the broker acts outside the bounds of the authority conferred upon it by its client.63 In North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68, the High Court held that a broker was unable to recover fees for advice given in the course of a transaction that involved a manipulation of the price of shares in connection with a takeover, in contravention of s 70 of the Securities Act 1970 (NSW): see 16.12. If the broker’s right to indemnity is lost, its client is entitled to recover any money paid to the broker in satisfaction of the right of indemnity, after allowing for any benefit obtained by the client.64 [page 594]

Broker’s right to a lien 14.19 A broker has a lien over its client’s securities, in support of the client’s obligation to pay the purchase price of the securities, and is entitled to decline to deliver the securities until the purchase price for the securities has been paid. In W Noall & Son v Wan above at 685, Menhennitt J characterised such a lien as being a general lien over securities held by the broker for any amount for which the client was indebted to the broker. His Honour treated the existence of that lien as an application of the principle of agency law which allows an agent a general or possessory lien on goods

and chattels of its principal in respect of all lawful claims it may have, in its capacity of agent, against its principal. In Mercantile Credits Ltd v Jarden Morgan Australia Ltd (1990) 1 ACSR 805, Kelly SPJ (with whom Carter J agreed) held that the broker’s lien allowed the broker to retain all scrip in respect of securities which he had purchased on behalf of the client until all its claims against the client were satisfied. His Honour held that the broker’s lien over shares purchased on behalf of its client arose on the making of the purchase contracts for those shares, notwithstanding that those shares did not come into the broker’s possession until a later date. Derrington J agreed that a broker was entitled to a common law lien in the nature of a general lien, which was applicable to all shares held by the broker whether paid for or not. His Honour observed that the broker’s client was bound from the time the broker was engaged to buy the shares by any lien which might subsequently arise under the engagement, and that a financier which provided finance for particular shares would take its security subject to the broker’s lien in respect of other shares purchased for the client, if the broker properly continued to buy shares for its client and to provide credit for the immediate payment of their purchase price on the legitimate expectation that its general lien would extend to the shares that had been paid for. On the facts, the court held that the broker’s equitable lien over shares purchased on behalf of its client took priority, as a prior equitable interest, over a later equitable charge over the shares in favour of a lender of which the broker did not have notice.

DISCLOSURE AND CONDUCT OF BUSINESS REQUIREMENTS Disclosure and conduct of business requirements generally 14.20 Part 7.7 of the Corporations Act imposes disclosure obligations on financial services licensees who provide services to retail clients. A licensee and its authorised representative is required to give a Financial Services Guide (FSG) to a retail client: see 14.21. A licensee and its authorised

representative must also give a Statement of Advice (SoA) to a retail client setting out the basis on which the advice was given and information about any conflict of interest (including commissions, fees or benefits) in respect of that advice: see 14.30. Where a retail client is given advice to replace an existing financial product, the licensee must advise its client of the potential loss of any benefits and costs associated with replacing the financial product: see 14.35. A licensee must also warn a retail client if advice is provided on incomplete or inaccurate information and must provide a warning where general advice is provided to retail clients: see 14.36. [page 595] Part 7.8 imposes accounting requirements and requirements as to the treatment of clients’ property on financial services licensees; it also imposes conduct of business requirements, including requirements as to priority of client orders and principal trading on financial services licensees: see 14.79ff. Conduct of business requirements are also imposed on stockbrokers and futures brokers under the ASIC Market Integrity Rules and the Operating Rules for the ASX and ASX 24 (formerly Sydney Futures Exchange (SFE)) markets. The imposition of disclosure and conduct of business requirements on financial services licensees reflects the fundamental policy objectives underlying the regulation of such licensees. Conduct of business requirements are intended to ensure that financial services licensees deal fairly with their clients and to reduce the risk that a financial services licensee which has an element of discretion in its dealings with clients might prefer its own interest to those of its clients, or might misappropriate funds or financial products held on behalf of its client.65 Conduct of business regulation ‘serves the objectives of protecting clients (investors) from harm, preserving and enhancing the integrity and orderly operation of financial markets, and otherwise serving the public interest’.66 The risk of conflict of interest and misconduct is exacerbated in the retail market (see also 14.53), and that risk is heightened in Australian

since retail investors are participating at an increased level in the financial markets, by direct and indirect investment, by reason of the compulsory superannuation regime established by the Superannuation Guarantee (Administration) Act 1992 (Cth).67 Since investments in financial products involve complex judgments, including about anticipated returns and levels of investment risk in relation to particular products and an investor’s portfolio generally, a retail client of a financial services licensee is not necessarily competent to assess whether advice given by that licensee or dealings undertaken on the client’s behalf are in the client’s best interests or are consistent with industry standards. Disclosure requirements are also less effective in dealings with retail clients, who may not fully read and understand disclosure documents; may have difficulty in assessing the suitability and quality of financial products before or after purchase, where they will purchase such products infrequently; and because of issues identified by behavioural finance including over-confidence and bias that affects investor decision-making. Failures in financial advice can have significant adverse consequences for retail clients, including loss of savings for retirement, financial distress and a potential inability to recover the client’s financial position, particularly for retired persons or those with limited income.68 [page 596] It has also been recognised, since the global financial crisis, that liquidity and solvency risks associated with intermediaries’ dealing activities, excessive risk-taking and misaligned incentives may create wider risks as to the stability of the financial system, and that earlier assumptions as to the capacity or commitment of wholesale clients to understand or assess the risk involved in investment in complex financial products are also open to question.69

Obligation to provide a Financial Services Guide to retail clients 14.21 A financial services licensee, and an authorised representative of

such a licensee, must give an FSG to a retail client to which it provides financial services: ss 941A, 941B. The term ‘retail client’ is defined in s 761G: see 6.17ff and 13.30. Section 940C sets out the means by which an FSG, Supplementary Financial Services Guide (SFSG), SoA or other information or statement may be given to a client. A financial services licensee does not contravene this requirement, or a requirement to provide an SoA or particular information or a particular statement to a client if it has not had a reasonable opportunity to give the client the document, information or statement by the time it is required to do so under Pt 7.7: s 940B. ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure, October 2013 sets out ASIC’s policy in relation to, among other things, the provision of financial product advice and the preparation and provision of an FSG. A contravention of s 941A is a strict liability offence (within s 6.1 of the Criminal Code) punishable by a fine of up to $5500, and also an ordinary liability offence (which uses the default Criminal Code elements) punishable by a fine of up to $11,000 and imprisonment of up to two years. For a body corporate the maximum fine is five times that amount: s 1312.

Exceptions to the requirement to provide a Financial Services Guide 14.22 The requirement to provide an FSG to a retail client is subject to certain exceptions set out in s 941C: Earlier FSG provided: An FSG need not be provided to a client who has already received an earlier FSG, which contains all of the information which the new FSG would be required to contain: s 941C(1). Issuer of financial products: An FSG also need not be provided if the providing entity is an issuer of financial products and is dealing only in its own financial products: s 941C(2). In that case, the relevant information will be contained in a Product Disclosure Statement (PDS) provided by the product issuer to the client under Pt 7.9. However, an FSG must be provided to the client if an authorised representative of the product issuer or another financial services

licensee or its authorised representative deals in the relevant financial product, or if the product issuer provides financial services such as advice. This exception also does not apply to dealings in derivatives able to be traded in a licensed market, and a licensee who trades [page 597] in such derivatives on behalf of a retail client will be required to provide a PDS, on the basis that it is treated as the product issuer. Responsible entity of a managed investment scheme: An FSG also need not be provided if the providing entity is the responsible entity of a registered managed investment scheme and the financial service consists only of its operation of that scheme: s 941C(3). In this situation, relevant information will again be contained in the PDS required under Pt 7.9 for each financial product offered as part of the scheme. Again, an FSG would be required if the responsible entity provided other services such as advice. Exception for general advice provided in a public forum: An FSG need not be provided if the providing entity gives general advice provided in a public forum in the manner prescribed by regulations: s 941C(4) and reg 7.7.02(2); see also Australian Securities and Investments Commission v Online Investors Advantage Inc (2005) 194 FLR 449; 23 ACLC 1929; [2005] QSC 324. The term ‘general advice’ is defined in s 766B(4) as financial product advice that is not ‘personal advice’. The term ‘personal advice’ is defined in s 766B(3) as financial product advice that is given or directed to a person (including by electronic means) in circumstances where the provider of the advice has considered one or more of that person’s objectives, financial situation and needs, or a reasonable person might expect the provider to have considered those matters; and see 14.29. For example, advice presented at a seminar or in a newspaper or radio program will generally not constitute personal advice, at least in circumstances that the people to whom the advice is directed do not have similar objectives, financial situations and needs.70 Where general advice is provided in such a forum, the providing entity must

provide the client, before the advice is provided, with the information required to be included in an FSG under s 942B(2)(a), (e) and (f) or s 942C(2)(a), (c), (f) and (g). A person who provides general advice to retail clients must also provide a warning of the kind required under s 949A: see 14.36. Exception for basic deposit products: A providing entity also does not need to give an FSG to a client if the financial service is a dealing in or otherwise relates to a basic deposit product; a facility for making non-cash payments (see s 763D) that is related to a basic deposit product; or a financial product of a kind prescribed by regulations: s 941C(6). In that case, the client must be given the information that would be required to be in the FSG by s 942B(2)(a) and (h) or s 942C(2)(a) and (i); namely, the name and contact details of the provider and information about the internal and external dispute resolution procedures available to deal with complaints by persons to whom it provides financial services, and about how those procedures may be accessed: s 941C(7). A providing entity also does not need to give an FSG to the client in circumstances specified in the regulations: s 941C(8) and reg 7.7.02.71 [page 598]

When a Financial Services Guide must be given to the client 14.23 An FSG must be provided to the client as soon as practicable after it becomes apparent to the providing entity that a financial service will be or is likely to be provided to the client, and in any event before that financial service is provided: s 941D(1). For example, an FSG might be provided to a client when it attends its first meeting with a financial services licensee, or as soon as possible after contact is made between the financial services licensee and its client by telephone, facsimile or other means. If a series of financial services are provided to a client, an FSG only needs to be given when those services are first provided unless the

information in it ceases to be accurate, in which case an updated FSG or Supplementary FSG must be given to the client: see 14.28. If a client expressly instructs that it requires the financial service to be provided immediately or by a specified time, and it is not reasonably practicable to give the FSG to the client before the service is provided, then the providing entity is required to give a statement of specified information to the client: s 941D(2). That statement must contain the information required to be in the FSG by s 942B(2)(e), (f) and (i) or s 942(f), (g) and (i), including information about remuneration or other benefits and information about any associations or relationships with product issuers capable of creating conflicts of interest, and such other information which would be required to be in the FSG as is particularly relevant to the financial service to be provided: s 941D(3). The service provider must then provide the client with an FSG within five days after giving the statement, or sooner if practicable: s 941D(4).

Currency of information in a Financial Services Guide 14.24 The information contained in an FSG must be up-to-date at the time it is given to the client: s 941E. If the FSG is given to the client before a financial service is provided, then a later change in circumstances has the result that the FSG does not contain the information it would be required to contain if given to a person immediately after that change, and the fact that the FSG does not contain the up-to-date information is materially adverse from the point of view of a reasonable person deciding, as a retail client, whether to proceed to be provided with the financial service; then, before the service is provided, the providing entity must give the client another FSG which contains up-to-date information or a Supplementary FSG (see 14.28) that updates the information in the FSG: s 941F. [page 599]

Content of a Financial Services Guide provided by financial services licensee

14.25 The content of an FSG provided to a retail client by a financial services licensee is specified in s 942B. The FSG must include specified statements and information; namely: the name and contact details of the financial services licensee, and any special instructions about how the client may provide instructions to the financial services licensee: s 942B(2)(a)–(b); information about the kinds of financial services that the financial services licensee is authorised to provide under its licence, and the kinds of financial products to which those services relate: s 942B(2) (c). It is not clear whether an FSG must list all financial services of the providing entity, or whether a providing entity may issue a number of different FSGs covering particular financial services or a number of financial services; information about who the financial services licensee acts for when providing the relevant services: s 942B(2)(d). This provision might specify, for example, whether a licensee acts for the insured or the insurer in arranging policy cover. In the case of a licensee that is authorised to use the term ‘insurance broker’ under s 923B (see 13.63), the FSG would typically include information that the licensee acts on the client’s behalf; information about the remuneration (including commission) or other benefits which the financial services licensee, a related body corporate, or any of the licensee’s or a related body corporate’s directors or employees, or their associates will receive in respect of, or which is attributable to, the provision of the relevant services: s 942B(2)(e); information about any associations or relationships between the financial services licensee or any related body corporate and the issuers of any financial products which might reasonably be expected to be capable of influencing the financial services licensee in providing the relevant services: s 942B(2)(f); in the case of a financial services licensee that provides marketrelated advice (within the scope of s 946B(1)), a statement to the effect that the client may request a record of that advice and particulars of how the client may request such a record. Any limitation in those particulars on the time within which the client

may request such a record must be consistent with any applicable requirements in the regulations or, if there are no such applicable requirements, must be such as to allow the client a reasonable opportunity to request a record of the advice: s 942B(2)(g). If an FSG includes a statement to this effect, and the client is provided with execution-related advice to which that statement applies and has not already been provided with a record of that advice, the licensee must comply with a request for a record of that advice: s 942B(8); information about the dispute resolution system that covers complaints by persons to whom the financial services licensee provides financial services, and about how that system may be accessed: s 942B(2)(h); [page 600] if the financial services licensee acts under a binder (see 13.40) in providing any of the services, a statement that identifies the services provided under the binder, states that they are provided under a binder and explains the significance of the services being provided under a binder: s 942B(2)(i); if the financial services licensee is a participant in a licensed market or a licensed clearing and settlement facility, a statement to that effect: s 942B(2)(j); and any other statements or information required by the regulations: s 942B(2)(k). Regulation 7.7.03 requires specified statements as to the purpose and content of the FSG and, if applicable, a Statement of Advice and Product Disclosure Document which may also be received by the client. Regulations 7.7.03A–7.7.04 require an FSG to also include statements as to the kind of compensation arrangements which the licensee has in place and as to any remuneration, commission and benefits which any other person will receive for referring clients to the licensee. ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure,

October 2013 sets out ASIC’s views as to disclosure of information about remuneration, commissions and other benefits in an FSG.72 The level of detail of information about a matter which is required to be included in the FSG is that which a person would reasonably require for the purpose of making a decision whether to acquire financial services from the financial services licensee as a retail client: s 942B(3). An FSG must be dated, with the date on which it was prepared or its preparation was completed: s 942B(5). An FSG may also contain information other than that required under s 942B: s 942B(6).

Content of a Financial Services Guide provided by authorised representative 14.26 The content of an FSG provided by an authorised representative is specified in s 942C. An FSG provided by an authorised representative must contain the information required to be included in an FSG provided by a financial services licensee, and must also: include a statement setting out the name and contact details of the authorising licensee, or of each of the authorising licensees, and a statement that the representative is the authorised representative of that licensee or those licensees: s 942C(2)(c); disclose remuneration (including commission) or other benefits that the authorised representative or its employer receives or is to receive in respect of providing those services; and any remuneration or other benefits that the authorising licensee or licensees, any of its or their employees or directors, or any associates of those persons receives or is to receive in respect of the provision of those services: s 942C(2) (f); and include information about any associations or relationships between the authorised representative or its employer and the issuers of any financial [page 601]

products, as well as information about any associations or relationships between the authorising licensee or licensees and its or their related body corporates and the issuers of any financial products, which might reasonably be expected to be capable of influencing the authorised representative in providing those services: s 942C(2)(g).

Alteration to a Financial Services Guide 14.27 A financial services licensee or authorised representative must not give a person an FSG that has been altered after the date specified in the FSG, unless the alteration was made by or with the authority of the financial services licensee to which the FSG relates, if it was issued by that licensee; or the financial services licensees who authorised its distribution, if it was issued by an authorised representative; and, in the case of a material alteration, the date of the FSG has been changed to the date on which the alteration was made: s 942E.

Supplementary Financial Services Guides 14.28 An SFSG may be used to correct a misleading or deceptive statement in the FSG; or correct an omission from the FSG of information it is required to contain; or update the information contained in the FSG: s 943A(1). An authorised representative of a financial services licensee may not give an SFSG to a person unless that licensee has authorised its distribution by the authorised representative: s 943A(2). If a person is given an FSG, and at the same time or later given an SFSG that supplements the FSG, then the FSG is taken to include the information and statements contained in the SFSG from when that SFSG is given to that person: s 943D. If a providing entity would otherwise be required to provide a new FSG to a person who has already been given an earlier FSG, which contains some but not all of the information that the new FSG is required to contain, then the provider may instead give that client an SFSG that contains the additional information instead of giving the client a new FSG: s 943E. A financial services licensee or authorised representative must not give a person an SFSG that has been altered after the date specified in

the SFSG, unless the alteration was made by or with the authority of the financial services licensee to which the SFSG relates, if it was issued by that licensee; or the financial services licensee who authorised its distribution if it was issued by an authorised representative; and, in the case of a material alteration, the date the SFSG has been changed to the date on which the alteration was made: s 943F.

What is personal advice? 14.29 The term ‘retail client’ is defined in s 761G: see 13.30. The term ‘personal advice’ is defined in s 766B(3) as financial product advice that is given or directed to a person (including by electronic means) in circumstances where the provider of the advice has considered one or more of that person’s objectives, financial situation and needs, or a reasonable person might expect the provider to have considered those matters. ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure, October 2013 identifies a number of factors relevant to determining whether advice is personal advice or general advice, including: whether the adviser had offered to provide personal advice; [page 602] whether the adviser clearly explained whether he or she was providing personal advice or general advice to the client; whether the client requested personal advice; whether the adviser requested information about the client’s relevant personal circumstances; whether the advice was directed toward a named client or readily identifiable client or clients; whether the advice contained or was accompanied by a general advice warning under s 949A(2) (see 14.36); and whether the advice appeared on its face to be tailored to the client’s relevant personal circumstances.

Whether advice constitutes ‘personal advice’ is a question of fact. For example, a research report directed to a limited number of customers and carrying a notation from a representative that ‘the attached may be of particular interest’ may constitute personal advice, particularly if there is a long-term relationship between the client and the representative and the client has a history of following the representative’s recommendations. This requirement does not apply unless personal advice is provided to the client, and it is open to a service provider to decline to provide such advice. The trend to providing brokerage services to retail clients on an ‘execution only’ basis will also limit the circumstances in which personal advice is provided to such clients, and thereby limit the scope for application of suitability requirements in dealing with such clients.

Statement of Advice 14.30 Where a financial services licensee or representative provides personal advice to a retail client, it must give that client an SoA: s 946A(1). That SoA may either be the means by which the advice is provided or a separate record of that advice: s 946A(2). The terms ‘retail client’ and ‘personal advice’ are discussed in 13.30 and 14.29 respectively. A contravention of s 946A is a strict liability offence (within s 6.1 of the Criminal Code) punishable by a fine of up to $5500, and also an ordinary liability offence (which uses the default Criminal Code elements) punishable by a fine of up to $11,000 and imprisonment of up to two years. For a body corporate the maximum fine is five times that amount: s 1312. ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure, October 2013 sets out ASIC’s policy in relation to, among other things, preparing and providing an SoA.

Exceptions to the requirement to provide a Statement of Advice 14.31 The requirement to provide an SoA to a retail client is subject to certain exceptions set out in ss 946AA–946B: Exception for advice as to small amounts: A licensee or representative does not need to provide an SoA to a client when providing personal advice in relation to a financial investment in an amount not exceeding that prescribed in the regulations, initially

$15,000: s 946AA, which was introduced by the Corporations Legislation (Simpler Regulatory System) Act 2007 (Cth). That exception is not available for specified products and advice in relation to [page 603] investments below that monetary amount must be documented by a record of advice. The Explanatory Memorandum to the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 noted that, prior to that amendment, the cost of producing an SoA was not economic for an adviser where a client was seeking a minor piece of advice or had a relatively small amount of money to invest; and many advisers were choosing not to provide personal advice to such clients, with the result that such clients would not be able to access advice that might benefit them.73 Exception for further market-related advice: A further exception to the requirement to provide an SoA applies in relation to advice (‘further market-related advice’) given by a participant in a licensed market or its representative in specified circumstances: s 946B(1). In that situation, the client must be given the information which would be required to be in an SoA by s 947B(2)(d)–(e) or s 947C(2)(e)–(f), as the case may be, relating to disclosure of remuneration (including commission) or other benefits that the providing entity and its associates74 will receive in connection with the advice and of interests which may affect the recommendation: s 946B(3). The licensee or representative must keep a record of the advice and, in doing so, comply with any applicable requirements under the regulations: s 946B(3A). Regulation 7.7.09(1) provides that a record of further market-related advice must set out the advice given to the client or brief particulars of the recommendations made to the client by the providing entity, including the basis on which the recommendations were made. That record may be kept in any form, including by a tape recording. The licensee or representative must keep that record for seven years after that advice is provided: reg 7.7.09(3).

Exception for basic deposit products: A further exception to the requirement to provide an SoA applies if the advice relates to a basic deposit product; a facility for making non-cash payments that is related to a basic deposit product; or a financial product of a kind prescribed by regulations: s 946B(5). Travellers’ cheques are prescribed so as to fall within that exclusion: reg 7.7.10. In that case, if the client is not given an SoA, the client must instead be provided, when the advice is provided or as soon as practicable after it is provided, with the information which would be required to be in an SoA by s 947B(2)(d)–(e) or s 947C(2)(e)–(f), as the case may be, relating to disclosure of remuneration (including commission) or other benefits that the providing entity and its associates will receive in connection with the advice, and of interests which may affect the recommendation: s 946B(6). [page 604] Exception for advice not involving recommendation or remuneration: A financial services licensee is also not required to provide an SoA if it provides personal advice which does not recommend a product and the adviser does not receive any remuneration from providing that advice, and personal advice which satisfies that requirement is required to be documented in a record of advice and provided to the client upon request: s 946B(7).

When a Statement of Advice must be given 14.32 If an SoA is not itself the means by which advice is provided to the client, then that SoA must be given to the client when the advice is provided or as soon as practicable after it is provided and, in any event, before the financial services licensee or representative provides the client with any further financial service which arises out of or is connected with that advice: s 946C(1). For example, if advice involves a recommendation as to the purchase of a financial product, the provider of the advice would be required to give the SoA to the client before selling the client the

product. If the SoA is not given to the client when the advice is provided, the licensee or representative must inform the client of the information which would be required to be in an SoA by s 947B(2)(d)–(e) or s 947C(2) (e)–(f), as the case may be, relating to disclosure of remuneration (including commission) or other benefits that the providing entity and its associates will receive in connection with the advice, and of interests which may affect the recommendation: s 946C(2). If the advice includes a recommendation to replace existing financial products, the licensee or representative must also inform the client of the information which would be required to be in an SoA by s 947D if applicable (see 14.35); namely, details of any charges the client will incur in replacing those products, the pecuniary or other benefits that the client may lose as a result of replacing those products, and any other significant consequences for the client of replacing those products: s 946C(2). There is an exception to the requirement as to the timing of giving the SoA if the client expressly instructs the financial services licensee or representative that it requires a further financial service that arises out of, or is connected with, the advice to be provided immediately or by a specified time; and it is not reasonably practicable to give the SoA to the client before that further service is provided as instructed. In that case, the financial services licensee or representative must give the SoA to the client within five business days after providing that further service, or sooner if practicable; or, if that further service is providing a financial product to a person and s 1019B (cooling-off period) will apply to that person’s acquisition of the product, before the start of that cooling-off period, or sooner if practicable: s 946C(3).

Content of Statement of Advice provided by financial services licensee 14.33 Section 947B sets out the required content of an SoA provided by a financial services licensee. That SoA must include statements and information as follows: a statement setting out the advice: s 947B(2)(a);

[page 605] information about the basis on which the advice is or was given: s 947B(2)(b). The explanation of the basis on which the advice is given should deal with the consideration given to the client’s objectives, financial situation and needs and how the advice will meet those objectives, financial situation and needs, and should illustrate how the recommendation made to the client addresses the request for advice originally made by the client taking account of subsequent investigations and considerations on the part of the service provider;75 a statement setting out the name and contact details of the providing entity: s 947B(2)(c); information about any remuneration (including commission) or other benefits, that the providing entity, a related body corporate, a director or employee of the providing entity or a related body corporate or an associate76 of any of them is to receive that might reasonably be expected to be or have been capable of influencing the providing entity in providing the advice: s 947B(2)(d); information about any other interests, whether pecuniary or not and whether direct or indirect, of the providing entity or of any associate of the providing entity; and any associations or relationships between the providing entity or any associate of the providing entity and the issuers of any financial products, that might reasonably expect to be or have been capable of influencing the providing entity in providing the advice: s 947B(2)(e); a statement setting out any warning required to be given to the client in relation to the advice under s 961H (see 14.58); and any other information required by the regulations: s 947B(2)(g). Regulation 7.7.11 provides that an SoA given by a financial services licensee must include information about all remuneration (including commission) and other benefits that a person has received or is to receive from referring another person to the licensee. The purpose of disclosure of information as to commissions, fees, benefits or advantages at the stage of the SoA is to help the consumer

identify any potential influences on or biases associated with the giving of advice and to identify any potential conflicts of interest that the adviser may have in recommending a specific product. Wherever possible, disclosure of any benefit or advantage should be in dollar amounts, otherwise percentage amounts or a written description must be provided, and benefits disclosed must include commission, soft dollar remuneration, sales quotas and volume bonuses. The requirement for disclosure of interests in the SoA reinforces the obligation of a financial services licensee to disclose its interest [page 606] in a transaction, which arise at general law where a financial services licensee is in a fiduciary relationship with its client: see 14.9. It will be a question of fact whether a particular interest of the financial services provider might reasonably be expected to be or have been capable of influencing it in providing advice in a particular case. A financial services provider would generally not need to disclose a holding of shares in a company whose shares are recommended to an investor, unless a significant volume of trading is likely to be generated through the recommendation.77 On the other hand, a financial services provider may need to disclose an interest in the issue of securities by a corporation if an associated company is a lender to the corporation, and the issue of securities would result in an increase in the shareholder’s funds of the company and improve its solvency and liquidity. It is likely that disclosure would also be required of a significant holding of securities held by the financial services provider or an associate as principal. A financial services provider that offered securities to its clients would also need to disclose an interest in those securities by way of its obligation to subscribe for the securities under an underwriting agreement. By contrast with former Corporations Act ss 849 and 850, it appears that there is no express recognition of an exception to the obligation to disclose if the adviser was not aware and could not reasonably have been expected to have been aware of an interest at the time an SoA was issued, or if the adviser did not become aware of that information because of the

operation of an information barrier or Chinese wall (see 17.32) or other internal procedures to prevent communication of that information to it. It is arguable that information that is held behind a Chinese wall could not reasonably be expected to influence a financial services licensee in providing advice, so as to fall within the disclosure obligation under s 947B(2)(e). Nonetheless, the absence of an express recognition of an information barrier or Chinese wall is unfortunate and may give rise to real uncertainty. The level of detail of the information that is required to be included in the SoA is that which a person would reasonably require for the purpose of deciding whether to act on the advice as a retail client: s 947B(3). That section provides only limited assistance in determining the extent of information that is required to be included in the SoA, particularly in relation to the disclosure of any interests that might affect that advice. Arguably, the requirement that the information to be included in the SoA ‘is such as a person would reasonably require for the purpose of deciding whether to act on the advice as a retail client’ requires disclosure of the fact that the person making the recommendation will receive a particular benefit in connection with the making of the recommendation or a dealing by the client in financial products as a result of the recommendation, or of the nature of the interest of the financial services provider or associate which may reasonably be expected to be capable of influencing the recommendation. For example, such disclosure might be to the effect that the financial services provider has an interest in the securities that are the subject matter of the recommendation by virtue of certain holdings in those securities or the beneficial ownership of those securities by it or a company associated with [page 607] it. The SoA must also include any information required by s 947D (see 14.35) in circumstances that the advice recommended the replacement of one product with another and may also include other information: s 947B(5). Although the obligation to provide an SoA and the consequential

disclosure requirements only apply to personal advice to a retail client, general advice would be subject to an adviser’s obligation at general law fully to disclose any material conflicts of interest of the adviser (or an associate) that may adversely affect that advice.

Content of Statement of Advice provided by authorised representative 14.34 Where advice is given by an authorised representative, the SoA must include the information required to be included in an SoA given by a financial services licensee, and must also include a statement setting out: the name and contact details of the authorising licensee or licensees and a statement that the representative is the authorised representative of that licensee or licensees: s 947C(2)(d); information about the remuneration (including commission) or other benefits that the representative, an employee of the representative, the authorising licensee or licensees, an employee or director of the authorising licensee or licensees or any associate of those persons is to receive that might reasonably be expected to be or have been capable of influencing the representative in providing the licence: s 947C(2)(e); and information about any other interests of the representative, its employees, the authorising licensee or licensees or their associates, and any associations or relationships between the representative, its employees, the authorising licensee or licensees or their associates and the issuers of any financial products, that might reasonably be expected to be or have been capable of influencing the authorised representative in providing the advice: s 947C(2)(f). The level of detail of information required in an SoA given by a representative is that which a person would reasonably require for the purpose of making a decision whether to act on the advice provided as a retail client: s 947C(3). The proportionate liability provisions introduced by the Corporations Act do not apply to a contravention of s 947C.78

Additional requirements when advice recommends replacement of one product with another 14.35 Additional information is required to be included in the SoA where advice is, or includes, a recommendation that the client dispose of or reduce its interest in all or part of a particular financial product and instead acquire all or part of, or increase its interest in, another financial product: s 947D(1). In that case, the SoA must include information as to any charges the client will or may incur in respect of that disposal, [page 608] reduction, acquisition or increase, and any pecuniary or other benefits that the client will or may lose (temporarily or otherwise) as a result of taking the recommended action, to the extent that the information is known to or could reasonably be found out by the financial services licensee or representative: s 947D(2)(a). That SoA must also include information as to any other significant consequences for the client of taking the recommended action that the licensee or representative knows or ought reasonably to know, are likely, and any other information required by the regulations: s 947D(2)(b)–(c). If that licensee or representative knows or is reckless as to whether the client will or may incur such charges, lose such benefits or whether there will or may be such consequences, but does not know and cannot reasonably find out what those charges, losses or consequences are or will be, then the SoA must include a statement to the effect that there will or may be such charges, losses or consequences but the licensee or representative does not know what they are: s 947D(3). The requirement for disclosure of this information is intended to limit the potential for ‘churning’ by financial services licensees.79 The term ‘churning’ refers to the practice of a dealer generating transactions in a client’s account that are excessive in amount and in number, having regard to the customer’s resources and investment objectives, in order to increase its commission income.80 The profitability of trading to the client is not necessarily increased and may well be decreased by an increase in the

number of transactions undertaken on the client’s account. Under Australian law, the practice of churning could involve a breach of retainer; a breach of fiduciary duty; a breach of the statutory best interests duty under s 961B where personal advice is provided to a retail client (see 14.54); or a contravention of s 1041H or ASIC Act s 12DA, prohibiting misleading and deceptive conduct in relation to dealings in financial products: see 8.37ff. By way of comparison, under United States law, the churning of a customer’s account may amount to a breach of r 10b-5 made under the Securities Exchange Act on the basis that the dealer is guilty of a material failure to disclose in connection with the purchase or sale of securities, if it does not inform the customer that trading activity in the customer’s account is excessive in the light of the customer’s financial circumstances and investment objectives. In Mihara v Dean Witter & Co 619 F 2d 814 at 821 (9th Cir 1980), the court held that a claim for churning would be established if the plaintiff showed that trading in the account was excessive having regard to his or her investment objectives; the broker exercised control over trading in the account; and the broker acted with the intent to defraud or with wilful and reckless disregard for the interests of the client. A broker’s control of a client’s account for the purposes of a churning action may be established under United States law not only by the broker’s express discretionary authority to make trading decisions, but also by the relationship between the customer and the broker, even if [page 609] the client is involved in approving individual transactions.81 The United States cases hold that ‘de facto’ control of the client’s account can be established if the client relies, as a matter of course, on a broker’s recommendation. In determining whether such control exists, the United States courts have looked to whether the broker rather than the client typically initiates trades in the account; whether the client exercises independent judgment as to trading decisions, for example, by rejecting the broker’s recommendations from time to time; and the level of the client’s knowledge and experience in the securities market.82

To determine whether the number of transactions in a client’s account is excessive, it would be necessary to take into account the character of the particular account, the trading needs of the client for whom the account was operated and whether there was a disparity between the turnover in that account and normal trading patterns for similar accounts. That conclusion will partly depend on the investment objectives of the particular client, since a higher level of trading would be expected in an account operated for a client whose investment objectives were speculative. Other evidence that may suggest the existence of churning includes a particularly high volume of commission earned on a client’s account by comparison with other accounts managed by the same broking firm or by other brokers and the ratio between the commission earned by the broker and the size of the account.83

Warnings in relation to general advice to retail clients 14.36 Where a financial services licensee, or authorised representative of a financial services licensee or licensees provides general advice (see 14.22, 14.29) to a retail client (as defined in s 761G: see 13.30) it must give a specified warning to the effect that the advice has been prepared without taking account of the client’s objectives, financial situation and needs; because of that, the client should, before acting on that advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and, if the advice relates to the acquisition or possible acquisition of a particular financial product, the client should obtain a PDS relating to the product and consider that statement before making any decision about whether to acquire the product: s 949A(2). That warning must be given to the client at the same time and by the same means as the advice is provided: s 949A(3). A providing entity which is giving general advice in relation to a financial product for which a PDS is not required under Pt 7.9 does not have to give a general advice warning: reg 7.7.14. There are also exemptions from the requirement to give such a warning made by class order.84 A contravention of s 949A(2) is an offence.

[page 610] A representative has a defence in any proceedings for an offence based on s 949A (but not in civil proceedings) if the licensee had provided the representative with information or instructions about the requirements to be complied with in relation to the giving of personal advice; the representative’s failure to comply with s 949A occurred because the representative was acting in reliance on that information or those instructions; and the representative’s reliance on that information or those instructions was reasonable: s 949A(4). A financial services licensee is required to take reasonable steps to ensure that its authorised representatives comply with the requirement to give a warning under s 949A(2): s 949A(5).

Part 7.7 cannot be contracted out of 14.37 Section 951A prevents a financial services licensee or representative contracting out of Pt 7.7. A condition of a contract for the acquisition of a financial product or the provision of a financial service is void if it provides that a party to the contract is required or bound to waive compliance with any requirement of Pt 7.7 or the regulations for the purposes of that Part, or is taken to have notice of any contract, document or matter which is not specifically referred to in an FSG, SoA or other document given to that party.

Exemptions and modifications by ASIC 14.38 ASIC may exempt a person or class of persons from all or specified provisions of Pt 7.7; may exempt a financial product or class of financial products from all or specified provisions of the Part; or declare that Pt 7.7 applies in relation to a person or financial product, or a class of persons or financial products, as if specified provisions of the Part were omitted, modified or varied as specified in the declaration: s 951B(1). An exemption may apply unconditionally or may be subject to specified conditions: s 951B(3).

Offences 14.39 Part 7.7 Div 7 sets out detailed (and very complex) provisions relating to offences under Pt 7.7. A number of these provisions adopt a structure of: imposing liability on a financial services licensee or authorised representative for a contravention of the relevant provision; providing a defence for an authorised representative who has acted in reliance on information provided by its authorising licensee; imposing an obligation on the authorising licensee to take reasonable steps to ensure that the authorised representative complied with the particular requirements; and providing a defence to the licensee if it took reasonable steps to do so. These offences include those considered in 14.40–14.46 below. [page 611]

Failing to give a disclosure document or statement 14.40 A person commits an offence if it is required by Pt 7.7 to give an FSG, SFSG, SoA or information or statement (‘disclosure document or statement’) to another person, and does not give anything purporting to be the required disclosure document or statement to that person by the time it is required to do so: s 952C(1). An offence under s 952C(1) is an offence of strict liability, within s 6.1 of the Criminal Code. A failure to provide a disclosure document or statement is also an ordinary offence under s 952C(3). An authorised representative has a defence to proceedings for an offence based on s 952C(1) or s 952C(3) if the licensee had provided the representative with information or instructions about the giving of disclosure documents or statements; the representative’s failure to give the required disclosure document or statement occurred because the representative was acting in reliance on that information or those instructions; and the representative’s reliance on that information or those instructions was reasonable: s 952C(4).

Giving a disclosure document or statement knowing it to be defective 14.41 A financial services licensee also commits an offence if it gives another person a disclosure document or statement which is required under Pt 7.7, or gives or makes available to another person an FSG (see 14.21) or SFSG (see 14.28), reckless as to whether the other person will or may rely on the information in it; and knows that the disclosure document or statement is defective: s 952D(1). The circumstances in which a disclosure document or statement is ‘defective’, for the purposes of s 952D(1)–(2), are specified in s 952B. A disclosure document or statement will only be treated as defective for these purposes if a misleading or deceptive statement in that disclosure document or statement, or an omission of material required to be included in it, is or would be materially adverse from the point of view of a reasonable person considering whether to proceed to be provided with the financial service concerned. A contravention of s 952D(1) is an offence. An authorised representative of a financial services licensee commits an offence if it gives a person a disclosure document or statement in circumstances in which it is required to be given to that person under Pt 7.7, or gives or makes available to a person an FSG or SFSG, reckless as to whether the person will or may rely on the information in it; and the representative knows that the disclosure document or statement is defective: s 952D(2). A financial services licensee or an authorised representative will only contravene this provision if it had actual knowledge that the relevant disclosure document or statement was defective.

Giving a defective disclosure document or statement, whether or not known to be defective 14.42 A financial services licensee also commits an offence if it gives a disclosure document or statement required to be given under Pt 7.7 to another person, or gives or makes available to another person an FSG or SFSG, reckless as to whether the person will or may rely on the information in it, and the disclosure document or statement is defective: s 952E(1). This section differs from s 952D(1) in that it does not require knowledge that the disclosure document or statements is defective.

[page 612] For the purposes of that offence, strict liability applies to the physical element of the offence; namely, whether the disclosure document or statement is defective: s 952E(2). A contravention of s 952E(1) is an offence. An authorised representative commits an offence if it gives an SoA or information or a statement required by specified sections and the disclosure document or statement is defective: s 952E(3). Again, for the purposes of that offence, strict liability applies to the physical element of the defence; namely, whether the disclosure document or statement is defective: s 952E(4). In proceedings against a licensee or representative for an offence based on s 952E(1) or (3), it is a defence if that licensee or representative took reasonable steps to ensure that the disclosure document or statement would not be defective: s 952E(5). It appears that the defence of ‘reasonable steps’ is intended to be less demanding than the due diligence defence previously contained in s 731.85 In proceedings against a representative for an offence based on s 952E(3), it is also a defence if the disclosure document or statement was provided to the representative by a financial services licensee for whom it was, at that time, an authorised representative, or was defective because of information or an omission from information provided to the representative by that licensee: s 952E(6). A representative will therefore not be liable for information prepared by the licensee and included in such a disclosure document or statement.

Financial services licensee knowingly providing defective disclosure material to an authorised representative 14.43 As noted above, an authorised representative is not liable in relation to an FSG or SFSG, or in relation to a defective disclosure document or statement or information for inclusion in it, which was provided to it by a financial services licensee. Instead, the licensee is made liable for that defect. A financial services licensee commits an offence if: it provides a disclosure document or statement (including an FSG, SFSG or SoA) to an authorised representative of the licensee and

knows that the disclosure document or statement is defective: s 952F(2); it provides information to an authorised representative and knows that, if the information is included by the representative in a disclosure document or statement, the disclosure document or statement concerned will be defective: s 952F(3); or it provides information to an authorised representative; the licensee knows that information is only some of the information relating to a matter or matters that a disclosure document or statement concerned is required to contain; and the licensee is reckless as to whether the representative will or may prepare the disclosure statement or statement on the basis that the information is all the information relating to the matter or matters that the disclosure document or statement is required to contain: s 952F(4). [page 613]

Providing defective disclosure material to an authorised representative, whether or not known to be defective 14.44 Section 952G deals with the situation where a disclosure document or statement is defective or the inclusion of information provided by the licensee would make it defective, but this was not necessarily known to the licensee. A financial services licensee commits an offence if it provides a disclosure document or statement to an authorised representative of the licensee and the disclosure document or statement is defective, other than in respect of material required to be in the document or statement only because the representative is also the authorised representative of another financial services licensee: s 952G(2). For the purposes of that offence, strict liability applies to the physical element of the offence; namely, whether the disclosure document or statement is defective: s 952G(3). The exclusion of liability for material required to be included where a representative is also the authorised representative of another financial services licensee has the consequence that, if an authorised representative

acts for a number of licensees which authorise an FSG, other licensees will not be liable for defective information in an FSG which relates to only one of those licensees, unless they had actual knowledge that information was defective so that s 952F applied. A financial services licensee also commits an offence if: it provides information to an authorised representative; the authorised representative includes the information in the disclosure document or statement concerned; and the disclosure document or statement is defective because it includes that information (whether or not it is also defective for some other reasons): s 952G(4)). For the purposes of that offence, strict liability applies to the physical element of the offence; namely, whether the disclosure document or statement is defective: s 952(G)(5); or it provides information to an authorised representative, which is only some of the information relating to the matter or matters that the disclosure document concerned is required to contain; the representative prepares the disclosure document or statement on the basis that the information is all the information relating to that matter which the disclosure document or statement is required to contain; and the disclosure document or statement is defective because it includes only that information about that matter or matters (whether or not it is also defective for some other reasons): s 952G(6). Again, strict liability applies to the physical element of the offence under s 952G(6); namely, whether the disclosure document or statement is defective: s 952G(7). In proceedings against a licensee for an offence based on s 952G(2), (4) and (6) respectively, it is a defence if the licensee took reasonable steps to ensure that the disclosure document or statement would not be defective; that the information the licensee provided would not be such as to make the disclosure document or statement defective; or that the information it provided about the matter or matters would be all the information about the matter or matters that the disclosure document or statement would be required to contain: s 952G(8)–(10). [page 614]

Failing to ensure authorised representative gives disclosure document or statement as required 14.45 A financial services licensee commits an offence if it does not take reasonable steps to ensure that an authorised representative complies with its obligations under Pt 7.7 to give a disclosure document or statement as and when required; or does not take reasonable steps to ensure that an authorised representative does not, in purported compliance with its obligations under that Part, give a disclosure document or statement that is defective: s 952H. A contravention of s 952H is an offence.

Other offences 14.46 It is also an offence for a financial licensee to give an FSG or SFSG which is incorrectly labelled or dated, or combined with a PDS in a single document, or give an SoA which is incorrectly labelled or combined with an FSG or a PDS in a single document (ss 952I–952J); for an authorised representative to give an FSG or SFSG if the licensee has not authorised its distribution (s 952K); for a licensee to fail to give its authorised representative a direction to cease distributing an FSG or SFSG, or only distribute it with a supplementary or replacement document, after it is aware that it is defective (s 952L); or to give a client an FSG or SFSG which has unauthorised alterations: s 952M.

Civil liability 14.47 Section 953B sets out a complex regime for the imposition of civil liability in respect of certain contraventions of Pt 7.7. The relevant contraventions, including the issue of a defective disclosure document or statement, or a financial services licensee’s failure to undertake an adequate investigation prior to making a recommendation, or the making of a recommendation which is unsuitable in the light of the client’s needs and objectives, would increase the risk that an investment decision made by its client would be unsuitable.86 The imposition of civil liability on a financial services licensee in respect of a defective disclosure document or statement or in respect of a recommendation made without a reasonable basis is also consistent with

the duty of such a licensee or representative to exercise reasonable care and skill. The imposition of civil liability may also be supported on grounds of economic efficiency. A client who seeks a financial services licensee’s recommendation as to a financial transaction presumably wishes to utilise that licensee’s expertise to assist in identifying and acquiring financial products that are suitable in the light of the client’s objectives and his or her preferred level of financial risk. That objective is not met if a financial services licensee or representative recommends financial products that involve an excessive risk, if that risk could have been reduced by recommending different financial products or by recommending a diversification of the client’s investment. The fact that compensation is available to a client who suffers loss as a result of relying on a defective disclosure document or statement or an inappropriate recommendation [page 615] made by a financial services licensee or representative reduces the need for monitoring of such recommendations by the client, and thereby preserves the benefit of the relationship between the licensee or representative and the client.87

When does s 953B apply? 14.48 Section 953B applies where: a person is required by Pt 7.7 to give another person (‘client’) an FSG, SFSG, SoA or information or a statement (‘required disclosure document or statement’); and does not give the client anything purporting to be the required disclosure document or statement by the time he or she is required to do so; a person gives another person (‘client’) an FSG, SFSG, SoA or information or a statement (‘disclosure document or statement’) that is defective in circumstances in which a disclosure document or statement is required by Pt 7.7 to be given to the client. The term ‘defective’ is defined in s 953A(1) and, by contrast with the definition in s 952B in respect of criminal liability, is not limited to the situation where a statement or omission is materially adverse

from the point of view of a reasonable person considering whether to proceed to be provided with the financial service concerned; or a financial services licensee gives, or makes available to, another person (‘client’) an FSG or SFSG that is defective, reckless as to whether the client will or may rely on information in it; or a person contravenes s 949A (obligation to warn client in relation to general advice) or s 949B (disclosure requirements imposed by regulations).

Who is liable under s 953B? 14.49 Where s 953B applies, and a person suffers loss or damage because the client was not given the disclosure document or statement it should have been given, or because the disclosure document or statement the client was given was defective, or because of a contravention of ss 949A or s 949B, then that person may recover the amount of the loss or damage by action against the liable person, as defined in s 953B(3)–(3A), whether or not that person or anyone else has been convicted of an offence in respect of that matter: s 953B(2). The liable persons are specified as follows: if the person who contravened the relevant requirement is a financial services licensee, that licensee is the liable person, subject to s 953B(4) (s 953B(3)(a)); if the person who contravened the relevant requirement is an authorised representative of only one financial services licensee, then that financial services licensee is the liable person (s 953B(3)(b)); if the person who contravened the relevant requirement is an authorised representative of more than one financial services licensee, then the licensee [page 616] which is responsible for that person’s conduct under s 917C or, if two or more of those licensees are jointly and severally responsible for that person’s conduct under s 917C, each of those licensees (s 953B(3)). For the purposes of attributing liability where the relevant

person is the authorised representative of more than one financial services licensee, then s 917C is taken to apply, despite s 917F; and s 917D (exception if lack of authority is disclosed to client) is taken not to apply (s 953B(3A)); and if liability arises because: (1) a person gives a disclosure document or statement that is defective to a client; (2) an alteration was made to the disclosure document or statement before it was given to the client, and that alteration made the disclosure document or statement defective, or more defective than it would otherwise have been; and (3) that alteration was not made by, or with the authority of the licensee, then, so far as a person has suffered loss or damage because the disclosure document or statement was defective because of the alteration, the person who made the alteration rather than the licensee is the liable person (s 953B(4)).

What loss is recoverable? 14.50 As noted above, where s 953B applies, a person who has suffered loss or damage because of the relevant contravention may recover the amount of the loss or damage by action against the specified persons. Any increase in the risk profile of the client’s investments as a result of a defective disclosure document or statement or a financial services licensee’s recommendation to its client should be taken into account in assessing the amount of that loss or damage. For example, an unsuitable recommendation may have the result that the client’s investment has a higher risk level than was appropriate having regard to the client’s investment objectives and financial circumstances. In that case, it is arguable that damages should be calculated by comparing the performance of the investments which the financial services licensee or representative recommended to the client with the performance of investments having an appropriate level of risk in the light of the client’s investment objectives and circumstances. The amount of damages recovered by the client would then depend on the extent to which investments which would have been appropriate, in the light of the client’s investment objectives and financial circumstances, would have produced a better result than the investments recommended by the financial services licensee or representative.

Time limits and defences to an action under s 953B 14.51 An action to recover loss or damage under s 953B(2) may be begun at any time within six years after the cause of action arose: s 953B(5). A person is not liable under s 953B(2) in respect of the defective disclosure document or statement, if the person took reasonable steps to ensure that the disclosure document or statement would not be defective: s 953B(6).

Other orders which the court can make 14.52 In a civil action to recover loss or damage under s 953B(2), a court may, in addition to awarding loss or damage under that section, and if it thinks it necessary in order to do justice between the parties, make an order declaring void a contract [page 617] entered into by the client referred to in s 953B(2) for or relating to a financial product or a financial service and, if it makes such an order, make such other order or orders as it thinks are necessary or desirable because of that order: s 953C(1). Without limiting the power to make ancillary orders, such an order may include an order for the return of money paid by a person, and/or an order for payment of an amount of interest specified in, or calculated in accordance with, the order: s 953C(2).

FUTURE OF FINANCIAL ADVICE REQUIREMENTS Background 14.53 The genesis of the Future of Financial Advice requirements was, generally, an increasing recognition of regulatory issues in respect of financial services to retail clients (see 14.20) and, specifically, the Report of the Parliamentary Joint Committee on Corporations and Financial

Services, Inquiry into Financial Products and Services in Australia, November 2009. The Australian retail financial services market has grown substantially, primarily as a result of compulsory superannuation requirements under the Superannuation Guarantee (Administration) Act 1992 (Cth) and also as a result of increased direct retail shareholdings following the privatisation of government entities and mutuals.88 However, there are issues as to the level of financial literacy among Australian investors, and there is evidence that the capacity of many retail investors to understand financial information, and the risk involved in investment decisions, remains relatively limited.89 Retail investors also suffered significant losses on the failure of several entities providing products and services to the retail sector, including Westpoint (property development), Opus Prime (securities lending) and Storm Financial (financial advice). The Report of the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia observed that disclosure had not been effective to address conflicts of interest and recommended that the Corporations Act be amended to ‘explicitly include a fiduciary duty for financial advisers operating under an AFSL [Australian financial services licence], requiring them to place their clients’ interests ahead of their own’.90 The report also recommended that the Commonwealth Government ‘consult with and support industry in developing the most appropriate mechanism by which to cease payments from product manufacturers to financial advisers’.91 The Corporations Amendment (Future of Financial Advice) Act 2012 introduced the best interests obligation for financial advisers, the requirement for client [page 618] agreement to ongoing advice fees, and changes to ASIC’s licensing and banning powers. The Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 introduced further prohibitions on (1) conflicted remuneration (including product commissions) where licensees or their representatives provide financial product advice to retail

clients; (2) volume-based shelf-space fees from funds managers to platform operators; and (3) a ban on asset-based fees on geared investments.

Statutory best interests obligation 14.54 Pt 7.7A Div 2 requires financial advisers to take reasonable steps to act in the best interests of their retail clients and to place the clients’ interests ahead of their own when providing advice to retail clients. This requirement applies directly to the individual who provides the advice (‘provider’) whereas the suitability requirement under former s 945A was imposed upon licensees or their authorised representatives. Pt 7.7A Div 2 applies in relation to the provision of personal advice as defined in s 766B (see 14.29) to a person as a retail client (as defined in s 761G): s 961. The provider of advice and his or her client may not contract out of the application of that Part: s 960A. The obligations imposed on a provider under Pt 7.7A Div 2 apply in addition to any obligations on the provider under the general law: s 960B.

Best interests duty under s 961B(1) 14.55 A provider of personal advice to a retail client is required to act in the best interests of the client when giving the advice: s 961B(1). This requirement is distinct from general law fiduciary duties (see 14.9) which do not require positive conduct on the part of the fiduciary but require the fiduciary to comply with the prohibition on undisclosed profit and the ‘no conflict’ rule, and overlaps with the ‘efficiently, honestly and fairly’ obligation under s 912A(1)(a): see 13.18. The intent of this provision is that meeting the client’s objectives, financial situation and needs must be the paramount consideration when providing financial advice to retail clients.92 ASIC has expressed the view that compliance with this duty requires an adviser to ensure that, within the subject matter of the advice, the advice addresses issues that must be considered so as to meet the client’s objectives, financial situation and needs, including the client’s tolerance for risk; any change in the scope of the advice is consistent with the client’s objectives, financial situation and needs; those objectives, financial situation and needs are identified through inquiries or otherwise;

and the advice provider provides advice that is not product–specific, including advice to do nothing, or provides such advice together with product specific advice, where that would better suit the client’s objectives, financial situation and needs.93 Other statutory provisions that require a person to have regard to the ‘best interests’ of another provide some assistance as to the content of the ‘best interests’ duty. For example, Corporations Act s 601FC(1)(c) requires a responsible entity, in exercising its powers and carrying out its duties, to ‘act in the best interests of [page 619] the members and, if there is a conflict between the members’ interests and its own interests, give priority to the members’ interests’. A broadly comparable covenant is implied in the rules of superannuation entities under the Superannuation Industry (Supervision) Act 1993 (Cth) s 52(2)(c) which requires that entity to ensure that its duties and powers are ‘performed and exercised in the best interests of the beneficiaries’. The case law regarding that section suggests that the ‘best interests’ duty is directed to the process by which an adviser provides advice, rather than to the outcome of that advice, and does not give rise to liability for advice that is given with the best interests of the client in mind but ultimately has an adverse outcome.94

Specified steps in s 961B(2) 14.56 The statutory bests interests duty under s 961B(1) will also be affected, and to some extent displaced, by s 961B(2) so far as taking the steps specified in s 961B(2) is treated as compliance with the ‘best interests’ duty specified in s 961B(1). Section 961B(2) specifies steps that a provider must take in acting in the client’s best interests. These steps are directed to the process of providing advice, and reflect ‘the notion that good processes will improve the quality of advice that is provided’ and are intended to set out the minimum required to establish that a provider has acted in the best interests of the client.95

The steps set out in s 961B(2) are, first, identifying the objectives, financial situation and needs of the client disclosed in the client’s instructions: s 961B(2)(a). An adviser may need to make further inquiries and exercise judgment in determining the client’s objectives, financial situation and needs, if those are not clear or understood by the client.96 The second specified step is identifying the subject matter of the advice requested by the client and the objectives, financial situation and needs of the client that would reasonably be considered as relevant to advice as to that subject matter (referred to as ‘the client’s relevant circumstances’): s 961B(2)(b). Relevant matters include a client’s instructions, the reason the client is seeking advice, the outcomes which the client seeks to achieve and the amount which the client is willing to pay for advice, and relevant circumstances include complexity of advice, the level of the client’s [page 620] financial literacy and the client’s risk profile.97 This step may be simpler or more demanding depending on the complexity of the client’s needs and objectives, and this requirement is intended to accommodate the provision of limited or ‘scaled’ advice dealing with a single issue as well as wider advice.98 The third specified step is making reasonable inquiries to obtain complete and accurate information if it is ‘reasonably apparent’ (as defined in s 961C) that the information initially provided by the client is incomplete or inaccurate: s 961B(2)(c). The fourth step is declining to give advice if the adviser does not have the expertise to give advice on the requested subject matter: s 961B(2)(d). The fifth step is, if, considering the subject matter of the advice, it would be reasonable to consider recommending a financial product, conducting a reasonable investigation into specified matters and assessing the information gathered: s 961B(2)(e). This requirement is not intended to require an investigation of every available product, and requires the provider to scope their product selection based on the client’s needs and

objectives and to ‘exercise professional judgement to determine whether this requires going beyond the provider’s approved product list’.99 The sixth step is basing all judgments in advising the client on the client’s objectives, financial situation and needs: s 961B(2)(f). This requirement is intended as an explicit statement of the principle that the client’s objectives, financial situation and needs must be the paramount consideration when advising a retail client.100 This requirement is not expressly limited to the objectives, financial situations and needs that the client disclosed to the provider. The seventh step is taking any other step that would reasonably be regarded as in the client’s best interests (as defined in s 961E), given the client’s relevant circumstances (as defined in s 961B(2)(b)): s 961B(2)(g). This provision requires a provider to take any additional step ‘necessary to demonstrate that it has acted in the best interests of the client’ and requires that the adviser ‘did anything else that it would reasonably be regarded as being in the best interests of the client to do’, and applies an ‘objective standard based on the client’s relevant circumstances, the provider’s relevant expertise and the subject matter of the advice sought’.101 This requirement potentially expands the scope of s 961B(2) since a step that is not specified in the previous steps set out in the section may nonetheless be reasonably regarded as being in the client’s best interests. There has been substantial controversy as to whether this requirement is appropriate. Those contending that s 961B(2)(g) should be removed rightly point out that the present form of s 961B(2) does not [page 621] guarantee a ‘safe harbour’ if the six previous steps are taken, but the adviser did not take another step that would reasonably be regarded as being in the client’s best interests as defined. However, that observation begs the question whether a safe harbour should extend to that situation. If, in a particular case, the first six specified steps comprise all that should reasonably be done in the relevant circumstances, then s 961B(2)(g) has no additional content and the requirement for a safe harbour would be satisfied. If, on the other hand, those steps were not all that should have

reasonably been done, then s 961B(2)(g) allows recourse for the client whose interests may have been prejudiced by the failure to take the additional steps that would reasonably have been taken by the adviser. Those supporting the removal of s 961B(2)(g) also point to an alternative basis for the duty in the other six steps in the broader best interests duty in s 961B(1); the obligation to give appropriate advice under s 961G (see 14.58); and the requirement to give priority to a client’s interests when giving advice under s 961J: see 14.59. It has been contended that s 961B(1) establishes a best interests duty without the need for s 961B(2)(g). However, if s 961B(2)(g) were deleted and taking the six steps specified in s 961B(2)(a)–(f) was sufficient to comply with the duty specified in s 961B(1), that duty would not extend beyond the six steps necessary to establish compliance with it. We address the duty to give priority to a client’s interests under s 961J below. Compliance with the statutory ‘best interests’ duty will also not, in itself, comply with any general law duty to avoid either an actual conflict of interest or a real and sensible possibility of a conflict of interest. The fact that the steps specified in s 961B(2), directed to the process by which advice is given, were taken does not seem capable of avoiding any breach of the no conflict rule in equity which arises if advice is given in a conflicted setting. That result would not follow if the general law fiduciary duties, including the no conflict rule, were read down to extend no wider than the statutory duties. One academic commentator has identified that possibility, noting that: Advisers and trustees will remain fiduciaries, in the sense that the general law proscriptions will continue to apply, but the substance of their duties will be dictated by statute, regulation, prudential standard and regulatory interaction rather than the proscriptions of the general law …102

On the other hand, the Corporations Act expressly preserves the operation of the general law, and a fiduciary status may either not be excluded or not effectively be excluded by contract. A regulator in a regulatory action, or a plaintiff in a private action, may well rely on the most demanding standard — which is likely to be the no conflicts rule if it applies — to establish a breach, even if the statutory duties have been satisfied.

The statutory ‘best interests’ duty, by contrast with a fiduciary duty, cannot be excluded by disclosure. It may therefore go some way to avoiding several risks with the use of disclosure to address conflicts of interest, which arguably shifts the burden of assessing a conflict and adjusting investment behaviour to the investor and [page 622] raises a risk that investors to whom disclosure has been made may assume that the intermediary will deal with them fairly, whereas an intermediary that has made such disclosure may then take a more aggressive approach.103

Banking and general insurance products 14.57 The scope of inquiries required to satisfy the best interests duty are more limited in respect of basic banking products, general insurance products, consumer credit insurance products or a combination of those products: s 961B(3)–(4) and regs 7.7A.05–7.7A.07.

Appropriateness of advice, warning as to incomplete information 14.58 A financial adviser is only be permitted to provide advice to a retail client if it is reasonable to conclude that the advice would be appropriate to the client, had the provider satisfied the best interests obligation under s 961B: s 961G. The Explanatory Memorandum to the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 states that whether advice is appropriate would be determined by reference to what the adviser ‘would have known had they fully complied with the best interests obligation’.104 This requirement appears to focus on the content of the advice rather than the process by which it is delivered. A provider must give a warning to the client if it is reasonably apparent that information is incomplete or inaccurate, although the provider has made reasonable inquiries in order to comply with the best interests

obligation: s 961H. This requirement broadly corresponds to the warning required under former s 945B (which has been repealed).

Priority to client’s interests, licensees’ obligations and penalties 14.59 A provider must also give priority to the interests of a retail client when giving advice where it knows, or reasonably ought to know, there is a conflict between the interests of the client and those of the provider, licensee, authorised representative or their associates: s 961J. This requirement is not intended to prevent an adviser from pursuing his or her own interests or the interests of another party, provided he or she does not fail to give priority to the client’s interests in the case of a conflict; and this requirement is also not intended to prevent an adviser receiving remuneration from a person other than the client, provided he or she does not give priority to maximising remuneration over the client’s interests.105 The language of this section is, as one commentator has pointed out, ‘open textured’,106 with the advantage that it will be [page 623] capable of applying in a range of circumstances, and the corresponding disadvantage that there may be uncertainty, or at least room for factual debate, as to whether conduct gave ‘priority’ to a client’s interests in any particular case. A duty to give priority to a client’s interests seems to assume the coexistence of two interests, that of the client and another interest, and to be satisfied by preferencing the client’s interest while still having regard to the other interest. This seems to follow from the use of the language ‘give priority’, which falls short of requiring that exclusive attention be given to the client’s interest. That reading of the section is consistent with the observation in the Explanatory Memorandum to the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 that this requirement was not intended to prevent an adviser from pursuing his or her own interests or the interests of another party, provided he or she did not fail to give priority to the client’s interests in the case of a conflict, and was also not intended to prevent an adviser receiving remuneration

from a person other than the client, provided he or she did not give priority to maximising remuneration over the client’s interests.107 Compliance with this requirement, in the manner that it is contemplated by the Explanatory Memorandum, would not necessarily comply with a requirement to avoid a conflict of interest in equity. Indeed, the section contemplates that the adviser will take a course that equity does not permit, that is to avoid liability for a conflict of interest by asserting that he or she preferred the client’s interest, as a matter of fact, to the conflicting interest. Compliance with that section will therefore not avoid liability for breach of the equitable conflict rule unless any fiduciary duty (which is expressly preserved by s 960B of the Corporations Act) has been effectively narrowed or excluded by contract or informed consent. A licensee must take reasonable steps to ensure that its representatives comply with the applicable requirements: s 961L. Breach of these requirements is subject to civil penalty liability in the circumstances specified in ss 961K, 961Q and 961L.

Ongoing fee arrangements Right to terminate ongoing fee arrangements 14.60 It is a condition of every ongoing fee arrangement (as defined in s 962A)108 that the client may terminate the arrangement at any time: s 962E(1). This provision is intended to prevent clients being locked into fixed term, ongoing fee arrangements as a result of the new disclosure and renewal notice obligations, and reflects a right that clients currently enjoy as a matter of common practice within the financial [page 624] planning industry.109 Exit or penalty fees triggered where a client terminates an ongoing fee arrangement are prohibited: s 962E(2).

Disclosure in respect of ongoing fee arrangements

14.61 A current fee recipient (as defined) who receives fees for providing personal advice to a retail client under an ongoing fee arrangement which will remain in place for longer than 12 months is required to send a written fee disclosure statement to that client within 60 days beginning on the disclosure day (as defined):110 s 962G. This requirement applies to all clients under such arrangements, not only persons who become clients after the commencement of the provisions on 1 July 2012. That disclosure statement is required to include specified information for the arrangement, subject to any exceptions prescribed by regulation: s 962H. A client is not liable to continue to pay the ongoing fee if a fee recipient does not provide the required disclosure statement, and does not waive his or her rights or enter into a new agreement by payment of that fee where the required disclosure statement has not been provided: s 962F. The fee recipient is not required to refund fees paid in full after a failure to provide the disclosure statement, since such a result could be disproportionate, particularly if the client continued to use an adviser’s services for a significant period after an accidental failure to make that disclosure.111 However, the client or ASIC may apply to the court to order a refund in the circumstances provided in s 1317GA: see 14.63.

Renewal of ongoing fee arrangements with duration of more than 24 months 14.62 A current fee recipient (as defined) who receives fees under an ongoing fee arrangement (as defined in s 962A: see 14.60) for providing personal advice to a retail client is required to send a written renewal notice (as defined) containing specified information and a fee disclosure statement within 60 days beginning on the renewal notice day (as defined):112 ss 962K(1), 962L. Unless the client provides a written response within 30 days indicating that he or she wishes to renew that arrangement, he or she is taken to have elected not to renew that arrangement: s 962K(2).113 A client is not liable to continue to pay the ongoing fee if a fee recipient does not provide the required renewal notice within time and does not waive his or her rights or enter into a new agreement by payment of that fee where the required

[page 625] renewal notice has not been provided: s 962F. Again, the fee recipient is not required to refund fees paid in full after a failure to provide the renewal notice, since such a result could be disproportionate, particularly if the client continued to use an adviser’s services for a significant period after an accidental failure to provide that notice.114 However, the client or ASIC may apply to the court to order a refund in the circumstances provided in s 1317GA: see 14.63. An ongoing fee arrangement terminates on the day a client gives written notice to a fee recipient that they do not wish to renew that arrangement, or at the end of 30 days after the renewal period if the client does not give notice that it wishes to renew the arrangement: ss 962M–962N. In effect, these provisions infer that the client does not wish to renew the arrangement if it does not respond to a renewal notice,115 reversing the previous position where such arrangements would generally continue unless a client took active steps to terminate them.

Anti-avoidance and civil penalty provisions 14.63 A person who enters a scheme with the sole or dominant purpose of avoiding the application of Pt 7.7A contravenes a civil penalty provision: s 965. A current fee recipient also contravenes a civil penalty provision if it continues to charge an ongoing fee after the arrangement terminates for any reason: s 962P. The court may make a refund order on the application of the client or ASIC if a fee recipient knowingly or recklessly contravenes s 962P, if it is reasonable to make that order in all the circumstances: s 1317GA. Specified contraventions of Pt 7.7A also contravene a civil penalty provision: ss 1317E(1), 1317G(1E).

Adviser remuneration 14.64 Broadly, the FOFA requirements also prohibit initial or upfront commissions (such as an advice fee charged as a percentage of the initial investment built into the price of the product by arrangement between the

product provider and adviser), trail commissions (such as a commission charged as a percentage of the investment and built into the price of the product) and payments based on volume or sales targets (such as a volume bonus or fee rebates and volume-based payments). Fees calculated as a percentage of investments or by reference to assets under management are permitted for ungeared (but not geared) products with a retail client’s agreement. The focus on gearing reflects a concern that clients can be inappropriately advised to adopt highly geared financial strategies in order to increase commissions paid to advisers. Financial services licensees, their authorised representatives and representatives are not permitted to accept ‘conflicted remuneration’ (as defined): ss 963E, 963G–963H. This term is defined in s 963A as any monetary or non-monetary benefit given to a [page 626] licensee or representative116 who provides financial product advice to retail clients that could reasonably be expected to influence product recommendations or the financial product advice given. Whether such remuneration could reasonably be expected to influence such matters will be determined objectively, and its capacity to influence the licensee or representative in respect of the recommendation or advice will plainly be a relevant matter.117 Sections 963B–963E specify particular monetary and non-monetary benefits that, when given in specified circumstances, are not treated as conflicted remuneration.118 A licensee must take reasonable steps to ensure that its representatives did not accept conflicted remuneration: s 963F. Employers of licensees or representatives must not give them conflicted remuneration for work carried out by them as an employee: s 963J. A product issuer must also not give conflicted remuneration to a licensee or its representative: s 963K. [page 627] A platform operator (defined in s 964)119 is not permitted to accept a

volume-based shelf-space fee (as defined): s 964A. A financial services licensee or its authorised representative is also not permitted to charge an asset-based fee (as defined in s 964F) on borrowed amounts (as defined in s 964G) used or to be used to acquire financial products: ss 964D–964E.

DEALING WITH CLIENTS’ MONEY AND PROPERTY Dealing with clients’ money 14.65 From time to time, a financial services licensee may hold assets on behalf of clients, such as securities held in the name of a broker’s nominee company or money held for a client in connection with a transaction. For example, a financial services licensee may receive moneys from a client with instructions to invest the amount on behalf of the client, to apply the amount to anticipated purchases of securities or other financial products by the client, to transmit the money to a company in payment for a new issue of securities, or in payment for securities where the licensee has already contracted to purchase the securities on behalf of the client. Pt 7.8 Div 2 deals with treatment of moneys and assets received by a financial services licensee on account of a client. This Division is intended to protect the interests of clients of Australian financial services licensees by separating client money from money belonging to licensees; generally requiring that licensees hold client money on trust; limiting the use of client money; limiting the circumstances in which client money may be withdrawn from client money accounts; specifying how client money may be dealt with if a licensee ceases to be licensed or becomes insolvent; and imposing sanctions on licensees who fail to comply with those provisions.120 Pt 7.8 Div 3 deals with treatment by a financial services licensee of a loan from a client.

When Pt 7.8 Div 2 applies 14.66 Part 7.8 Div 2 Subdiv A applies to money paid to a financial services licensee121 by a client, by a person acting on behalf of the client or

to the licensee in its capacity as a person acting on behalf of the client, in connection with a financial service that has been provided or may be provided to the client, or in connection with a financial product held by the client: s 981A(1). That subdivision does not apply to: remuneration payable to the licensee, or to the extent the licensee is entitled to deduct such remuneration from moneys paid to it; or [page 628] money paid to reimburse the licensee for payments made to acquire, or acquire an increased interest in, a financial product, or to discharge a liability incurred by the licensee in respect of the acquisition of a financial product or an increased interest in a financial product, or to indemnify the licensee in respect of such a liability; or money paid to acquire, or acquire an increased interest in, a financial product issued or sold by the licensee; or if Div 2 Subdiv B (dealing with treatment of loan money) applies: s 981A(2). For example, if a buying broker had paid the purchase price of securities to a selling broker out of its general account prior to receiving payment from the buying client, in discharge of its personal liability to the selling broker, the buying broker would be entitled to pay moneys received from the buying client in payment of that purchase price directly into its general account. That subdivision also does not apply to moneys paid by a person to a financial services licensee in order for it to be deposited to the credit of a deposit product held by the person or another person with the licensee: s 981A(3).

Licensee must pay money into designated account 14.67 A financial services licensee must pay money to which Div 2 Subdiv A applies into an account that satisfies specified requirements: s 981B. That account must be held with an Australian authorised deposittaking institution (ADI)122 or be of a kind prescribed by the regulations

and must be designated as an account for the purposes of s 981B: s 981B(1)(a). The designation of the account will place the bank on notice of the client’s claim over the moneys held in the account, and it will be unable to set off moneys in that account against any other liabilities of the financial services licensee to the bank.123 The only money paid into that account must be money to which Div 2 Subdiv A applies, which may include money paid by or on behalf of or for the benefit of several different clients; interest on the amount held in the account; interest or other similar payments on an investment made in accordance with regulations referred to in s 981C or the proceeds of the realisation of such an investment; or other money permitted to be paid into the account by the regulations: s 981B(1)(b).124 An account maintained by a financial services licensee under s 981B must satisfy any additional requirements imposed by regulations made for the purposes of s 981B and by the licence conditions imposed on the financial services licensee: s 981B(1)(c)–(d). A licensee may maintain a single account or two or more accounts for the purposes of s 981B: s 981B(2).125 [page 629]

When payments may be made out of the account 14.68 The regulations may deal with the circumstances in which payments may be made out of an account established under s 981B, including the circumstances in which money may be withdrawn and invested, and the kinds of investment that may be made; the minimum balance to be maintained in an account; how interest on an account is to be dealt with; and how interest or other earnings on an investment of money withdrawn from an account, or the proceeds of realisation of such an investment are to be dealt with; and a licensee must take all reasonable steps to ensure that those regulations are complied with: s 981C. Regulation 7.8.02(1) provides that payments may be made out of an account maintained under s 981B for specified purposes;126 reg 7.8.02(2)– (5) specifies permissible investments in respect of such an account; reg

7.8.02(6) specifies minimum balance requirements in respect of moneys received in relation to insurance products; and reg 7.8.02(7) deals with interest on such an account.

Purposes to which client funds can be applied 14.69 Money paid to a licensee under a derivatives contract is subject to the requirement in s 981B that it be paid into an account, notwithstanding that that money may be the property of the licensee rather than the client’s moneys. Section 981D permits the use of client funds relating to derivatives to cover margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee, including dealings on behalf of people other than the client. It follows that moneys deposited by one client may be used to cover a risk attaching to another client. While this is consistent with existing practice in the futures industry, it is inconsistent with previous requirements in the securities industry. Regulation 7.8.03 deals with how money held in an account maintained by a licensee under s 981B is to be dealt with if the licensee ceases to be licensed, including by reason of its insolvency. Where that regulation applies, the s 981B account is taken to be subject to a trust in favour of each person who is entitled to be paid money from that account (reg 7.8.03(4)); and, if money in a s 981B account has been invested, that investment is taken to be subject to a trust in favour of each person who is entitled to be paid money from that account (reg 7.8.03(5)). Regulation 7.8.03(6) in turn provides that money in the account of a financial services licensee maintained for s 981B of the Act is to be paid in a specified order including to each person who is ‘entitled’ to be paid money from the account and, if the money in the account is not sufficient to be paid in accordance with reg 7.8.03(6)(a)–(c), in proportion to the amount of each person’s entitlement: reg 7.8.03(6)(d). In Re Georges v Seaborn International (Trustee); Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; 87 ACSR 442; [2012] FCA 75 at [79] (varied on appeal [2012] FCAFC 140), Gordon J summarised the effect of reg 7.8.03(6) as follows: [page 630]

So, for example, where moneys are paid into a segregated account and the balance in that account represents a particular client’s payment or the proceeds of that payment, the client will be entitled to an equitable charge over the whole balance of the account: s 981H of the Corporations Act read with reg 7.8.03(4). Regulation 7.8.03(6)(c) provides for the realisation of that entitlement. Where a number of clients have an entitlement to be paid moneys in a segregated account but the balance is insufficient to meet each entitlement in full, then the money is paid in proportion to each client’s entitlement: reg 7.8.03(6)(d).

The reference to ‘money’ in reg 7.8.03(6) includes amounts in foreign currencies.127 The expression ‘the account’ in reg 7.8.03(6) refers to each of the accounts maintained by a licensee under s 981B separately. However, the court may order pooling of such accounts where there is evidence that it would be not be practical to make distributions by reference to the particular accounts, for example because of lack of records of individual client deposits, withdrawals from individual accounts and transfers of funds between client accounts.128 Possible approaches to determining clients’ entitlements under reg 7.8.03(6) include a ‘contributions’ based approach, having regard to the amount of money actually segregated for clients or a ‘claims’ based approach having regard to the amount which ought to have been segregated had the licensee complied with its obligations.129 The concept of ‘entitlement’ includes not only presently enforceable but also contingent entitlements, and a contractbased measure of determination of clients’ entitlements may be adopted in an appropriate case.130 A single date must be adopted to value entitlements for the purposes of reg 7.8.03(6), although the choice of that date will inevitably possess a degree of arbitrariness.131 Trust law principles are potentially relevant to determining clients’ entitlements where client funds have been mixed in such an account and that account is deficient.132 Regulation 7.8.03(6) does not provide for payment from a trust account of a liquidator’s or administrator’s expenses incurred in recovering monies held in the trust account or administering the trust account or determining the entitlement of persons to monies in that account or distributing those monies; nonetheless, the case law has treated such costs as recoverable under a predecessor section.133 Regulation 7.8.03 applies despite anything to the contrary in the Bankruptcy Act 1966 (Cth) or a law relating to companies: reg 7.8.03(7). [page 631]

Other requirements applicable to clients’ money 14.70 Section 981E protects money held in an account under s 981B from attachment; s 981F deals with how such money is to be dealt with where a licensee ceases to be licensed; and s 981G exempts an Australian ADI from liability arising because of a licensee’s contravention of these requirements. Where money to which Div 2 Subdiv A applies is paid to a licensee by a client, by a person acting on behalf of the client, or to the licensee in its capacity as a person acting on behalf of the client, that money is taken to be held in trust by the licensee for the benefit of the client, subject to s 981H(3): s 981H(1). The regulations may also provide that provision does not apply in relation to money in specified circumstances, and may also provide for matters relating to money taken to be held in trust, including, for example, terms on which the money is taken to be held in trust and circumstances in which it is no longer taken to be held in trust: s 981H(3); and see regs 7.8.04–7.8.05. The effect of this section was summarised in Re Georges v Seaborn International (Trustee); Sonray Capital Markets Pty Ltd (in liq), above (at [77]), where Gordon J noted that: … the effect of these provisions is to create one or more mixed trust funds with special characteristics: they are intended to be used specifically for the provision of financial services and for the holding of and dealing in financial products; they can be used to meet margin calls and to act as security for dealings in derivatives, including dealings on behalf of clients other than the depositing client; however, they cannot be used to satisfy the creditors of the licensee. Such money ‘is taken to be held on trust by the licensee for the benefit of the client’ …

Funds subject to a trust under this section cannot be used to satisfy the licensee’s creditors including by way of any claim to subrogation arising from a trustee’s right of indemnity in respect of that account.134 The requirements as to the maintenance of separate accounts imposed upon financial services licensees under Pt 7.8 overlap with specific obligations imposed upon stockbrokers under Pt 3.5 of the ASIC Market Integrity Rules (ASX Market), which deals with market participants’ obligations in respect of client money and property.

Treatment of loan moneys 14.71 Division 2 Subdiv B applies where moneys are paid to a financial services licensee by way of a loan from a client in connection with activities authorised by that licensee’s licence: s 982A(1). However, that subdivision does not apply where a person pays money to a financial services licensee for it to be deposited to the credit of a deposit product held by that person or another person with the licensee, or on condition that it is to be repaid to the person by the licensee, as a debt, pursuant to the terms of a debenture or other financial product issued by the licensee: s 982A(2). [page 632] Where this subdivision applies, a licensee must ensure that money is paid into an account with an Australian ADI designated as an account for the purposes of s 982B, and that the only money paid into that account is money to which that subdivision applies (which may be money lent by several different persons) or interest on that amount from time to time standing to the credit of that account. That money must be paid into that account on the day it is received by the licensee or the next business day: s 982B(1). A licensee may, for the purposes of s 982B, maintain a single account or two or more accounts: s 982B(2). The licensee must, in accordance with the regulations, give the client a statement setting out the terms and conditions on which the loan is made and accepted and the purpose for which, and the manner in which, the licensee is to use the money: s 982C(1) and see reg 7.8.06. The licensee must keep the money in the account until the client gives it a written acknowledgment that the client has received that statement: s 982C(2). A licensee must not use the money given to it by a client except for the purpose and in the manner set out in the statement given to the client under s 982C or for any other purpose or manner agreed on in writing by the licensee and the client after the licensee gave that statement to the client: s 982D.

Powers of the court 14.72 Sections 983A–983E set out the orders a court can make relating to dealings in accounts of a financial services licensee or former financial services licensee. On ASIC’s application, the court may make an order restraining dealings in respect of the bank accounts of a financial services licensee or former financial services licensee, if: there are reasonable grounds for believing that there is a deficiency in an account maintained by that licensee for the purposes of s 981B or s 982B, whether that account is maintained in the jurisdiction or elsewhere; there has been undue delay or an unreasonable refusal on the licensee’s part in paying, applying or accounting for money as provided for by Div 2, a licence condition or the operating rules of a licensed market or licensed clearing and settlement facility in which the person is or has been a participant; or the licensee has otherwise contravened s 981B or s 982B: s 983A(2). The court may also make such orders if satisfied that a person holds or has at any time held an Australian financial services licence which has been revoked or suspended; or that person is incapable, through mental or physical incapacity, of managing his or her affairs; or that person no longer carries on a financial services business or has died: s 983A(3). The court may grant an interim order before considering an application under s 983A, and must not require ASIC or another person to give an undertaking as to damages as a condition of granting such an order: s 983B. If an order made under s 983A is directed to a financial institution, it must disclose to ASIC every account kept at that institution in the name of the person to whom the order relates, and any account that the institution reasonably suspects is held or kept at it for the benefit [page 633] of that person, and permit ASIC to make a copy of, or take an extract

from, any account of the person to whom the order relates to any of its books relating to that person: s 983C. If an order is made under s 983A or s 983B, the court may, on application by ASIC or a person whom the order affects, make further orders dealing with ancillary matters, directing that specified amounts in an account affected by the order be paid to ASIC or a person nominated by ASIC, or varying or discharging the orders: s 983D. The court may also give directions to a person to whom money is ordered to be paid under s 983D providing for that money to be paid into a separate account; or authorising that person to prepare a scheme for distributing the money to persons who claim, within six months after that person receives the money, to be entitled to it; or, if the money received is insufficient to pay all proved claims, to apportion the money among the claimants in proportion to their proved claims: s 983E(1). A scheme for distribution of money prepared under s 983E(1) is subject to the court’s approval: s 983E(2).

Dealing with other property 14.73 At general law, a broker is not entitled to sell or pledge securities held on behalf of the client without the client’s authority. For example, in Solloway v McLaughlin [1938] AC 247, the Privy Council held that a broker had no right to deal with shares which had been deposited with the broker on margin calls, and the broker’s sale of the shares amounted to the tort of conversion. The broker’s client was awarded damages for conversion, measured as the value of the shares at the date of the conversion less the value of any shares which were subsequently delivered to the client in substitution for the converted shares as at the date the client received them. In Tobin v Broadbent (1947) 75 CLR 378; [1947] HCA 46, a stockbroker pledged share certificates, which were the property of its client and which were registered in its client’s name, as security for an advance made to the broker, although the client was not then indebted to the broker. On the broker’s bankruptcy, the client sought the return of the shares and the lender argued that there was a custom for a broker to hold a client’s securities as cover for its client’s indebtedness to the broker and to lodge them with lenders as security. Latham CJ held that there was no practice of brokers in Australia which conferred any authority on a broker

to pledge securities which were the property of its client to a lender and that the client was not estopped from relying on the actual limits to the broker’s authority: at 393–4. Dixon J (with whom McTiernan J agreed) held that there was no ground for holding that it was within the recognised scope of a broker’s business to raise money in its own name by mortgaging or pledging its client’s interest in securities which it held on behalf of the client: at 407. The position at general law is altered by Pt 7.8 Div 3, which deals with property other than money given to a financial services licensee by a client, a person dealing on a client’s behalf or for the client’s benefit, in connection with a financial service that has been provided or will or may be provided to the client, or a financial product held by a client. The licensee must ensure that such property is not dealt with except in accordance with any requirements specified in regulations for the purposes of s 984B and, subject to those requirements, the terms and conditions [page 634] on which the property was given to the licensee and any subsequent instructions given by the client: s 984B(1). Regulation 7.8.07 sets out requirements in relation to the treatment of such property, including that the licensee must hold it on trust for the benefit of the person who is entitled to it, must deposit that property in safe custody if the client requests it to do so, and as to the name in which that property is registered.135 A financial services licensee is prohibited from depositing such property as security for a loan or advance to it other than in the circumstances specified in reg 7.8.07(8). If a financial services licensee deposits property as security for a loan or advance in these circumstances, it must withdraw the property from that deposit not later than one business day after the amount owed to it by the client on the day of that deposit is repaid and must give the client written notice if that property has not been withdrawn from the deposit, at quarterly intervals after the day of that deposit: reg 7.8.07(9). Where such property is provided to a financial services licensee in connection with a dealing in a derivative, then that property may also be

used for the purposes of meeting obligations incurred by that licensee in connection with margining, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives by the licensee, including dealings on behalf of people other than the client: s 984B(2).

Treatment of funds held by insurance brokers 14.74 Part 7.8 Div 4 provides that the insurer rather than the insured bears the risk of funds held by the insurance broker. If a contract of insurance is arranged or effected by a financial services licensee, which is not itself the insurer, then payment to the licensee of money payable by the insured under or in relation to the insurance contract (whether in respect of a premium or otherwise) discharges, as between the insured and the insurer, the insured’s liability to the insurer in respect of that money: s 985B(1). Similarly, payment to a financial services licensee by or on behalf of an intending insured of money in respect of a contract of insurance to be arranged or effected by the licensee with an insurer, other than the licensee, is treated as a discharge, as between the insured and the insurer, of any liability of the insured under or in respect of the contract, to the extent of the amount of the payment: s 985B(2). However, payment by an insured to the financial services licensee of money payable to an insured, whether in respect of a claim, return of premiums or otherwise, does not discharge any liability of the insurer to the insured in respect of that money: s 985B(3). The regulations may also impose requirements to be complied with by a financial services licensee in relation to specified situations which arise in relation to a contract or proposed contract of insurance under which the licensee is not the insurer, including the licensee’s receipt of an amount as premium or an instalment of premium, the licensee’s receipt of money from the insured or intending insured where the risk or part of the risk has not been accepted by a particular time, and [page 635] the licensee’s receipt of money from the insurer for payment to or on

behalf of the insured: s 985C(2); see also reg 7.8.08.

ACCOUNTING AND AUDITING OBLIGATIONS OF FINANCIAL SERVICES LICENSEES 14.75 Part 7.8 Div 6 sets out certain requirements in relation to accounting and auditing standards and practices of financial services licensees. The accounting and auditing obligations imposed upon a company which holds a financial services licence apply in relation to the financial services business carried on by the licensee and do not affect the operation of Ch 2M, which deals with the general accounts of companies: s 987A(2).

Obligation to keep financial records 14.76 A financial services licensee must keep financial records that properly record and explain the transactions and financial position of the financial services business carried on by the licensee, in accordance with the requirements of Div 6 Subdiv B: s 988A(1). Those records must be kept in a way that enables true and fair profit and loss statements and balance sheets of the financial services business of the licensee to be prepared from time to time, and allows those statements and balance sheets to be conveniently and properly audited: s 988B. Section 988E requires the financial services licensee’s financial records to be kept in sufficient detail to show specified information.136 The operation of these sections is modified by class order relief.137 A financial services licensee must prepare a true and fair profit and loss statement and balance sheet in respect of each financial year in accordance with Div 6 Subdiv C, and lodge the statement and balance sheet with ASIC, together with an auditor’s report containing the information and matters required by the regulations: s 989B; and see reg 7.8.13. Unless an extension is granted by ASIC, the profit and loss statement and balance sheet must be lodged within two months after the end

[page 636] of the financial year if the licensee is not a body corporate, and within three months after the end of the financial year if the licensee is a body corporate: s 989D.

Audit requirements 14.77 Requirements governing the appointment of auditors by financial services licensees are set out in Div 6 Subdiv D. Sections 990B–990H do not apply to a financial services licensee that is a public company: s 990A. A licensee must appoint an auditor within one month after beginning to hold its licence, and must appoint a new auditor within 14 days after a vacancy occurs in the office of auditor of the licensee: s 990B(1)–(2). The licensee must notify ASIC of the initial appointment of an auditor and of any appointment following a vacancy: s 990B(6). A person or firm will be ineligible to act as auditor in circumstances specified by the regulations: s 990C; and see reg 7.8.16. A licensee must remove an auditor who has become ineligible to act as auditor under the criteria specified in the regulations, and may otherwise remove an auditor with ASIC’s consent: s 990F. An auditor may resign with ASIC’s written consent: s 990G. An auditor of a financial services licensee has a right of access at all reasonable times to the financial records or other records of the licensee and is entitled to require such assistance and explanation as it desires for the purposes of an audit from the licensee or any executive officer of the licensee: s 990I. The reasonable fees and expenses of a licensee’s auditor are payable by the licensee: s 990J. The auditor must lodge a written report with ASIC, and send a copy of that report to the licensee, any licensed market and any licensed facility in which the licensee is a participant, if it becomes aware of specified matters in performing its duties as auditor of the licensee, within seven days after becoming aware of the matter: s 990K(1). Such a report must be provided concerning a matter that, in the auditor’s opinion, has adversely affected, is adversely affecting or may adversely affect the licensee’s ability to meet its obligations as a licensee; or which constitutes or may constitute a

contravention of specified provisions of the Corporations Act or a condition of the licensee’s licence; or constitutes an attempt to unduly influence, coerce, manipulate or mislead the auditor in the conduct of the audit: s 990K(2). Additional obligations as to the keeping of financial records, audit of accounts and provision of information in an auditor’s report may be imposed by self-regulatory organisations such as the ASX. For example, the ASIC Market Integrity Rules for the ASX and ASX 24 (formerly SFE) markets impose additional obligations expanding the accounting and auditing obligations of stockbrokers and futures brokers respectively under the Corporations Act.

OTHER CONDUCT OF BUSINESS REQUIREMENTS Prohibition on unconscionable conduct 14.78 A financial services licensee must not, in or in relation to the provision of a financial service, engage in conduct that is, in all the circumstances, unconscionable: s 991A(1). A person who suffers loss or damage because of a contravention of s 991A by a financial services licensee may recover the amount of that loss or damage by [page 637] action against the licensee: s 991A(2). An action under s 991A may be brought at any time within six years after the cause of action arose: s 991A(3). By contrast with ASIC Act s 12CA, the prohibition in s 991A is not limited to conduct that is unconscionable within the meaning of the unwritten law of the states and territories. That section will at least be contravened by conduct within the four classes of cases identified by French J at first instance in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2000) 96 FCR 491; 169

ALR 324 at 331; [2000] FCA 2, namely, exploitation of vulnerability or weakness; the abuse of a position of trust or confidence; insistence upon rights in circumstances which make that hard or oppressive; or inequitable denial of legal obligations.138 The prohibition on unconscionable conduct under s 991A may at least extend more widely to conduct which is ‘unconscionable’ in the sense that it involves ‘serious misconduct or something clearly unfair or unreasonable’, or shows ‘no regard for conscience, or [is] irreconcilable with what is right or reasonable or involves a high degree of moral obloquy’.139 More recent case law indicates that moral obloquy, although relevant, is not a necessary element of a breach of the section.140 In Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584; [2015] FCAFC 50 at [261]–[262], Allsop CJ noted the relevance of social norms and values and the standard of conduct contemplated by the purpose, structure and text of the legislation in determining whether unconscionability was established and noted that unconscionability did not require dishonesty. That decision was affirmed on appeal to the High Court: Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 596; [2016] HCA 28; see 15.21. Matters of the kind specified in ASIC Act s 12CC may also be relevant to a determination whether conduct is unconscionable, including the relative strengths of the bargaining positions of a licensee and his or her client; whether the client was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the licensee; whether the client was able to understand any documents relating to the supply or [page 638] possible supply of the financial services; whether any undue influence or pressure was exerted, or any unfair tactics used against, the client; and the amount for which, and circumstances under which, the client could have acquired identical or equivalent services from a person other than the licensee. It is possible that the prohibition on unconscionable conduct will apply,

for example, in relation to unacceptable selling practices such as pressure selling.

Priority to clients’ orders 14.79 In circumstances where a financial services licensee is fiduciary to its client, or acts as agent for its client, it is under a duty not to enter the market and trade in competition with that client. In Hewson v Sydney Stock Exchange Ltd [1968] 2 NSWR 224 at 231, Street J observed that such conduct would be inconsistent with a fundamental principle of commercial morality. Section 991B is a statutory recognition of a financial services licensee’s duty not to compete with its client. That section applies if a client has instructed a financial services licensee to buy or sell financial products of a particular class that are able to be traded on a licensed market; the licensee has not complied with the instructions; the client is not an associate of the licensee; and regulations made for the purposes of the section do not exclude those financial products from its operation: s 991B(1). In that situation, the financial services licensee must not, except as permitted by s 991B(3), itself enter into or instruct another person to enter into a transaction of purchase or sale of financial products of that class on its own behalf or on behalf of an associate141 of the licensee: s 991B(2). The prohibition under s 991B(2) is subject to an exception under s 991B(3) if the client’s instructions required the purchase or sale to be effected only on specified conditions relating to price and the licensee has been unable to comply with the instructions because of those conditions, or the transaction or giving of the instruction is otherwise permitted under the regulations. That exception would apply if the client specified a particular price for the purchase or sale of the financial products, and the order could not be executed because of a difference between the buy or sell prices on the market and that price. On the other hand, that exception would not apply and the prohibition under s 991B would apply if a client imposed no price limit, but instructed a financial services licensee to purchase or sell financial products ‘at best’ or ‘at discretion’, leaving that licensee to exercise its professional judgment as to the price for the transaction.

The prohibition in s 991B(2) also does not apply in relation to transactions entered into by a participant in a licensed market in accordance with the operating rules of the licensed market: reg 7.8.17. Rules 5.1.3–5.1.4 of the ASIC Market Integrity [page 639] Rules (ASX Market) deal with the execution of client orders on the ASX and exclude the operation of reg 7.8.18 in relation to trading on that market: see 11.21.

Execution of instructions 14.80 Order execution requirements promote market efficiency, liquidity and investor protection, by limiting agency risks between an intermediary and its client, particularly in respect of conflict of interest and order priority.142 There is authority which suggests that, at general law, a buying broker’s duty to its client requires it to execute instructions in the order which they are received, at least if the price of the securities which are the subject of the instructions is rising on the market. In Constable v Myer (1972) 3 DCR 41 (District Court of New South Wales), the court held that a broker who is instructed by a number of clients to buy shares in a particular company at market price, on a rapidly rising market, is under a duty to those clients to execute their commissions strictly in the order in which they are received. The court held that a broker that failed in that duty had not performed its contract with its client and could not recover under that contract. That decision would not apply in circumstances that a purchase order given by a client to a broker was subject to a price limit. The regulations may impose requirements relating to the order in which instructions are to be transmitted to a licensed market or to another financial services licensee who is a participant in a licensed market: s 991C(a). Regulation 7.8.18 in turn applies to all instructions received by a financial services licensee to deal in financial products through licensed markets, except to the extent that operating rules of a licensed market of which a financial services licensee is a participant otherwise provide. A

financial services licensee must transmit, in the sequence in which they are received, all instructions to deal in a class of financial products at or near the prevailing market price: reg 7.8.18(2). That requirement is subject to reg 7.8.18(3), which prohibits a person transmitting or giving instructions to any other person to transmit instructions for a dealing in a class of financial products on the licensee’s own account, if that person is aware of a client’s instructions to deal in that class of financial product at or near the prevailing market price, which have not yet been transmitted, until after the client’s instructions have been transmitted. This provision gives effect to the requirements as to client order priority noted above: see 14.79. The requirement as to transmission of instructions under reg 7.8.18(3) is applicable except to the extent that the operating rules of a licensed market of which a financial services licensee is a participant otherwise provide: reg 7.8.18(1). Rules 5.1.3–5.1.4 of the ASIC Market Integrity Rules (ASX Market) deal with the execution of client instructions on the ASX and apply to the exclusion of reg 7.8.18(3) in respect of such instructions. Rule 3.1.5 of the ASIC Market Integrity Rules (ASX 24 Market) deals with the order of execution of client instructions on the ASX 24 market and excludes the operation of reg 7.8.18(3) in relation to trading on that market. [page 640]

Allocation of financial products 14.81 At general law, a broker is under no obligation to allocate particular shares purchased for a client to that client, and it would generally be sufficient for the broker to obtain possession of an equivalent number of shares to the number of shares that are the subject of instructions received from that client. In Solloway v McLaughlin [1938] AC 247 at 256; [1937] 4 All ER 328, Lord Atkin observed that a broker is not obliged to deliver to its client the specific shares that are delivered to a broker under a contract which it enters on behalf of its client, provided the broker takes possession of and retains an equivalent number of shares. However, the regulations may impose requirements relating to the order

in which dealings that have been effected on a licensed market are to be allocated to instructions: s 991C(b). Regulation 7.8.18(4) in turn deals with the allocation of financial products to instructions received by a financial services licensee to deal in the financial products through a licensed market. If, during a particular period, a financial services licensee transmits instructions (including instructions on its own account) to deal in a class of financial products at or near the prevailing market price, and dealings in that class of financial products are effected pursuant to those instructions, the licensee must allocate the dealings to those instructions in the sequence in which the dealings were effected and in the sequence in which the financial services licensee transmitted the instructions. This regulation applies except to the extent that the operating rules of a licensed market, of which the financial services licensee is a participant, otherwise provides: reg 7.18(1). Rules 5.1.5–5.1.6 of the ASIC Market Integrity Rules (ASX Market) deal with fairness and priority in allocation by market participants and apply to the exclusion of the order of execution of instructions otherwise specified in reg 7.8.18(4) in relation to transactions executed by market participants on the ASX: reg 7.8.18(1). Rule 3.1.16 of the ASIC Market Integrity Rules (ASX 24 Market) deals with allocation by market participants on the ASX 24 market and also excludes the operation of reg 7.8.18(4) in relation to trading on that market.

Disclosure of instructions 14.82 There is some basis for a conclusion that a stockbroker or futures broker owes a duty of confidentiality to its client at general law. Information held by a broker as to the identity of its client and the order placed by the client appears to have the necessary quality of confidentiality to attract an obligation of confidence.143 That information retains a degree of secrecy, since in the ordinary case the only persons aware that an order has been placed will be the broker and its client. Both the broker and the client would expect that the broker was not free to reveal the fact that an order had been placed by a client or to reveal details of that order to third parties. The existence of a duty of confidence owed by brokers to their

clients may also be supported on the basis that this is a consequence of the broker’s professional [page 641] relationship with its client.144 Adherence to this obligation is necessary to allow a client to obtain the best bargain in respect of traded financial products, which he or she may not obtain if the fact that he or she has placed an order to buy or sell became known to other purchasers or sellers of those products who then placed competing orders. The regulations may also prohibit the disclosure of instructions received by financial services licensees to deal in financial products through licensed markets, in specified circumstances: s 991C(c). Regulation 7.8.18(5) applies in relation to all instructions received by a financial services licensee to deal in financial products through licensed markets, except to the extent that operating rules of a licensed market of which the financial services licensee is a participant otherwise provide. That regulation prohibits a financial services licensee, its directors, partners, officers or employees, from disclosing a client’s instructions to deal in a class of financial products to any other financial services licensee, or to a person engaged or employed in the business of the first financial services licensee or any other financial services licensee, except to the extent necessary to execute the instructions or as required by the Corporations Act or by law.145

Records of instructions to deal on licensed markets and foreign markets 14.83 The regulations may impose requirements for records to be kept in relation to instructions received by a financial services licensee to deal in financial products through licensed markets or through other financial products markets, whether inside or outside Australia, the execution of such instructions and the transmission of such instructions: s 991D. Regulation 7.8.19 applies in relation to instructions received by a financial

services licensee to deal in financial products, on behalf of a client or on a licensee’s own account, through licensed markets or through other financial markets, whether inside or outside Australia and requires a financial services licensee to keep records setting out specified information.

Dealings with non-licensees as principal 14.84 The existence of principal trading can add liquidity to a market for financial products, and need not be inconsistent with a financial services licensee’s duties to its client if appropriate disclosure is made by the financial services licensee and informed consent is given by the client.146 Principal trading may also facilitate client trading if the financial services licensee takes the other side of a trade initiated by the client.147 [page 642] On the other hand, principal trading can generate systemic risks where losses affect the liquidity of an intermediary and then impact on counterparties.148 At general law, any fiduciary duty owed by a financial services licensee to its client would require it to disclose to the client if it is acting as principal in a transaction, in order to avoid a breach of the no conflict or no profit rules: see 14.11. A failure to disclose that fact would entitle the client to rescind the transaction, even if the financial services licensee had bought or sold the financial products at market price and acted without any intention to defraud its client.149 However, a client would not be entitled to rescind a transaction if it had assented to that licensee’s trading as principal, after the licensee had made full disclosure of the relevant circumstances.150 The general law position is reinforced by s 991E, which prohibits a financial services licensee (either personally or through an authorised representative) from entering into a financial product transaction on its own behalf that relates to a financial product which is able to be traded on a licensed market, with a person who is not a financial services licensee or

authorised representative (‘non-licensee’), unless the licensee or its authorised representative has disclosed to the non-licensee that it will be acting on its own behalf and the non-licensee has consented (in accordance with any applicable regulations) to the licensee so acting in the proposed dealing: s 991E(1).151 The disclosure required by s 991E(1) must be given by the licensee to the non-licensee in writing and, in the case of on-market transactions, must be given in relation to a particular transaction, a class of on-market transactions or all on-market transactions. The consent required by s 991E(1) may be given by the non-licensee orally or in writing and is effective until it is revoked by the non-licensee. If a non-licensee gives an oral consent, or orally revokes a consent, the financial services licensee must make a written record of that consent or revocation and provide it to the non-licensee within 10 business days after that consent was given or revoked: reg 7.8.20(2). A financial services licensee that enters into an own account transaction, either personally or through an authorised representative, may not charge brokerage, commission or a fee to the non-licensee in respect of the transaction, except as permitted by the regulations: s 991E(3). However, a financial services licensee may charge a brokerage, commission or other fee in respect of a transaction where: the licensee is a participant in a licensed market; [page 643] the transaction is effected in accordance with the operating rules of the relevant licensed market; those operating rules permit that brokerage, commission or fee to be charged to a non-licensee of the same kind as the particular nonlicensee (for example, a retail or institutional client);152 the particular non-licensee has authorised the financial services licensee to charge it in respect of the transaction; and the financial services licensee discloses the amount of the brokerage, commission or fee, or the basis on which it will be calculated, to the non-licensee before it gives that authorisation, and the amount of the brokerage, commission or fee is reasonable having regard to the

amount which would have been charged in an agency transaction rather than an own account transaction: reg 7.8.20(3). The authorisation by the non-licensee may again be given orally or in writing by the non-licensee, and is effective until it is revoked by the nonlicensee. The financial licensee must again make a written record of any oral authorisation or revocation, and provide a copy of that record to the non-licensee within 10 business days after the authorisation was given or revoked. The licensee’s disclosure of the amount of the brokerage, commission or fee, or the basis on which it will be calculated, must be given in writing and, in the case of on-market transactions, in relation to the particular transaction, a class of on-market transactions or all onmarket transactions: reg 7.8.20(4). If a financial services licensee deals as principal and fails to disclose that fact to the non-licensee, or charges a brokerage, commission or other fee where it is not entitled to do so, the non-licensee has a statutory entitlement to rescind the contract, unless that contract was for the purchase of financial products by the non-licensee and the non-licensee has subsequently disposed of those products: s 991E(4). That right may be exercised during the period of 14 days starting on the date on which the contract was entered into, or a later date specified by the regulations, by giving notice in writing to the licensee: s 991E(5). The right of rescission under s 991E(4) is expressly provided in addition to other rights of the non-licensee, which may include the right of rescission in equity and a right to seek equitable compensation for breach of fiduciary duty: s 991E(6). The regulations may require records to be kept by a financial services licensee in respect of own account dealings: s 991E(7); and see reg 7.8.20(5).

Dealings involving employees of financial services licensees 14.85 A financial services licensee and an employee of the licensee must not, subject to the regulations, jointly acquire a financial product on their own behalf: s 991F(1). A financial services licensee must also not, subject to the regulations, give credit to an employee of the licensee, or to a person

who they know is an associate of such an employee, if the credit is given for the purpose of enabling that employee or person [page 644] to acquire a financial product, or the licensee knows or has reason to believe that the credit will be used for the purpose of acquiring a financial product: s 991F(2).153 The prohibition on licensees providing credit to employees has the primary purpose of preserving the liquidity of such licensees, and the incidental effect of restricting the opportunity for employees to trade in competition with clients of the licensee. The extension of credit by financial services licensees in relation to trading by employees involves a greater risk to the liquidity position of the financial services licensee than the extension of credit to clients at arm’s length, given the possibility of inadequate credit control and of conflict of interest.154 Section 991F(2) restricts the circumstances in which credit is extended to employees in a way in which the extension of credit to other clients of a financial services licensee is not restricted. On one view, a licensee should be taken to give credit to an employee where it purchases securities on behalf of the licensee and permits payment to be deferred to a date later than the date on which a contract note is issued to the employee. An alternative view is that a licensee should be taken to give credit to an employee at an earlier time, namely, when a purchase is concluded, since the licensee incurs a liability to pay the purchase price at that time. Whichever of these views is correct, it is not necessary that the licensee has extended an additional time for payment to an employee, beyond the time which it allows to other clients, before it can be said to have given credit to that employee for the purposes of s 991F(2). Subject to the regulations, an employee of a financial services licensee that is a participant in a licensed market, who is employed in connection with a licensee’s business of dealing in financial products, may only acquire, or agree to acquire, a financial product of a kind that is able to be traded on that market on his or her own behalf, if the licensee acts as agent of that employee in respect of the acquisition: s 991F(3).155 A related body

corporate may act as the agent of an employee of a financial services licensee, in respect of an acquisition mentioned in s 991F(3), subject to the requirements specified in reg 7.8.21(2). Section 991F(3) is limited to the acquisition of financial products, and does not apply to the sale of such products. That limitation is inconsistent with a policy of ensuring the trading occurs in-house so that financial services licensees may monitor trading by their employees to ensure that they do not trade on the basis of market information obtained as an employee of the financial services licensee. The fact that the employee is permitted to acquire financial products through his or her employer may also allow the employee the [page 645] opportunity to advance his or her interests to the detriment of interests of clients of the employer, by engaging in practices such as ‘line switching’ or allocation of orders to defer payment on the securities. For example, an employee who trades through a financial services licensee that is his or her employer could seek to allocate the most advantageous sales and purchases on a particular day against his or her own orders, allocating the balance to satisfy the client’s orders, although such conduct would contravene reg 7.8.18(4): see 14.81. This risk should be addressed in a properly structured internal control system established within a financial services licensee. A reference to an employee of a financial services licensee in s 991F includes an officer of a body corporate: s 991F(4). The extension of the definition of ‘employee’ of a financial services licensee to an officer, for a licensee that is a body corporate, has the result that that restriction in s 991F(3) applies to purchases of financial products made by an executive director of a licensee who is employed in connection with the business of dealing in financial products by that licensee. However, the better view is that that prohibition does not extend further to, for example, a nonexecutive director of an incorporated financial services licensee who has no operational involvement in its business of dealing in financial products, since the section applies only to a person who is an employee or officer of the licensee ‘in connection with’ the business of dealing in financial products carried on by the licensee. Arguably, the fact that a person is a

director, and particularly a non-executive director, of a financial services licensee does not of itself establish a connection with the licensee’s business of dealing in securities. By contrast with r 5.4.2 of the ASIC Market Integrity Rules (ASX Market), the restriction in s 991F(3) does not extend to persons associated with employees.

Prohibition on hawking of financial products 14.86 Section 736 prohibits ‘hawking’ of securities: see 6.68. A person must not offer securities for issue or sale in the course of, or because of, an unsolicited meeting with or telephone call to another person: s 736(1). A meeting or telephone call would be ‘unsolicited’ if it was not requested or initiated by that other person: .au Domain Administration Ltd v Domain Names Australia Pty Ltd (2004) 207 ALR 521; [2004] FCA 424. Because that prohibition is targeted at contacts in meetings and telephone calls, it does not apply to unsolicited contact by mail, email or by facsimile. This prohibition does not apply to offers of securities falling within the exceptions in s 736(2), including offers of securities in respect of employee share schemes. A person who acquires securities as a result of an offer made in contravention of s 736 may return them and receive repayment of the amount paid within one month after the issue or transfer of the securities: s 738. Section 992A prohibits hawking of other financial products. A person must not offer financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person: s 992A(1). That prohibition does not apply in relation to the offering of securities or managed investments, where such conduct is prohibited by ss 736 and 992AA respectively. This prohibition also does not apply to an offer of financial products if the offer is not to a retail client, or to an offer of financial products made under an eligible employee share scheme (as defined [page 646] in s 9): s 992A(3A)–(3B).156 The term ‘retail client’ is defined in s 761G:

see 13.30. A contravention of this provision is an offence. A person is also prohibited from making an offer to issue or sell a financial product in the course of, or because of, an unsolicited personal contact157 with another person unless specified requirements158 are satisfied: s 992A(3). That prohibition also does not apply to an offer of financial products if the offer is not to a retail client: s 992A(3A). As noted above, the term ‘retail client’ is defined in s 761G: see 13.30. If a person acquires financial products in circumstances involving a failure to comply with s 992A, he or she has a right of return and refund exercisable within one month after the expiry date of the relevant coolingoff period for the financial product, or one month and 14 days if no cooling-off period applies: s 992A(4). That right of return does not apply to specified products; namely, a product offered or issued under a distribution reinvestment plan or switching facility; acquisition of a product through additional contributions required by an existing agreement; a product issued as consideration for an offer made under a takeover bid; a superannuation product issued in relation to a non-public offer superannuation entity or certain pooled superannuation trusts; and a risk insurance product of less than 12 months duration which is a renewal of an existing product on its current terms and conditions: reg 7.8.24. Section 992AA prohibits a person offering interests in managed investment schemes for issue or sale in the course of, or because of, an unsolicited meeting or unsolicited telephone call to another person, unless the exemption under s 992AA(2) applies. That prohibition does not apply to an offer of interests in managed investment schemes which is not made to a retail client; or is an offer of interests in a listed managed investment scheme made by telephone by a financial services licensee; or is made to a client by a licensee through whom the client has acquired or [page 647] disposed of an interest in a managed investment scheme in the previous 12 months; or is made under an eligible employee share scheme (as defined in

s 9): s 992AA(2). ASIC also has a wide power of exemption and modification from these provisions under s 992B.

Enforcement of conduct of business obligations 14.87 Conduct of business obligations, whether imposed on financial services licensees as statutory obligations under the Corporations Act or as conditions of licences, may be enforced in proceedings brought by ASIC under s 1101B: see 13.72. Section 1101B also permits an order to be made in relation to a contravention of the operating rules, and any compensation rules, of a licensed market operated by a market licensee on the application of that licensee. The court has power under s 1101B to make a range of orders, including an order declaring a contract relating to financial products or financial services to be void or voidable.159 In Australian Securities Commission v Mount Burgess Gold Mining Co NL (1994) 15 ACLR 714, the Federal Court made orders under the former s 1114 of the Corporations Law that certain share transactions, which occurred following a misleading announcement of an intention to make a takeover offer, should be voidable at the option of the purchasers. In the case of persistent contraventions or continuing contraventions of Corporations Act Ch 7 or any other law relating to dealings in financial products or providing financial services, the conditions or restrictions of a financial services licence, or a provision of the operating rules or any compensation rules of a licensed market, the orders which may be made by the court in an application under s 1101B include an order restraining a person from carrying on a business or doing an act or classes of act in relation to financial products or financial services. Third parties may also bring an action based on breach of statutory duty or under s 1324 if a licensee engages in conduct which contravenes Ch 7: see 13.72. Alternatively, a third party may plead illegality as a defence to an action for breach of contract brought by the licensee against that third party.160

___________________________ 1.

Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384 at 402–3; Hawkins v Clayton (1988) 164 CLR 539 at 544; [1988] HCA 15.

2.

Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd (1979) 144 CLR 596 at 606; [1979] HCA 51; Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226 at 241; [1986] HCA 14.

3.

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24; Eric Preston Pty Ltd v Euroz Securities Ltd (2010) 77 ACSR 135; [2010] FCA 97; aff’d (2011) 274 ALR 705; [2011] FCAFC 11.

4.

Johnson v Minet Mathers Ltd (1990) 6 ANZ Ins Cas 60-968; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442; [1995] HCA 24.

5.

Redmayne Bentley Stockbrokers v Isaacs [2010] EWHC 1504.

6.

Thompson v Meade (1891) 7 TLR 698.

7.

Option Investments (Aust) Pty Ltd v Martin [1981] VR 138.

8.

Option Investments (Aust) Pty Ltd v Martin, above at 142.

9.

Drexel Burnham Lambert International NV v Nasr [1986] 1 Lloyd’s Rep 356.

10.

Option Investments (Aust) Pty Ltd v Martin above; Dalton v AML Finance Corp Ltd (1980) Aust Sec Law Cases 76-006.

11.

Option Investments (Aust) Pty Ltd v Martin, above.

12.

Cee Bee Marine Ltd v Lombard Insurance Co Ltd (1989) 5 ANZ Ins Cas 60-890.

13.

Cock, Russell & Co v Bray, Gibb & Co (1920) Ll R 71; Cee Bee Marine Ltd v Lombard Insurance Co Ltd, above at 75,671.

14.

Tadoran Pty Ltd (in liq) v NG Delaney Insurances Pty Ltd (1989) 5 ANZ Ins Cas 60-900; Mitor Investments Pty Ltd v General Accident Fire & Life Assurance Corporation Ltd and Australian Insurance Brokers (WA) Pty Ltd (1984) 3 ANZ Ins Cas 60-562; D Kelly and M Ball, Principles of Insurance Law, LexisNexis, looseleaf, [4.014.1], [16.0105.30].

15.

Tepko Ltd v Water Board (2001) 206 CLR 1; [2001] HCA 19 at [47]; ABN Amro Bank NV v Bathurst Regional Council (2014) 309 ALR 445; [2014] FCAFC 65 at [574].

16.

Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; [2004] HCA 16 at [23]–[24]; ABN Amro Bank NV v Bathurst Regional Council, above at [575].

17.

ABN Amro Bank NV v Bathurst Regional Council, above at [588], [593].

18.

Woolcock Street Investments Pty Ltd v CDG Pty Ltd, above at [23]; Brookfield Multiplex Ltd v The Owners Corporation Strata Plan 61288 (2014) 313 ALR 408; [2014] HCA 36.

19.

Perre v Apand Pty Ltd (1999) 198 CLR 180 at 192; [1999] HCA 36 at [108].

20.

Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 282, 286; [1997] HCA 8; Astley v Austrust Ltd (1999) 197 CLR 1 at 22; [1999] HCA 6; Perre v Apand Pty Ltd, above at 227; Selig v Wealthsure Pty Ltd (2013) 94 ACSR 308; [2013] FCA 248 at [868]–[869], on appeal Wealthsure Pty Ltd v Selig (2014) 221 FCR 1; [2014] FCAFC 64; Casaclang v Wealthsure Pty Ltd (2015) 107 ACSR 274; [2015] FCA 761 at [390].

21.

Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398 at 418; Heydon v NRMA Ltd (2000) 51 NSWLR 1; 36 ACSR 462 at [237] per Malcolm AJA; [2000] NSWCA 374.

22.

Drexel Burnham Lambert International NV v Nasr, above.

23.

Barclays Bank plc v Khaira [1992] 1 WLR 623; Bankers Trust International plc v PT Dharmala Sakti Sejahtera [1996] CLC 518.

24.

Hawkins v Clayton (1988) 164 CLR 539 at 579; [1998] HCA 15; Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642.

25.

Rogers v Whitaker (1992) 175 CLR 479; [1992] HCA 58; Heydon v NRMA Ltd, above.

26.

JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) at [108], on appeal [2010] EWCA (Civ) 1221, where Gloster J observed that a ‘trading floor opinion’, where a dealer advised a client as to the availability and terms of products and commented on their merits in taking an order, did not create a wider advisory relationship or duty although it could arguably give rise to a ‘low level duty of care … not to make any negligent misstatements, or even to use reasonable care not to recommend a highly risky investment without pointing out that it was such’; Titan Steel Wheels Ltd v The Royal Bank of Scotland plc [2010] EWHC 211 (Comm); [2010] 2 Lloyd’s Rep 92; Standard Chartered Bank v Ceylon Petroleum Corp [2011] EWHC 1785 (Comm), on appeal [2012] EWCA (Civ) 1049; Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm) (taking the same view as in JP Morgan Bank v Springwell Navigation Corporation, above); Wilson v MF Global UK Ltd [2011] EWHC 138 (QB), where Eady J held that the exchange of information and swapping of ideas between a client and a trader did not did not give rise to a relationship involving the making of a personal recommendation or give rise to a duty to advise, where that duty was not expressly incorporated into the terms of business governing the client relationship.

27.

Voli v Inglewood Shire Council (1963) 110 CLR 74 at 84; [1963] HCA 15; Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] 1 Ch 384 at 403; Rogers v Whitaker, above at 487.

28.

Rest-Ezi Furniture Pty Ltd v Ace Shohin (Aust) Pty Ltd (1987) 5 ACLC 10.

29.

Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 at 74; Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp, above at 402; Edward Wong Finance Co Ltd v Johnson, Stokes & Master (a firm) [1984] AC 296 at 306.

30.

Rhoads v Prudential-Bache Securities Canada Ltd [1992] 2 WWR 630; 63 BCLR (2d) 256.

31.

Lloyd v Citicorp Australia Ltd (1986) 11 NSWLR 286 at 288.

32.

Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981; Anglo-African Merchants Ltd v Bayley [1969] 1 Lloyd’s Rep 268 at 279; Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) Ltd (1986) 160 CLR 226 at 234; [1986] HCA 14.

33.

Keighley, Maxsted & Co v Durant [1901] AC 240; Greenwood v Martins Bank [1932] 1 KB 371; Maynegrain Pty Ltd v Compafina Bank [1982] 2 NSWLR 141 at 150 per Hope JA; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 at 276 per McHugh JA.

34.

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96–7; [1984] HCA 64 per Mason J; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963 at [272].

35.

Daly v Sydney Stock Exchange Ltd, above at 377 per Gibbs CJ; at 385 per Brennan J (stockbroker); Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 391; 102 ALR 453 (trading bank); Aequitas Ltd v Sparad No 100 Ltd (formerly Australian European Finance Corporation Ltd), above at [307]–[310] (corporate adviser).

36.

D C Langevoort, ‘Selling Hope, Selling Risk: Some Lessons for Law from Behavioral Economics about Stockbrokers and Sophisticated Customers’ (1996) 84 California LR 627.

37.

Some United States courts have held that whether a broker–client relationship is fiduciary in nature requires a factual inquiry as to whether a sufficient relationship of trust and confidence existed, with the level of the client’s sophistication having particular relevance to that inquiry: Mid-America Federal Savings & Loans Association v Shearson/American Express Inc 886 F 2d 1249, 1258–9 (10th Cir 1989). Other United States courts hold that the broker–client relationship will not be fiduciary in character in the absence of special circumstances: Romano v Merrill Lynch, Pierce Fenner & Smith Inc 834 F 2d 523 (5th Cir 1987). On the most limited view adopted by United States courts, a broker–client relationship will not be fiduciary in nature, unless the broker exercises actual or de facto control of a discretionary account: Lefkowitz v Smith Barney, Harris Upham & Co 809 F 2d 154 (1st Cir 1986); Shearson Hayden Stone Inc v Leach 583F 2d 367 (7th Cir 1978). As to the position in United States and Canadian law, see generally C R Goforth, ‘Stockbrokers’ Duties to Their Customers’ (1989) 33 St Louis University LJ 407 at 419; G A Hicks, ‘Defining the Scope of Broker and Dealer Duties — Some Problems in Adjudicating the Responsibilities of Securities and Commodities Professionals’ (1990) 39 DePaul LR 709; N S Poser, Broker–Dealer Law and Regulation: Private Rights of Action, Boston, Little Brown & Co, 1995; P C Wardle, ‘Playing the Market: An Exploration of Stockbrokers’ Liability for Clients’ Losses’ (1996) 27 Canadian Business LJ 323; D C Langevoort, ‘Selling Hope, Selling Risk: Some Lessons for Law from Behavioral Economics about Stockbrokers and Sophisticated Customers’, above at 676.

38.

Ryder v Osler, Wills, Bickle Ltd (1985) 16 DLR (4th) 80; Maghun v Richardson Securities of Canada Ltd (1986) 34 DLR (4th) 524 (Ont CA); MidAmerica Federal Savings & Loan Association v Shearson/American Express Inc, above.

39.

Leib v Merrill Lynch, Pierce, Fenner & Smith Inc 461 F Supp 951 at 953 (ED Mich 1978); aff’d 647 F 2d 165 (6th Cir 1981).

40.

Hlavinka v Commodity Futures Trading Commission 867 F 2d 1029, 1033 (7th Cir 1989); Varcoe v Sterling (1992) 7 OR (3d) 204 at 234–6; approved by the Supreme Court of Canada in Hodgkinson v Simms (1994) 117 DLR (4th) 161.

41.

Parker v McKenna (1874) LR 10 Ch App 96; Chan v Zacharia (1984) 154 CLR 178 at 199 per Deane J; [1984] HCA 36; Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569; [2006] FCAFC 44 at [12]; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963 at [291].

42.

Anglo-African Merchants Ltd v Bayley [1970] 1 QB 311.

43.

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 73 per Gibbs CJ; at 99 per Mason J; at 123 per Deane J; [1984] HCA 64.

44.

Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384; [1929] HCA 24; New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 2 All ER 1222; 1 WLR 1126; Noranda Australia Ltd v Lachlan Resources NL (1988) 14 NSWLR 1; Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 206; News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 539; 21 ACSR 635; [1996] FCA 870; Breen v Williams (1996) 186 CLR 71; [1996] HCA 57; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4), above at [279], [323]; Eric Preston Pty Ltd v Euroz Securities Ltd (2010) 77 ACSR 135; [2010] FCA 97; aff’d (2011) 274 ALR 705; [2011] FCAFC 11.

45.

Robinson v Merrill Lynch, Pierce, Fenner and Smith, Inc 337 F Supp 107 at 111 (1971).

46.

Shearson Hayden Stone Inc v Leach, above.

47.

J S Currie, Australian Futures Regulation, Longman Professional, Melbourne, 1994, pp 110–11.

48.

Jones v Canavan [1972] 2 NSWLR 236.

49.

T Brailsford, ‘The ASX Crossing Rule: Concepts and Use’ (1988) 6 C&SLJ 254 at 254.

50.

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97 per Mason J; [1984] HCA 64; Chan v Zacharia, above at 196; Noranda Australia Ltd v Lachlan Resources NL, above; Henderson v Merrett Syndicates Ltd, above at 206; News Ltd v Australian Rugby Football League Ltd, above at FCR 539; Breen v Williams, above; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4), above at [279], [323].

51.

New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 2 All ER 1222 at 1227; 1 WLR 1126; Woolworths Ltd v Kelly (1991) 22 NSWLR 189; 4 ACSR 431; 9 ACLC 539; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [107]; Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4), above at [296].

52.

S Degeling and J Hudson, ‘Fiduciary Obligations, Financial Advisers and FOFA’ (2014) 32 C&SLJ 527.

53.

Chan v Zacharia (1984) 154 CLR 178 at 199 per Deane J; [1984] HCA 36.

54.

Nocton v Lord Ashburton [1914] AC 932; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; 102 ALR 453.

55.

Re Dawson [1966] 2 NSWR 211; Day v Mead [1987] 2 NZLR 443 at 461–2; Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1; 33 ACSR 1; [1999] NSWCA 40.

56.

Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165; 38 ACSR 122; [2001] HCA 31.

57.

Re Ararimu Holdings Ltd [1989] 3 NZLR 487.

58.

Re Goode; Ex parte Mount (1974) 24 FLR 61; 4 ALR 579, distinguished in Meth & Co (Aust) Pty Ltd v Commercial Banking Co of Sydney Ltd (1977–8) CLC ¶40-302.

59.

See I E Davidson, ‘The Equitable Remedy of Compensation’ (1982) 13 MULR 349; J B Kearney, ‘Accounting for a Fiduciary’s Gains in Commercial Contexts’ in P D Finn (ed), Equity and Commercial Relationships, Law Book Company, Sydney, 1987, pp 182–216; W M C Gummow, ‘Compensation for Breach of Fiduciary Duty’ in T G Youdan (ed), Equity, Fiduciaries and Trusts, Carswell, Toronto, 1989, p 82.

60.

W Noall & Son v Wan [1970] VR 683.

61.

Forget v Baxter [1900] AC 467 (PC) at 479; Solloway v Blumberger [1933] SCR 163 at 166; Greenshields Inc v McDonough [1968] 1 OR 297.

62.

Hunt, Cox and Co v Chamberlain (1896) TLR 186; Hitchens, Harrison, Woolston and Co v Jackson & Sons [1943] AC 266.

63.

Skelton v Wood (1894) 71 LT 616; Osborne v Australian Mutual Growth Fund Ltd [1972] 1 NSWLR 100.

64.

Solloway v McLaughlin [1938] AC 247 at 257.

65.

M Q Conelly, ‘The Licensing of Securities Market Actors’ in Proposal for a Securities Market Law for Canada, Department of Consumer and Corporate Affairs, Ottawa, 1978, pp 1273–4; A J Black, ‘Professional Responsibilities and Fiduciary Obligations of Securities Brokers’ (1991) 14 UNSWLJ 98 at 99.

66.

A Tuch, ‘Conduct of Business Regulation’ in N Moloney et al, The Oxford Handbook of Financial Regulation, Oxford University Press, Oxford, p 538.

67.

D Kingsford Smith, ‘ASIC Regulation for the Investor as Consumer’ (2011) 29 C&SLJ 327; S Corones and K Irving, ‘Raising Levels of Awareness of Rights and Obligations in the Provision of Financial Advice to Retail Clients’ (2014) 32 C&SLJ 192.

68.

N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, Oxford, 2014, pp 770–1; see also Australian Securities and Investments Commission (ASIC) v Cassimatis (No 8) [2016] FCA 1023.

69.

Above, pp 322–3.

70.

ASIC FSRB Policy Proposal Paper No 1, April 2001, [C6].

71.

The requirement to provide an FSG is also modified by several ASIC class orders and instruments. For example, ASIC Corporations (Superannuation and Schemes: Underlying Investments) Instrument 2016/378 exempts a responsible entity and superannuation trustee from the requirement to provide an FSG if it deals in financial products which are the underlying investments of the relevant fund. [CO 03/578] exempts a financial services licensee and its authorised representative which conducts the service of making a market of a financial product through a licensed market from the requirement to provide an FSG. ASIC Corporations (Financial Services Guides) Instrument 2015/541 (formerly CO 04/1572 – 04/1573) deals with the provision of an FSG where an expert’s report is prepared for inclusion in a disclosure statement to be issued by a third party. ASIC Corporations (Advertising by Product Issuers) Instrument 2015/539 (formerly [CO 05/835]) provides relief for a financial services licensee that provides general financial advice in the form of an advertisement for securities to be issued by the licensee, provided the advertisement indicates that a person should consider whether the financial product is appropriate for that person.

72.

ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure, [175.163]– [175.181].

73.

Explanatory Memorandum to the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007, [7.4].

74.

A person will be an associate of a financial services provider for the purposes of ss 947B and 947C in the circumstances set out in Pt 1.2 Div 2. An associate will include a person in partnership with whom the provider carries on a financial services business; a trustee of a trust of which the provider benefits or is capable of benefiting, other than in the course of money lending transactions carried out in the ordinary course of business (s 13(c)); and a person in concert with whom the provider is acting: s 15.

75.

Explanatory Memorandum to the Financial Services Reform Bill, [12.52].

76.

A person will be an associate of a financial services provider for the purposes of s 947B(2)(d) in the circumstances set out in Pt 1.2 Div 2. An associate will include a person in partnership with whom the provider carries on a financial services business; a trustee of a trust of which the provider benefits or is capable of benefiting, other than in the course of money lending transactions carried out in the ordinary course of business (s 13(c)); and a person in concert with whom the provider is acting: s 15.

77.

ASIC expressed this view in former Policy Statement 122, 3 March 1997.

78.

Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450; 244 ALR 552; [2007] FCA 1216 at [13].

79.

Explanatory Memorandum to the Financial Services Reform Bill, [12.58].

80.

Carras v Burns 516 F 2d 251 at 258 (4th Cir 1975); Thomson v Smith Barney, Harris Upham & Co 709 F 2d 1413 at 1416 (11th Cir 1983); Costello v Oppenheimer & Co 711 F 2d 1361 at 1367 (7th Cir 1983);

Arceneaux v Merrill Lynch Pierce Fenner & Smith, Inc 767 F 2d 1498 at 1501 (11th Cir 1985). 81.

Davis v Merrill Lynch, Pierce Fenner and Smith, Inc 906 F 2d 1206 at 1214–16 (8th Cir 1990).

82.

Tiernan v Blyth, Eastman, Dillon & Co 719 F 2d 1 at 3–4 (1st Cir 1983).

83.

M Slonim, ‘Customer Sophistication and a Plaintiff’s Duty of Due Diligence; A Proposed Framework for Churning Actions in Nondiscretionary Accounts under SEC Rule 10b-5’ (1986) 54 Fordham LR 1101; P A O’Hara, ‘The Elusive Concept of Control in Churning Claims under Federal Securities and Commodities Law’ (1987) 75 Georgetown LJ 1875; M G Hains, ‘Churning and Burning: A Futures Cause of Action’ (1989) 63 ALJ 608.

84.

For example, ASIC Corporations (Advertising by Product Issuers) Instrument 2015/539 (formerly ASIC [CO 05/835]) provides relief for a financial services licensee that provides general advice in the form of an advertisement of securities to be issued by the licensee, subject to specified requirements. ASIC Corporations (General Advice Warning) Instrument 2015/540 (formerly [CO 05/1195]) exempts Australian financial services licensees and their authorised representatives from the obligation to give a general advice warning for oral general advice if a simplified oral warning is given.

85.

Explanatory Memorandum to the Financial Services Reform Bill, [12.89].

86.

D C Langevoort, ‘Fraud and Deception by Securities Professionals’ (1983) 61 Texas LR 1247 at 1280.

87.

F H Easterbrook and D R Fischel, ‘Optimal Damages in Securities Cases’ (1985) 52 Uni Chicago LR 611 at 651.

88.

D Kingsford Smith, ‘ASIC Regulation for the Investor as Consumer’ (2011) 29 C&SLJ 327.

89.

D Kingsford Smith, ‘ASIC Regulation for the Investor as Consumer’, above at 329, 337–8; M Soh and G Cameron, ‘Controlling the Quality of Financial Advice’ (1997) JBL 143; G Pearson, ‘Risk and the Consumer in Australian Financial Services Reform’ (2006) 28 Syd LR 99; A Serpell, ‘Treating Consumers Fairly in the Australian Financial Services Sector’ (2010) 25 AJCL 26; ASIC Report 230: Financial Literacy and Behavioural Change, March 2011.

90.

Report of the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia, Recommendation 1.

91.

Above, Recommendation 4.

92.

Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.22].

93.

ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure, [175.234].

94.

Manglicmot v Commonwealth Bank Officers Superannuation Corp (2010) 239 FLR 159; [2010] NSWSC 363 at [45]ff; K Lindgren, ‘Fiduciary Duty and the Ripoll Report’ (2010) 28 C&SLJ 435; M Vrisakis, ‘So If the Fiduciary Duty of an Adviser Will Be a Duty to Act in the Best Interest of the Clients …’ (2010) 9(1) FSN 5; G Craddock, ‘The Ripoll Committee Recommendation for a Fiduciary Duty in the Broader Regulatory Context’ (2012) 30 C&SLJ 216; AJ Serpell, ‘The Future of Financial Advice Reforms’ (2012) 30 C&SLJ 240; S Corones and T Galloway, ‘The Effectiveness of the Best Interests Duty — Enhancing Consumer Protection?’ (2013) 41 ABLR 5; P F Hanrahan, ‘The Relationship between Equitable and Statutory “Best Interests” Obligations in Financial Services Law’ (2013) 7 J Eq 46; M S Donald, ‘Regulating for Fiduciary Qualities of Conduct’ (2013) 7 J Eq 142; R Batten and G Pearson, ‘Financial Advice in Australia: Principles to Proscription; Managing to Banning’ (2013) 87 St John’s L Rev 511; S Corones and K Irving, ‘Raising Levels of Awareness of Rights and Obligations in the Provision of Financial Product Advice to Retail Clients’ (2014) 32 C&SLJ 192; P Latimer, ‘Protecting the Best Interests of the Client’ (2014) 29 AJCL 8.

95.

Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.23], [1.25].

96.

ASIC Regulatory Guide 175 — Licensing: Financial Product Advisers — Conduct and Disclosure, [175.253].

97.

Above, [175.269].

98.

Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.32]–[1.34].

99.

Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.41].

100. Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.42]. 101. Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.43]–[1.44]. 102. M S Donald, ‘Regulating for Fiduciary Qualities of Conduct’ (2013) 7 J Eq 142 at 143. 103. D Cain et al, ‘The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest’ (2005) 34 Journal of Legal Studies 1; B Church and X Kuang, ‘Conflicts of Interest, Disclosure and (Costly) Sanctions: Experimental Evidence’ (2009) 38 Journal of Legal Studies 505; J Payne, ‘The Role of Gatekeepers’ in N Moloney et al, The Oxford Handbook of Financial Regulation, Oxford University Press, Oxford, p 264; A Tuch, ‘Conduct of Business Regulation’ in N Moloney et al, above, p 553. 104. Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.59]. 105. Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.66], [1.68]. 106. M S Donald, ‘Regulating for Fiduciary Qualities of Conduct’ (2013) 7 J Eq 142 at 147. 107. Explanatory Memorandum to Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011, [1.66], [1.68]. 108. An arrangement is an ‘ongoing fee arrangement’ where (1) a financial service licensee, or their representative, provides personal advice (as defined in s 766B(3): see 14.29) to a person as a retail client (as defined in as defined in s 761G: see 13.30); (2) the client enters into an arrangement with the licensee or representative; and (3) a fee is to be paid during a period of more than 12 months under the terms of that arrangement: s 962A. An arrangement is not an ongoing fee arrangement if it satisfies six conditions set out in s 962A(3) that broadly relate to payment for advice that has previously been provided by instalments. This concept also does not include ongoing payments of insurance premiums or product fees prescribed by regulation: s 962A(4)–(5). 109. Explanatory Memorandum to Corporations Amendment (Future of Financial Advice) Bill 2011, [1.50]. 110. The term ‘disclosure day’ is defined as the anniversary of the day on which the arrangement was entered into, or the anniversary of the day on which the last statement was provided: s 962J. 111. Explanatory Memorandum to Corporations Amendment (Future of Financial Advice) Bill 2011, [1.27]. 112. The term ‘renewal notice day’ is defined as the second anniversary of the day on which the arrangement was entered into or the second anniversary of the day of the provision of the last renewal notice: s 962L(1).

113. Section 962CA allows ASIC to exempt a class of persons from this requirement if that class of persons is bound by a code of conduct approved by ASIC and ASIC is satisfied that the code obviates the need for the opt-in requirement that would otherwise apply under ss 962K–962L. 114. Explanatory Memorandum to Corporations Amendment (Future of Financial Advice Measures) Bill 2011, [1.37]. 115. Explanatory Memorandum to Corporations Amendment (Future of Financial Advice Measures) Bill 2011, [1.45]. 116. A note at the end of s 963A, inserted by the Corporations Amendment (Financial Advice Measures) Act 2016, indicates that references in Pt 7.7A Div 4 Subdiv B (including ss 963A–963D) to giving a benefit include causing or authorising that benefit to be given within the meaning of s 52 of the Corporations Act. That note confirms that the exclusion, from the concept of conflicted remuneration, of a benefit given by a retail client under ss 963B(1)(d)(ii) and 963C(e)(ii) may extend to a benefit that a client authorises a product issuer to pay to an adviser. That exclusion has the capacity to narrow the prohibition on conflicted remuneration, if such authorities come to be regularly included in standard form documents executed by clients: see D Mendoza-Jones, ‘Reform of the Financial Advice Industries in Australia and the United States’ (2013) 31 C&SLJ 261 at 263. 117. Tarrant v Australian Securities and Investments Commission [2013] AATA 926; (2013) 62 AAR 192 at [203]; G Pearson, ‘Conflicted Remuneration: The Debate is not Over’ in S McCracken and S Griffiths, Making Banking and Finance Law: A Snapshot, Ross Parsons Centre of Commercial, Corporate and Taxation Law, Sydney, p 44. 118. A monetary benefit given to a financial services licensee or representative which provides financial product advice to a retail client is not conflicted remuneration where, among other things, the benefit is a prescribed benefit or is given in prescribed circumstances: s 963B(1)(e). Regulation 7.7A.12–7.7A.12D, introduced by the Corporations Amendment Regulation 2012 (No 10), is made for the purposes of s 963B(1)(e) and specifies certain benefits that are not conflicted remuneration, including benefits given in respect of certain life risk insurance products, stamping fees, benefits for advice relating to an interest in a time-sharing scheme, and brokerage fees (as defined in reg 7.7A.12D) given by a provider to a representative of the provider; and fees paid by clients for dealing services. Regulation 7.7A.12E allows an exception for a monetary benefit given to a provider by the retail client in relation to the provider dealing in a financial product on the client’s behalf; there is an open issue whether that exception is limited to a benefit given from monies that are a client’s property so that it would not extend, for example, to a benefit paid from superannuation entitlements that are vested but have not yet been paid to a member of a superannuation fund. Regulation 7.7A.12EA allows an exemption for monetary benefits given to a financial services licensee or representative where the benefit is paid as part of the purchase or sale of the licensee’s or representative’s financial advice business, if the price is calculated using a specified formula. Regulations 7.7A.12F–7.7A.12I specify the circumstances in which monetary or non-monetary benefits relating to, among other things, general insurance, basic banking and general insurance products and mixed benefits are not treated as conflicted remuneration. Certain kinds of remuneration relating to the volume of financial products recommended or funds invested are presumed to be conflicted remuneration unless the contrary is shown: s 963L. 119. This term is defined as a financial services licensee or RSE licensee (as defined in the Superannuation Industry (Supervision) Act 1993 (Cth)) that offers to be the provider of a custodial arrangement (as defined in s 1012IA), by which, broadly, the client instructs the provider to acquire certain financial products which are held on trust for the client or in which the client retains an interest. 120. ASIC Regulatory Guide 212 — Client Money Relating to Dealing in OTC Derivatives, [212.1].

121. A person who is exempt from the licensing requirements under s 911(2A)–(2E), introduced by the Corporations Amendment Regulations 2005 (No 5) is also exempt from the requirements of Pt 7.8 in respect of the relevant service: reg 7.9.98. 122. A reference to ‘Australian ADI’ will include Australian banks, building societies, credit unions and foreign banks. 123. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491. 124. Regulation 7.8.01 deals with the operation of such an account in respect of, among other things, moneys received by a licensee for the account of an insurer or the insured and margin calls. 125. The operation of s 981B is modified by several class orders. [CO 03/1112] exempts an Australian financial services licensee that is an Australian ADI from the requirement under s 981B(1)(c) to hold a wholesale client’s money on trust if the licensee and client agree in writing. [CO 04/1063] modifies this section to permit money to be paid into a cash common fund. 126. ASIC Regulatory Guide 212 — Client Money Relating to Dealing in OTC Derivatives, [212.53]–[212.63] expresses a generally adverse view of contract terms which provide authority for a licensee to withdraw money for any purpose. 127. Sonray, above at [95]ff; Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [89]–[91]. 128. Sonray, above at [84]–[85]; Re MF Global Australia Ltd (in liq), above at [46]ff. 129. The latter was preferred by the Supreme Court of the United Kingdom in Re Lehman Bros International (Europe) (in admin) [2012] 3 All ER 1; [2012] UKSC 6 at [139]. 130. Re MF Global Australia Ltd (in liq), above. 131. Re Lehman Bros International (Europe) (in admin) [2009] EWHC 3228 at [290]; Sonray, above at [112]; Re MF Global Australia Ltd (in liq), above at [110]–[117]. 132. Re Lehman Bros International (Europe) (in admin) [2010] EWCA Civ 917 at [65]; Sonray, above at [82]– [86]; Re MF Global Australia Ltd (in liq), above at [102], [152]; Re All Class Insurance Brokers Pty Ltd (in liq) [2014] NSWSC 475. In MF Global Australia Ltd (in liq), above, Black J preferred the view that ‘entitlement[s]’ under reg 7.8.03(4) were to be determined by reference to the position if a licensee had performed its obligations, for example by depositing monies received for clients into the relevant account, and White J took the same view in Re All Class Insurance Brokers Pty Ltd (in liq), above. 133. Re Greater West Insurance Brokers Pty Ltd (2001) 39 ACSR 301; [2001] NSWSC 825, followed in Re All Class Insurance Brokers Pty Ltd (in liq), above at [30]–[31]. 134. Sonray, above at [77]; Re MF Global Australia Ltd (in liq), above at [149]. The approach in Sonray and MF Global was followed in Warner, Re GTL Tradeup Pty Ltd (in liq) (2015) 104 ACSR 633; [2015] FCA 323. 135. [CO 03/1110] exempts an Australian financial services licensee that is an ADI from the obligation to hold a client’s property in trust if that property consists of securities, the licensee holds the securities under a prime brokerage agreement, the client is a wholesale client and the licensee and client so agree in writing. 136. That information includes particulars of (1) all moneys received or paid by the licensee, including money paid to or disbursed from an account maintained for the purposes of s 981B or s 982B (see 14.67, 14.71); (2) all acquisitions and disposals of financial products made by the licensee, the

charges and credits arising from them, and the names of the person acquiring or disposing of each of those products; (3) all income received from commissions, interest and other sources, and all expenses, commissions and interest paid by the licensee; (4) all the assets and liabilities, including contingent liabilities, of the licensee; (5) all securities or managed investment products that are the property of the licensee, showing by whom the securities or products or documents of title to the securities or products are held and, if they are held by some other person, whether or not they are held as security against loans or advances; (6) all securities or managed investment products that are not the property of the licensee and for which the licensee or a nominee controlled by it is accountable, showing specified information; and (7) any other matters specified in the regulations; and see reg 7.8.11. 137. ASIC Corporations (Foreign Licensees and ADIs) Instrument 2016/186 exempts an overseas-based ADI from the accounting and audit obligations applicable to holders of Australian financial services licenses under, among other things, ss 988B, 988D, 988E and Pt 7.8 Div 6 Subdivs C and D, if equivalent reports which are prepared for the overseas regulator of the foreign ADI are lodged with ASIC. 138. See also Blomley v Ryan (1956) 99 CLR 362 at 405 per Fullager J; at 415 per Kitto J; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474 per Deane J; [1983] HCA 14; Louth v Diprose (1992) 175 CLR 621 at 637; [1992] HCA 61; CG Berbatis Holdings Pty Ltd v Australian Competition and Consumer Commission (2001) 185 ALR 555; ATPR ¶41-826; [2001] FCA 757. 139. Hurley v McDonald’s Australia Pty Ltd [2000] ATPR ¶41-741; Francis v South Sydney District Rugby League Football Club Ltd [2002] FCA 1306 at [300]; Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17; Durkin v Pioneer Permanent Building Society Ltd [2003] FCA 419 at [42]; Apple Computer Australia Pty Ltd v Mekrizis (2003) 44 ACSR 518; [2003] NSWSC 126 at [251]; AttorneyGeneral (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557; [2005] NSWCA 261 at [121]; Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; 56 ACSR 131; [2005] FCAFC 226 at [43]; Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324; [2009] FCA 17 at [109]–[110], [113]–[115]. For academic commentary see S Drummond, ‘Unconscionable Conduct and Utmost Good Faith’ (2003) 14 ILJ 208; B Horrigan, ‘The Expansion of Fairness-Based Business Regulation — Unconscionability, Good Faith and the Law’s Informed Conscience’ (2004) 32 ABLR 159; G Pearson, ‘The Ambit of Unconscionable Conduct in Relation to Financial Services’ (2005) 23 C&SLJ 105. 140. Australian Competition & Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90; Australian Competition & Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405; Australian Competition & Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liq) [2015] FCA 25. 141. The term ‘associate’ will here include a person in partnership with whom the licensee carries on a financial services business; a person who is a partner of the licensee other than in the course of carrying on a financial services business in partnership; a trustee of a trust from which the licensee benefits or is capable of benefiting, other than by lending transactions entered into in the ordinary course of business; and a director of a body corporate of which the licensee is also a director, whether or not that body corporate carries on a financial services business: s 13. 142. N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, Oxford, 2014, pp 511, 524. 143. Seagar v Copydex Ltd [1967] 2 All ER 415 at 417; Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 47; Hunter v Mann [1974] QB 767; 2 All ER 414. 144. Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 at 471–2 per Bankes LJ; at 480 per Scrutton LJ; at 483–4 per Atkin LJ; Brown v Inland Revenue Commrs [1965] AC 244 at 263;

Parry-Jones v Law Society [1969] 1 Ch 1 at 7. 145. A stockbroker’s general law duty of confidentiality is qualified by r 5010 of the ASX Operating Rules, which requires brokers to provide information to the ASX in specified circumstances. 146. M J Aitken and P Latimer, ‘Principal Trading by Stockbrokers’ (1995) 5 AJCL 1 at 9. 147. For discussion of forms of client facilitation, and ASIC’s expectations as to the procedures to be adopted by licensees in conducting facilitation business, see ASIC Report 452, Review of High Frequency Trading and Dark Liquidity, October 2015, [254], [264]. 148. N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, Oxford, 2014, p 512. 149. Armstrong v Jackson [1917] 2 KB 822 at 824. 150. Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 385 per Brennan J; [1986] HCA 25; see also G Cooper and R J Cridlan, Law and Procedure of the Stock Exchange, Butterworths, London, 1971, p 147 and authorities there cited. 151. The restriction on own account dealings in s 991E(1) does not apply to the sale or purchase of securities by the body corporate by which the securities were made available, if securities are made available in accordance with Chs 5C and 6D: reg 7.8.20(1). That restriction also does not apply to the sale or purchase of interests in a registered scheme by the body corporate by which those interests were made available, if those interests are made available in accordance with Chs 5C and 7: reg 7.8.20(1). 152. Part 3.2 of the ASX MIRs in turn applies where a market participant enters into a market transaction, as defined: for discussion of that rule, see 11.18. 153. The prohibition in s 991F(2) does not apply to a bank or a body corporate which gives credit in good faith to a person (other than a director) employed by it, or by a related body corporate, to enable that person to acquire fully paid shares in the body corporate which are to be beneficially owned by that person: reg 7.8.21(1). 154. For example, the Rae Committee’s examination of trading by employees and extension of credit to employees during the mineral boom in the period from 1969–70 concluded that trading by employees, under inadequately controlled credit arrangements, gave rise to significant losses on the failure of brokers following the mineral boom, and that deficiencies in the trust accounts of defaulting members of the securities exchanges had also in part resulted from financing employee trading. 155. Rule 5.4.2 of the ASIC Market Integrity Rules (ASX Market) also requires a market participant to ensure that specified requirements are satisfied in respect of each market transaction entered into by or for the account of its connected persons (as defined). 156. The operation of this section is modified by the regulations, by class order relief and by ASIC instruments. Regulation 7.8.21A limits the application of this prohibition in relation to basic deposit products, related non-cash payment facility or travellers’ cheques which are offered by an unsolicited telephone call or other unsolicited contact. [CO 02/641] provides that this section does not apply to securities (which are covered by s 736) or interests in managed investment schemes (which are covered by s 992AA). [CO 04/239] provides relief from this prohibition to persons who provide certain financial services in relation to factoring arrangements, subject to specified conditions. ASIC Corporations (Non-Cash Payment Facilities) Instrument 2016/211 allows relief from this prohibition to persons providing financial services in relation to low value non-cash payment facilities which meet specified criteria, subject to the specified consumer protection requirements and also to persons providing financial services in relation to gift facilities and pre-paid

mobile facilities. 157. The term ‘personal contact’ is not defined in the Corporations Act, but would clearly include, for example, telephone calls. 158. These requirements are, relevantly, that the person (1) has been contacted only during hours prescribed by the regulations; (2) is not listed in a ‘no contact/no call’ register maintained by the person making the contact; (3) has been given an opportunity to register on the ‘no contact/no call’ register at no cost to that person and select the time and frequency of any future contacts; (4) has been given a PDS before becoming bound to acquire the financial product; (5) has been informed of the importance of using the information in the PDS when making a decision to acquire a financial product; and (6) has been given the option of having the information in the PDS read out to that person. 159. National Companies and Securities Commission v Monarch Petroleum NL (1984) 8 ACLR 785; 2 ACLC 256. 160. North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68; Spedley Securities Ltd (in liq) v Greater Pacific Investments Pty Ltd (in liq) (1992) 30 NSWLR 185; 7 ACSR 155.

[page 649]

Chapter 15 CONSUMER PROTECTION Introduction ASIC Act Consumer Laws Unfair Contract Terms Unconscionable Conduct Consumer Protection and Sales Practices Conditions and Warranties ASIC Notice Powers

15.1 15.10 15.14 15.19 15.22 15.25 15.30

INTRODUCTION 15.1 Earlier editions of this book did not include a separate chapter on ‘consumer protection’. Traditionally the acquisition by a person of financial products1 and financial services, particularly in the context of investment or trading activity, was not considered a consumer transaction, and the norms of consumer protection law did not apply. These transactions were instead primarily viewed as interactions between equal counterparties in markets, and the regulatory interventions were directly primarily at correcting information asymmetries (through mandatory disclosure) and ensuring that participants in markets observed minimum standards of honest conduct towards each other and the market. 15.2 However, many people who acquire financial products and services do so as ‘consumers’. It has been rightly observed that, over the last quarter century: … the retail investor market in Australia has been radically extended. This is due to a combination of government privatisations and individual provision for needs previously provided for by the state, such as education and retirement income. There has also been growing affluence, and disposable income to be invested. Retail investing has become a ‘“mass market’ in a fashion not unlike the mass market in cars and other consumer goods, in previous decades.2

[page 650] 15.3 The extent to which consumer issues now impact on securities and financial services law and regulation is readily apparent from the various reviews and parliamentary inquiries dealing with retail investor losses that have been conducted in Australia since the global financial crisis.3 The need for adequate consumer protection is complicated in Australia by the penetration of complex financial products and services into the retail market here. Financial products and services can be marketed to retail clients in Australia regardless of asset class, investment structure, level of gearing, or underlying risk or complexity, so long as the relevant disclosure, licensing and (in the case of collective investments) registration requirements are met. This includes alternate investment products such as hedge funds that would not routinely be offered to retail investors in other markets. 15.4 The increasing involvement of consumers in markets for financial products and financial services requires close and ongoing consideration of the adequacy of existing consumer protection mechanisms.4 In the final report by the Financial System Inquiry (FSI) in 2014, Ch 4 is devoted entirely to ‘consumer outcomes’. The FSI concluded that: The financial system plays a vital role in meeting the financial needs of individual Australians. To fulfil this role effectively, consumers should be treated fairly and financial products and services should perform in the way consumers are led to believe they will. Consumers have a responsibility to accept their financial decisions, including market losses, when they have been treated fairly. However, financial system participants, in dealing with consumers, should have regard to consumer behavioural biases and information imbalances. Recent consumer experiences reveal poor industry standards of conduct and areas for enhancement in the current framework.5

15.5 The reference by the FSI to ‘consumer behavioural biases’ is noteworthy. In recent years the Australian Securities and Investments Commission (ASIC) has been working through the implications of behavioural economics for disclosure and other financial services regulation.6 This issue has been recognised in the academic literature for a considerable period,7 and has received heightened attention from regulators since the global financial crisis. Following the global financial crisis, in its submission

[page 651] to the Ripoll Inquiry, ASIC recognised limitations to the efficacy of disclosure as a regulatory technique, and the Turner Committee in the United Kingdom had similar doubts.8 ASIC’s submission to the Financial Services Inquiry (April 2014) noted (at ([124]) the significance of disclosure as a regulatory tool, but also noted its limitations arising from behavioural biases, lack of resources of investors to read and understand disclosure documents and the complexity of financial products. ASIC concluded that disclosure was unlikely to correct market structures or conflicts that drove product development or distribution practices that result in poor investor outcomes. ASIC also noted (at [126]) that its experience is that: Disclosure has proved relatively ineffective in enhancing consumer understanding of the level of risk involved in a product or service, or in addressing problems associated with conflicts of interest.

ASIC is now developing this territory in research and in its approach to regulation of more complex and higher risk financial products. ASIC’s Strategic Outlook 2014–15 notes ASIC’s intention to continue to focus on the relationship between the design and disclosure of retail products and consumer decision-making and ASIC has sought to apply behavioural finance principles in respect of disclosure of hybrid securities and to financial calculators.9 However, the application of behavioural finance principles to frame specific regulation is difficult. Disclosure-based regulatory regimes offer the promise of a wide regulatory solution, by bringing risks to the attention of investors who can then take them into account. Once confidence in that approach is shaken, as it has been, what are left are much more difficult exercises in shaping particular regulation in respect of particular products to seek to minimise adverse effects of investor biases. In parallel with the loss of confidence in disclosure, we are also seeing limited moves towards a form of merits regulation, both by the product intervention power proposed by the FSI and in specific contexts, including the regulation of debentures issued by financial corporations.10 15.6 In its report the FSI made a number of recommendations to alter the existing regulatory framework insofar as it applies to consumers in the

financial sector. In so doing it was ‘guided by the objective of ensuring the fair treatment of participants, particularly consumers of financial products and services’. The principles articulated by FSI as underlying this objective are: A fair, well-functioning financial system allows consumers to take on risk to make a return. Inevitably, this means consumers will incur gains and losses from market movements. Consumers should bear responsibility for their financial decisions. To assist them in doing this: [page 652] –

Consumers should receive fair treatment from financial firms.

–

Consumers should have access to competent, good-quality, customer-focused advice and guidance.

–

Information provided to consumers should be accessible, engaging and understandable.

–

Financial literacy strategies should be an important element of the consumer framework.

Product issuers and distributors should take responsibility for the design, targeting and distribution of financial products. ASIC should be proactive in its supervision and enforcement to reduce the risk of significant detriment to consumers. Consumers should have access to timely and low-cost dispute resolution.11 The FSI recommendations include introducing ‘a targeted and principlesbased product design and distribution obligation’, that is intended to ‘reduce the number of consumers buying products that do not match their needs, and reduce consequent significant consumer detriment’.12 This option was recommended over introducing an individual appropriateness test at point of sale for complex products of the kind proposed in Europe.13 The precise form that obligation will take is not yet clear

15.7 At a global level, there has also been increased focus on consumer protection since the global financial crisis. In the revisions to the United Nations Guidelines for Consumer Protection, made in 2016, there are (at [66]–[68]) specific recommendations directed at the protection of consumers of financial services. Similarly, the High-level Principles on Financial Consumer Protection of the Organization for Economic Cooperation and Development and the Group of 20, the Principles for Innovative Financial Inclusion of the Group of 20, and the Good Practices for Financial Consumer Protection of the World Bank all emphasise consumer protection, including in relation to investment products. 15.8 For now, consumer protection in Australia remains focused primarily on conduct and disclosure regulation. Much of the existing law discussed elsewhere in this book serves a consumer protection function. This includes the licensing, conduct and disclosure rules that apply to issuers (discussed in Chapters 4–9) and to intermediaries (discussed in Chapters 13–14) who are transacting with retail clients. These laws are supplemented by additional consumer protection rules, contained for the most part in Pt 2 Div 2 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and discussed in this chapter. These include provisions mirroring the consumer protection laws that apply outside the financial sector, under the Australian Consumer Law (ACL), that are administered by the Australian Competition and Consumer Commission (ACCC) and state fair trading agencies. In particular, the ASIC Act deals with: unfair contract terms; [page 653] unconscionable conduct; misleading conduct and undesirable sales practices; and conditions and warranties in consumer transactions. 15.9 The ASIC Act also empowers ASIC to take certain actions to disrupt the sale of financial products and services where there is a

demonstrable risk to consumers, although it is limited. A further recommendation of the FSI is that ASIC’s powers to do so be extended in future by granting it a proactive product intervention power.14

ASIC ACT CONSUMER LAWS 15.10 Part 2 Div 2 of the ASIC Act contains a number of consumer protection rules that apply in connection with the provision of financial services and financial products, as defined. The application of ASIC Act Pt 2 Div 2 and its relationship with the Competition and Consumer Act 2010 (Cth) and state fair trading legislation is discussed in Chapter 8 above. There may be situations in which both legislative regimes apply in connection with a single transaction that, for example, involves the provision of both goods and financial services.15 15.11 Most of the provisions of Pt 2 Div 2 apply only with respect to conduct engaged in ‘in trade or commerce’. The meaning of that expression is to be construed in accordance with the principles articulated by the High Court in Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594; 92 ALR 193: see also Prestia v Aknar (1996) 40 NSWLR 165; Fasold v Roberts (1997) 70 FCR 489; Houghton v Arms (2006) 225 CLR 553; New Cap Reinsurance Corporation Ltd v Daya (2008) 66 ACSR 95 [2008] NSWSC 64 at [40]–[50] (Barrett J). In Concrete Constructions the High Court held (at CLR 604) that: What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. Such conduct includes, of course, promotional activities in relation to, or for the purposes of, the supply of goods or services to actual or potential consumers, be they identified persons or merely an unidentifiable section of the public. In some areas, the dividing line between what is and what is not conduct ‘in trade or commerce’ may be less clear and may require the identification of what imports a trading or commercial character to an activity which is not, without more, of that character.

The scope of the notion of ‘trade or commerce’ is discussed at 8.42 above. 15.12 The ASIC Act prohibits various types of undesirable conduct in

relation to the supply or possible supply for financial services. While these provisions are generally referred to as ‘consumer protection’ provisions, their application is not limited to consumer transactions. Many of the prohibitions may also apply in relation to commercial transactions between sophisticated parties. [page 654] 15.13 The definition of ‘financial service’ as it is used in ASIC Act Pt 2 Div 2 is discussed in 8.40 above. Importantly, it is wider than that used in Ch 7 of the Corporations Act. A person provides a financial service for the purposes of the ASIC Act if, among other things, they ‘deal in a financial product’: ASIC Act s 12BAB. ‘Financial product’ includes a security: see ASIC Act s 12BAA(7)(a), discussed at 3.38 above. A person deals in a financial product if they apply for or acquire a financial product, issue a financial product, underwrite securities or managed investment interests, vary a financial product or dispose of a financial product: ASIC Act s 12BAB(7). Arranging for a person to engage in conduct referred to in ASIC Act s 12BAB(7) is also dealing, unless the actions concerned amount to the provision of financial product advice: ASIC Act s 12BAB(8). The effect of ASIC Act s 12BAB is that, in connection with an offer of securities, the actions of the issuer (as well as those of intermediaries such as brokers and advisers) can amount to the provision of a financial service for the purposes of ASIC Act Pt 2 Div 2. While a person is taken not to deal in a financial product if the person deals in the product on their own behalf, this exception does not apply if the person is an issuer of financial products and the dealing is in relation to one or more of those products: ASIC Act s 12BAB(9). There is no equivalent of the Corporations Act s 766C(4) (which carves out the actions of securities issuers other than investment companies from the definition of ‘financial services’ used in the Corporations Act) in the ASIC Act.

UNFAIR CONTRACT TERMS 15.14 Part 2 Div 2 Subdiv BA of the ASIC Act applies to standard form

consumer contracts that are financial products or contracts for the supply of financial services. The effect of the Subdivision is to render void a term of a contract that is unfair within the meaning of s 12BG. This is done by s 12BF(1), which provides that a term of a consumer contract is void if: (a) the term is unfair; and (b) the contract is a standard form contract; and (c) the contract is: (i)

a financial product; or

(ii) a contract for the supply, or possible supply, of services that are financial services.

The contract continues to bind the parties if it is capable of operating without the unfair term: s 12BF(2). Section 12GND empowers the court, on the application of a party to a consumer contract or ASIC, to declare that a term is an unfair term. However, s 12BI(1)(a) and (b) exempt terms that define the main subject matter of the contract and terms that set the upfront price payable under the contract from the operation of the legislation. 15.15 The unfair contracts provisions only apply to consumer contracts as defined: that is, contracts to which at least one of the parties is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for ‘personal, domestic or household use or consumption’: s 12BF(3). In Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 56 ACSR 131; [2005] [page 655] FCAFC 226 at [49], the acceptance by retail investors of an unsolicited offer to acquire shares, which is a financial service, was held not to be for a personal, domestic or household use. However, it is not entirely clear-cut that investment and related transactions can never be treated as consumer contracts. In Oliver v Commonwealth Bank of Australia (No 1) [2011] FCA 1440, an application to strike out a claim relating to a margin loan was based, in part, on an argument that the loan was acquired for

personal, household or domestic use. The bank submitted that Leveraged Equities v Goodridge (2011) 191 FCR 71; [2011] FCAFC 3 at [416] was authority for the proposition that borrowing money for the purposes of buying securities was not a household or domestic purpose. However, Perram J declined to read Goodridge in that way, concluding (at [88]): ‘Whilst I have some sympathy with the idea that a margin loan facility is not for household or domestic purposes … this appears to me to be a triable issue.’ The provisions do not apply to a consumer contract that is the constitution of a company, managed investment scheme or other kind of body constitution: ASIC Act s 12BL. 15.16 As to whether a contract is a ‘standard form contract’ s 12BK provides that a court may take into account such matters as it thinks relevant, but must take into account the following: (a) whether one of the parties has all or most of the bargaining power relating to the transaction; (b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; (c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in subsection 12BI(1)) in the form in which they were presented; (d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in subsection 12BI(1); (e) whether the terms of the contract (other than the terms referred to in subsection 12BI(1)) take into account the specific characteristics of another party or the particular transaction; (f)

any other matter prescribed by the regulations.

15.17 Under s 12BG(1) a term of a consumer contract is unfair if: (a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; (b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and (c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Section 12BG(2) provides that, in determining whether a term of a

consumer contract is unfair under s 12BG(1), a court may take into account such matters as it thinks relevant, but must take into account the extent to which the term is transparent and the contract as a whole. Section 12BG(3) provides guidance on the meaning of ‘transparent’ in this context. Section 12BG(4) provides that, for the purposes of ss 12BG(1)(b), a term of a consumer contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise: s 12BG(4). [page 656] Section 12BH(1) provides a non-exhaustive list of examples of the kinds of terms of a consumer contract that may be unfair, including a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract, and a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract. 15.18 In Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377, Gilmour J considered the following principles, extracted from cases dealing with equivalent (although not necessarily identical) unfair contracts regimes, to be of assistance in interpreting and applying Pt 2 Div 2 Subdiv BA of the ASIC Act: (a) the underlying policy of unfair contract terms legislation respects true freedom of contract and seeks to prevent the abuse of standard form consumer contracts which, by definition, will not have been individually negotiated: Jetstar Airways Pty Ltd v Free [2008] VSC 539 at [112]; (b) the requirement of a ‘significant imbalance’ directs attention to the substantive unfairness of the contract: Director-General of Fair Trading v First National Bank plc [2002] 1 AC 481 at [37]; (c) it is useful to assess the impact of an impugned term on the parties’ rights and obligations by comparing the effect of the contract with the term and the effect it would have without it: Director-General of Fair Trading v First National Bank plc at [54]; (d) the ‘significant imbalance’ requirement is met if a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in its favour — this may be by the granting to the supplier of a beneficial option or discretion or power, or by the imposing on the consumer of a disadvantageous burden

or risk or duty: Director-General of Fair Trading v First National Bank at 494 [17] per Lord Bingham, applied in ACCC v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Ltd) [2015] FCA 368 at [950]; (e) significant in this context means ‘significant in magnitude’, or ‘sufficiently large to be important’, ‘being a meaning not too distant from substantial’: Jetstar Airways Pty Ltd v Free at [104]–[105] per Cavanough J: Cf Director of Consumer Affairs Victoria v AAPT Ltd [2006] VCAT 1493 at [32]–[33]; (f)

the legislation proceeds on the assumption that some terms in consumer contracts, especially in standard form consumer contracts, may be inherently unfair, regardless of how comprehensively they might be drawn to the consumer’s attention: Jetstar Airways Pty Ltd v Free at [115]; and

(g) in considering ‘the contract as a whole’, not each and every term of the contract is equally relevant, or necessarily relevant at all. The main requirement is to consider terms that might reasonably be seen as tending to counterbalance the term in question: Jetstar Airways Pty Ltd v Free at [128].

UNCONSCIONABLE CONDUCT 15.19 Part 2 Div 2 Subdiv C of the ASIC Act prohibits certain forms of unconscionable conduct. There are three relevant provisions: ss 12CA, 12CB and 12CC. Section 12CA applies to any conduct engaged in, in trade or commerce, in relation to financial services; it prohibits conduct that is ‘unconscionable within [page 657] the meaning of the unwritten law, from time to time, of the States and Territories’. Sections 12CB and 12CC, as amended in 2011 to unify the consumer and business-related provisions, apply to conduct engaged in, in trade or commerce, in connection with the supply or possible supply, or acquisition or possible acquisition, of financial services to or from a person other than a listed public company. Section 12CB prohibits ‘conduct that is, in all the circumstances, unconscionable’. Section 12CB includes a number of interpretative principles, including (s 12CB(4)(b)): … it is the intention of the Parliament that … this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour.

Section 12CC sets out a number of factors to which a court may have regard in determining whether conduct is unconscionable for this purpose, including matters such as the relative strengths of the bargaining positions of the supplier and the customer. 15.20 The term ‘unconscionable’ is not defined in the ASIC Act. It is to be given its ordinary meaning, being something done not in good conscience and that which is irreconcilable with what is right or reasonable.16 In Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29,699 at [291], cited with approval by Gordon J in Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249; [2014] FCA 35 at [283], Allsop P said that: Aspects of the content of the word ‘unconscionable’ include the following: the conduct must demonstrate a high level of moral obloquy on the part of the person said to have acted unconscionably: Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583; the conduct must be irreconcilable with what is right or reasonable: Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; 148 FCR 132 at 140; Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; 117 FCR 301 at 316–317; Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262; … the concept of unconscionable in this context is wider than the general law and the provisions are intended to build on and not be constrained by cases at genera/law and equity: National Exchange at 140; the statutory provisions focus on the conduct of the person said to have acted unconscionably: National Exchange at 143. It is neither possible nor desirable to provide a comprehensive definition. The range of conduct is wide and

[page 658] can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances.17

In Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] ATPR 42–447 at [23], the court said: The task of the Court is the evaluation of the facts by reference to a normative standard of conscience. That normative standard is permeated with accepted and acceptable community values. In some contexts, such values are contestable. Here, however, they can be seen to be honesty and fairness in the dealing with consumers. The content of those values is not solely governed by the legislature, but the legislature may illuminate, elaborate and develop those norms and values by the act of legislating, and thus standard setting. The existence of State legislation directed to elements of fairness is a fact to be

taken into account. It assists the Court in appreciating some aspects of the publicly recognised content of fairness, without in any way constricting it … These laws … reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure. These considerations are central to the evaluation of the facts by reference to the operative norm of required conscionable conduct.

15.21 The notion of ‘unconscionability’ and the various statutory prohibitions on unconscionable conduct were explored at length in the Paciocco litigation concerning bank fees, including at first instance by Gordon J,18 by Allsop CJ19 and Middleton J20 in the Full Federal Court, and by Gageler J21 and Keane J22 in the High Court. Gageler J says (at [188]) that the question to be answered is whether conduct is: … objectively to be characterised as ‘unconscionable’ according to the ordinary meaning of that term, requiring as it does a ‘high level of moral obloquy’ on the part of the person said to have acted unconscionably.23

The answer to that question turns on a consideration of that conduct in the context of what s 12CC(1) (previously, s 12CB(1)) describes as ‘all the circumstances’. In this regard his Honour says (at [189]): The word ‘may’ in [what is now s 12CC(1)] of the ASIC Act was not permissive, but conditional. The import of [the section is] to spell out that circumstances relevant to the determination of whether conduct was objectively to be characterised as ‘unconscionable’ according to the ordinary meaning of that term might or might

[page 659] not include, in respect of particular conduct, all or any of the particular matters referred to in [the section]. The provision made clear that, where any one or more of those matters existed in respect of particular conduct, each of those extant matters was to form part of the totality of the circumstances mandatorily to be taken into account for the purpose of determining the statutory question posed by s 12CB(1). The provision did not leave it open to a consumer who alleged that conduct of a supplier was in breach of s 12CB(1) to pick and choose. The customers could not choose to rely on matters referred to in [former] s 12CB(2)(a) and (b), yet to ignore matters referred to in s 12CB(2)(c), (d) and (e).

CONSUMER PROTECTION AND SALES PRACTICES

15.22 Subdivision D of ASIC Act Pt 2 Div 2 is headed ‘consumer protection’. However, as noted above, it applies beyond the realm of consumer transactions. 15.23 Section 12DA prohibits a person, in trade or commerce, engaging in conduct in relation to financial services that is misleading or deceptive or likely to mislead or deceive. Section 12DB prohibits certain false or misleading statements in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services. These provisions are discussed at length in Chapter 8 above. 15.24 The balance of Subdiv D deals with a range of undesirable or unlawful sales conduct. Section 12DF prohibits conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for purpose or the quality of financial services. Sections 12DE, 12DG, 12DH, 12DI, 12DJ, 12DK and 12DM prohibit certain undesirable selling practices, including offering gifts and prizes without an intention to provide, bait advertising, referral selling to ‘consumers’ as defined, accepting payment for services without intention to supply, harassment or coercion towards consumers, pyramid selling of financial products, and asserting right to payment for unsolicited financial services.

CONDITIONS AND WARRANTIES 15.25 Subdivision E of ASIC Act Pt 2 Div 2 deals with conditions and warranties in consumer transactions. Because of s 12EB(1), the application of the provisions cannot be excluded or modified; a term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) is void if it purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying the application of the provisions of the Subdivision, the exercise of a right conferred by a provision, or any liability of the person for breach of a condition or warranty implied by such a provision. By s 12EB(2), a term of a contract is not taken to exclude, restrict or modify the application of a provision unless the term does so expressly or is inconsistent with that provision.

15.26 Section 12EC is concerned with contractual terms that purport to limit a provider’s lability. It is to the effect that a term of a contract for the supply of financial services (other than services of a kind ordinarily acquired for personal, domestic or household use) is not void under s 12EB merely because the term limits the liability [page 660] of the supplier for a breach of a condition or warranty to the supplying of the services again, or the payment of the cost of having the services supplied again. However, if the services are of a kind ordinarily acquired for personal, domestic or household use, discussed above, then a term limiting the provider’s liability in this way will be void if the client establishes that it is not fair or reasonable for the provider to rely on that term of the contract. In determining whether or not reliance on a term of a contract is fair or reasonable, s 12EC(3) says that a court must have regard to all the circumstances of the case and, in particular, to the following matters: (a) the strength of the bargaining positions of the supplier and the person to whom the services were supplied (the buyer) relative to each other, taking into account, among other things, the availability of equivalent services and suitable alternative sources of supply; (b) whether the buyer received an inducement to agree to the term or, in agreeing to the term, had an opportunity to acquire the services or equivalent services from any source of supply under a contract that did not include that term; (c) whether the buyer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties).

15.27 Section 12ED contains certain warranties that are implied into ‘every contract for the supply of financial services by a person to a consumer in the course of a business’, other than a contract of insurance. Financial service is defined for this purpose in s 12BAB, discussed in Chapter 8. Consumer is defined in s 12BC; it is presumed in proceedings under ASIC Act Pt 2 Div 2 that a person is a consumer in relation to a service unless the contrary is established.

Under s 12BC, unless the contrary intention appears, a person is taken to have acquired particular financial services as a consumer if, and only if, the price of the services did not exceed $40,000,24 or if the price of the services exceeded that amount, the services were of a kind ordinarily acquired for personal, domestic or household use or consumption. Where the price exceeds $40,000 and the services were of a kind ordinarily acquired for business use or consumption, the person will still be a consumer if the services were acquired for use or consumption in connection with a small business. A small business means a business employing less than 100 people (if the business is or includes the manufacture of goods) or 20 people (otherwise). 15.28 There are two warranties potentially implied by s 12ED into contracts of this kind. The first, in s 12ED(1), is that: (a) the services will be rendered with due care and skill; and (b) any materials supplied in connection with those services will be reasonably fit for the purpose for which they are supplied.

In the context of contracts for the provision of services, this warranty usually overlaps with the provider’s duty of care: see Chapter 14. [page 661] The second, in s 12ED(2), is implied if a person supplies financial services to a consumer in the course of a business, and the consumer, expressly or by implication, makes known to the person any particular purpose for which the services are required or the result that he or she desires the services to achieve. In this case, there is an implied warranty: (c) the services supplied under the contract for the supply of the services; and (d) any materials supplied in connection with those services; will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except if the circumstances show that the consumer does not rely, or that it is unreasonable for him or her to rely, on the person’s skill or judgment.

The fact that a client indicates that he or she wants to preserve assets

and grow wealth do not amount to a statement of purpose of a kind which would supports the alleged implied warranties as to protection of assets. ‘Aspirational statements about a proposed course of investment action, if successful or unsuccessful, are not such a purpose.’25 15.29 In ABN Amro Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2015] FCAFC 65 at [936]–[945], s 12ED was used to imply certain warranties into the mandate letter given by a client to a bank in connection with the client’s investment in complex financial products, including that the bank would render its services with due care and skill; that it would structure and arrange the products so that they would be reasonably fit for the purpose of being held by client (a body responsible for investing on behalf of certain local councils) or the local councils to whom the client might sell the notes as investments with a high degree of security commensurate with a AAA rating; and that the bank would structure and arrange the notes so that they might reasonably be expected to have a degree of security commensurate with a AAA rating. In this case it was not disputed that the client was a consumer: at [940].

ASIC NOTICE POWERS 15.30 ASIC does not (yet) have a general power to prevent the sale of ‘unsafe’ financial products and services to consumers. However, as noted, the FSI has recommended that ASIC be given a proactive product intervention power. 26 Specifically, the recommendation is that government ‘should amend the law to provide ASIC with a product intervention power … to be used as a last resort or pre-emptive measure where there is a risk of significant detriment to a class of consumers’.27 It is envisaged that the power would enable intervention without a demonstrated or suspected breach of the law. [page 662] 15.31 At present, ASIC has certain powers to disrupt the distribution of financial products and services under the ASIC Act. These include the

public warning notice power in s 12GLC and the substantiation notice power in Subdiv GC of ASIC Act Pt 2 Div 2. They are in addition to, and available in different circumstances from, ASIC’s stop order powers in respect of defective disclosure, discussed in Chapter 5. 15.32 Under s 12GLC, ASIC may issue to the public a written notice containing a warning about the conduct of a person if: (a) ASIC has reasonable grounds to suspect that the conduct may constitute a contravention of a provision of Subdivision C or D; and (b) ASIC is satisfied that one or more other persons has suffered, or is likely to suffer, detriment as a result of the conduct; and (c) ASIC is satisfied that it is in the public interest to issue the notice.

15.33 Under s 12GLC(2) ASIC may issue a warning notice if a person fails to respond to a substantiation notice given to the person (see below) and ASIC is satisfied that it is in the public interest to issue a notice under this subsection. In this case ASIC may issue to the public a written notice containing a warning that the person has refused or failed to respond to the substantiation notice within that period, and specifying the matter to which the substantiation notice related. A notice issued by ASIC under s 12GLC (1) or (2) is not a legislative instrument: s 12GLC(3). The notices are published on ASIC’s website. 15.34 Substantiation notices are issued under s 12GY. This section applies if ‘a person has made a claim or representation promoting, or apparently intended to promote, a supply, or possible supply, of financial services by that or any other person’. ASIC may, under s 12GY(2), give the person written notice that requires the person to do one or more of the following: (a) give information and/or produce documents to ASIC that could be capable of substantiating or supporting the claim or representation; (b) give information and/or produce documents to ASIC that could be capable of substantiating: (i)

the quantities in which; and

(ii) the period for which; the person is or will be able to make a supply to which the claim or representation

relates (whether or not the claim or representation relates to those quantities or that period); (c) give information and/or produce documents to ASIC that are of a kind specified in the notice; within 21 days after the notice is given to the person.

15.35 The notice must meet certain statutory requirements. Under s 12GYB, the person must comply with the notice within the required period (which can in some circumstances be extended pursuant to s 12GYA). However, under s 12GYB(1) an individual may reuse or fail to give particular information or produce a particular document in compliance with a substantiation notice on the ground that the information or production of the document might tend to incriminate the individual or expose the individual to a penalty. ___________________________ 1.

At least, other than insurance products or transactional banking products.

2.

D Kingsford Smith, ‘ASIC Regulation for the Investor as Consumer’ (2011) 29 C&SLJ 327.

3.

See in particular Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia, November 2009 (Ripoll Inquiry); Senate Economics Reference Committee, Final Report: Performance of the Australian Securities and Investments Commission, June 2014; Financial System Inquiry, Final Report, November 2014 (FSI); Senate Economics Reference Committee, Agribusiness Managed Investment Schemes — Bitter Harvest, March 2016.

4.

See in particular G Pearson, ‘Risk and the Consumer in Australian Financial Services Reform’ (2006) 28 Syd L R 99.

5.

FSI, p 193.

6.

Other regulators internationally are also examining the implications of behavioural insights for regulatory design. See, for example, Financial Conduct Authority (UK), Occasional Paper No 1 — Applying Behavioural Economics at the Financial Conduct Authority, April 2013.

7.

D Langevoort, ‘Taming the Animal Spirits of the Stock Markets: A Behavioral Approach to Securities Regulation’ (2002) 97 NWU L Rev 135; L Stout, ‘The Mechanisms of Market Inefficiency: An Introduction to the New Finance’ (2003) 28 J Corp L 635; R Shiller, Irrational Exuberance, 2nd ed, Princeton University Press, 2005; G Walker, ‘Securities Regulations, Efficient Markets and Behavioural Finance: Reclaiming the Legal Genealogy’ (2006) 36 Hong Kong LJ 481.

8.

Financial Services Authority, The Turner Review: A Regulatory Response to the Global Banking Crisis, 2009.

9.

ASIC Report 427 — Investing in Hybrid Securities: Explanations Based on Behavioral Economics, ASIC Consultation Paper 249 — Remaking ASIC Class Orders on Generic Financial Calculators, [26]; L McCann and V Kumar, ‘Behavioral Economics: ASIC Puts Investors on the Couch’ (2016) BCLB [152].

10.

E Brown, ‘From “If Not, Why Not” to “If Not, NOT” — Regulatory Reform of the Debenture

Sector’ (2014) 32 C&SLJ 159. 11.

FSI, p 197.

12.

FSI, pp 198–205.

13.

European Securities and Markets Authority (ESMA), Consultation Paper — MIFID/MiFIR, 2014, p 136.

14.

Above, Recommendation 22. See also R Bollen, ‘Quality and Safety for Financial Services and Products’ (2015) 26 JBFLP 182.

15.

Australian Competition and Consumer Commission v CLA Trading Pty Ltd [2016] FCA 377 at [32]–[33].

16.

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at [42]; Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] ATPR 42–447 at [41]; Hurley v McDonald’s Australia Ltd (2000) ATPR 41–741 at [22] and [31] cited with approval in Ange v First East Auction Holdings Pty Ltd (2011) 284 ALR 638 at [96] and [104] and followed in Australian Competition and Consumer Commission v Simply No-Knead Franchising Pty Ltd (2000) 104 FCR 253 at [30]; Australian Competition and Consumer Commission v 4WD Systems Pty Ltd (2003) 200 ALR 491 at [183]–[185]; Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324 at [113]; Perdaman Chemicals and Fertilisers Pty Ltd v ICICI Bank Ltd [2013] FCA 175 at [22]; Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249; [2014] FCA 35 at [283].

17.

See also Lux Distributors at [23] and Director of Consumer Affairs Victoria v Scully (2013) 303 ALR 168.

18.

Paciocco v Australia and New Zealand Banking Group Ltd (2014) 309 ALR 249; [2014] FCA 35 at [281]– [285].

19.

Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 at [250]–[306].

20.

Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; [2015] FCAFC 50 at [402]–[406].

21.

Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569; [2016] HCA 28 at [185]–[191].

22.

Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569; [2016] HCA 28 at [288]–[295].

23.

Referring to Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583.

24.

How the price is calculated is set out in s 12BC(3).

25.

Westpac Banking Corporation v Jamieson (2014) 98 ACSR 63; [2014] QSC 32 at [95].

26.

FSI, pp 206–12.

27.

Above, p 206.

[page 663]

Part 5 Market Conduct

[page 665]

Chapter 16 MARKET MISCONDUCT, PROHIBITED CONDUCT and SHORT SELLING Introduction Nature of market manipulation Motivations for market manipulation Policies underlying the prohibition of market manipulation Manipulative transactions at common law Prohibitions on Market Manipulation, False Trading and Market Rigging Prohibition on market manipulation under s 1041A Stabilising transactions False trading and market rigging — creating a false or misleading appearance of active trading in or with respect to market or price: s 1041B Wash sales Matched orders Fictitious and Illegal Transactions Fictitious transactions: s 1041C Dissemination of information about illegal transactions: s 1041D Other Matters Civil penalties for contraventions of ss 1041A–1041D Extraterritorial application of ss 1041A–1041D Application of ss 1041E–1041I to market misconduct Order setting aside a transaction under s 1101B Orders under s 1324 Short Selling

16.1 16.1 16.2 16.3 16.4 16.5 16.5 16.9 16.10

16.15 16.16 16.17 16.17 16.18 16.19 16.19 16.20 16.21 16.28 16.29 16.30



Short selling generally Legislative restriction on short selling

16.30 16.31 [page 666]

INTRODUCTION Nature of market manipulation 16.1 The essential characteristics of market manipulation are the interference with supply and demand in the market for securities, and either the inducement of persons to trade in a particular security or the attempt to force a security’s price to an artificial level.1 The forms of market manipulation include information-based manipulation, including the release of false information; manipulations based on artificial transactions, including wash sales and matched orders (see 16.15–16.16); price manipulations, including trade-based manipulations, involving largescale or structured and timed trades designed to influence the price levels of traded investments; manipulations using market control, such as ‘squeezes’ in futures contracts; and contract-based manipulations, designed to move prices to allow profits on positions held in related investments such as futures contracts or through triggering contractual rights on such investments.2 A leading academic commentator has also identified additional elements of a definition of market manipulation as follows: Relevant trading must be in such a direction or the exercise of rights must be effected in such a way, as to either lead the price of these investments to an artificial level, and/or enable the perpetrators of the behaviour to materialise, from interests held in the specific or related investments, financial gains that would be not possible, in the absence of such behaviour. 3

That commentary also points to the relevance of two subjective elements, namely inducement and the manipulator’s intent.4 The United States case law provides some assistance as to the content of the concept of ‘manipulation’. In Cargill, Inc v Hardin 452 F 2d 1154, 1163 (8th Cir), cert denied 406 US 932 (1972), the Eighth Circuit observed that manipulation involved the creation of artificial market activity, so that

the price at which shares are traded does not reflect ‘the basic forces of supply and demand’. In Mobil Corp v Marathon Oil Co 669 F 2d 366, 374, the court observed that the term [page 667] ‘manipulation’, where used in s 14(e) of the Securities Exchange Act 1934 (US), referred to an ‘affecting of the market for, or price of, securities by artificial means, i.e. means unrelated to the natural forces of supply and demand’. In Ernst & Ernst v Hochfelder 425 US 185 (1976), the United States Supreme Court noted that the word ‘manipulate’, in connection with the securities market, connoted ‘intentional or wilful conduct designed to deceive or defraud investors by artificially affecting the price of securities’. Similarly, in Santa Fe Industries, Inc v Green 430 US 462 at 476–7 (1977), the court held that the term ‘manipulative’ in s 10(b) of the Securities Exchange Act 1934 (US)5 referred to ‘practices such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity’. Such manipulation deprives investors of the prices set by the free interplay of supply and demand.6 However, a United States commentator has pointed to the difficulty of distinguishing manipulative from non-manipulative trading by reference only to the effect of the particular trade in the market, and suggested that the central feature of manipulative trading is the intention of the trader. That commentator suggests that trading is manipulative if it is intended to move the price of securities in a particular direction; the trader has no belief that the price would move in that direction but for the trade; and the resulting profit arises solely from the trader’s ability to move the price of the securities and not from his or her possession of information relating to the underlying value of the security.7 That definition is intended to recognise that traders may properly trade on the basis of information derived from research or the analysis of publicly available information, even if the effect of that trading results in movement in the market price of the securities.

Motivations for market manipulation 16.2 A number of motivations may induce a person to attempt to manipulate the price at which securities are traded. For example: If a first company has a substantial holding of shares in a second company in its investment portfolio, it will be in the first company’s interests that those shares are trading at a higher rather than a lower price at the first company’s balance date. If a person wishes to dispose of his or her shares in a company, it is in his or her interest that the share price of that company remains firm or increases, rather than decreases, prior to the disposal.8 [page 668] In a contested takeover, the directors of a target company have an interest in seeing that the price of its securities on-market is higher than the bid price, to reduce the likelihood that shareholders in the target company would accept the bid,9 while the bidder has a converse interest in seeing the decline of the price of shares in the target company on-market. Even in the absence of an existing offer, management may be concerned that a fall in a company’s share price may make it vulnerable to such an offer. It is in the interests of a takeover bidder which has made a scrip offer that its shares trade at a higher rather than a lower price, maximising the attractiveness of the offer to shareholders in the target company.10 The manipulation of share prices might allow an investor to derive profits on the futures market, or affect the price at which options to subscribe for shares are exercised or the number of shares issued on the conversion of preference shares.11 A decline in the price at which shares are trading may trigger an event of default under loan covenants; or a margin call where those shares have been lodged with a broker; or may release an underwriter from underwriting obligations. An issuer or underwriter to a rights issue might seek to prevent a

decline in the price at which shares in the issuer are traded, since investors will not take up a rights issue if the market price for shares in the issuer is less than the subscription price in the rights issue.

Policies underlying the prohibition of market manipulation 16.3 As a matter of policy, it is arguably necessary to prohibit market manipulation in order to maintain investors’ confidence in the market’s integrity. Presumably, persons who trade in the securities market do so on the basis of an expectation that the price of securities on-market reflects the operation of market forces, rather than the outcome of manipulative conduct of other traders.12 Thus, in Basic Inc v Levinson 485 US 224 (1988) (see also 9.40), the United States Supreme Court was prepared to accept that investors relied on the integrity of the market price in trading in securities. Justice Blackmun (delivering the opinion of the majority) noted that the efficient capital market hypothesis13 implied that the price of securities reflected [page 669] all available information in a well-developed securities market, and that false or misleading statements relating to securities will affect the market price of those securities, and in so doing would ‘defraud purchasers of stock even if the purchasers do not directly rely on the misstatements’. In R v Lloyd (1996) 19 ACSR 528, the majority observed that there was a critical need for investors to have confidence in the Australian securities market, that being a factor vital to the Australian economy, and that such confidence depended upon the securities market having integrity and being seen to have such integrity, which would be undermined by market rigging schemes: per Ipp J, with whom Malcolm J agreed at 19 ACSR 540. Justice Murray noted (at 548) that it is: … an essential feature of a system of trading in securities in listed corporations by bidding for stock at centralised Stock Exchanges that the system does reflect the interplay of the market forces of supply and demand … Investor confidence is the quality which the

market must be able to maintain. If investors become suspicious that the values of securities which the market reflects do not provide a measure of the worth of the stock then it seems obvious that they will be reluctant to invest.

In R v Jacobson [2014] VSC 592 at [41], Kaye J similarly observed: The express objective of s 1041A of the Corporations Act is to promote a fair, orderly and transparent market for registered securities. As part of that objective, s 1041A is directed to ensuring that the market price for registered securities truly reflects the genuine interaction of the forces of supply and demand for those securities on a free market.

His Honour also there noted that manipulative conduct ‘had the capacity to erode the integrity of, and public confidence in, the securities market, and thereby to cause damage to members of the community, who have invested their savings in that market’. Thus, if manipulative market practices led to a loss of confidence in the integrity of the securities market, then investors would arguably look to other investment avenues, or would demand higher risk premiums, in either event increasing the cost of capital to listed companies. In the absence of a prohibition of market manipulation, the ‘rational investor’ postulated by the efficient market theory would either incur greater policing costs, discount all securities in the market or refrain from trading.14 [page 670] Fraud in the market also upsets allocative efficiency of the market, since it interferes with the task of identifying the most efficient uses for scarce resources. It is not accepted by all commentators that a legislative prohibition on market manipulation is necessary or desirable in policy. One United States commentator has argued that such a prohibition is flawed by the lack of an objective definition of market manipulation and that the conduct it seeks to proscribe is of little practical importance, since an attempt to manipulate the market is likely to be either self-defeating or so costly that the attempt is not worthwhile, partly because it is hard to move prices by trading in widely traded stocks, and partly because it is irrational to

assume that the trader can successfully sell out without the price falling back from its manipulated level.15 It might be noted, in response, that it may be possible to distinguish manipulative from a non-manipulative trading by reference to the fact that legitimate trades are typically executed in a manner that will minimise their price impact, at least unless there is some other good reason that the trade is not price-sensitive, for example, where the trader seeks to acquire a prebid stake in a takeover or establish or unwind a hedging transaction within a short time frame. On the other hand, trades undertaken with a manipulative purpose may be structured so as to increase price impact, for example, by trading in periods of limited liquidity or placing trades in a manner that will accelerate existing price movements. It also appears that market manipulation can be successfully effected in at least some circumstances, as the case law noted in this chapter will illustrate. A tradebased manipulation will only succeed if the manipulator’s trading causes the price of the security to rise and the manipulator is able to sell at a price higher than its purchase price and transaction costs. That can be achieved by liquidity effects or by information effects, if other traders perceive a manipulator’s trades as indicating that a particular stock is an attractive or unattractive trading opportunity.16 A trade-based manipulation may also be difficult to implement in a highly liquid market, if any price change caused by manipulative trades would be offset when those trades are unwound. However, a manipulator can avoid that difficulty if it can achieve a market effect from trades in smaller volume, which do not need to be unwound before trades in larger volume are executed at an artificial price or some other advantage, such as a change in the conversion ratio of converting securities or avoiding a margin call, is achieved at that price.17 [page 671]

Manipulative transactions at common law 16.4 At common law, a market transaction may be void for illegality if it involves an attempt to deceive other traders in the market, even where the transaction involves an actual sale or purchase of securities. In R v De

Berenger (1814) 3 M&S 67; 105 ER 536, De Berenger and seven others were convicted of the crime of conspiracy to spread false reports so as to bring about a rise in the market price of government securities with intention to injure persons who might purchase those securities. The case arose at a time when England was hoping ‘for a quick end to the war with France … On 21 February 1814, De Berenger arrived in Winchester from Dover, wearing a military uniform and scattering French gold among the postilions’18 and claimed to have news that Napoleon had been killed and that the allies were in Paris. Shortly afterwards, two other men dressed as French loyalist officers arrived with similar news and then disappeared. The effect on the stock market was a dramatic rise in the price of government securities. The Court of King’s Bench held that a combination of using wrongful means (that is, false rumours) for a wrongful purpose (that is, to give false value to a commodity in the public market) was a crime. One of the judges, Le Blanc J, observed: It may be admitted therefore that the raising or lowering of the price of the public funds is not per se a crime. A man may have occasion to sell out a large sum, which may have the effect of depressing the price of stocks, or may buy in a large sum, and thereby raise the price on a particular day, and yet he will be guilty of no offence. But if a number of persons conspire by false rumours to raise the funds on a particular day, that is an offence; and the offence, is not in raising the funds simply, but in conspiring by false rumours to raise them on that particular day.

The court held that the defendants were rightly convicted even though the prosecution did not allege that loss had been caused to particular purchasers of government securities. Similarly, in Scott v Brown, Doering, McNab & Co [1892] 2 QB 724, the plaintiff instructed stockbrokers to buy shares on-market at a premium to the issue price, in order to encourage other investors to take up shares because they were trading at a premium. An action brought by the plaintiff under its contract with the stockbrokers failed on the ground that the contract was void for illegality. On appeal, Lindley LJ observed that the transaction was unlawful because its object: … was to impose upon and to deceive the public by leading the public to suppose that there were buyers of such shares at a premium on the Stock Exchange, when in fact there were none but himself. The plaintiff’s purchase was an actual purchase, not a sham purchase; that is true, but it is also true that the sole object of the purchase was to cheat and mislead the public.

[page 672]

PROHIBITIONS ON MARKET MANIPULATION, FALSE TRADING AND MARKET RIGGING Prohibition on market manipulation under s 1041A 16.5 Section 1041A of the Corporations Act 2001 (Cth) (Corporations Act) prohibits a person taking part in, or carrying out (whether directly or indirectly and whether in the jurisdiction or elsewhere) a transaction that has or is likely to have, or two or more transactions that have or are likely to have, the effect of creating an artificial price for trading in financial products on a financial market operating in the jurisdiction or maintaining at an artificial level (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in the jurisdiction. The concept of a ‘transaction’ includes an act or doing, negotiating or dealing with something.19

Whether a financial market is operated in the jurisdiction 16.6 The scope of this prohibition depends on the scope of the concept of a financial market ‘operated’ in the jurisdiction. The term ‘financial market’ is widely defined as a facility through which offers to acquire or dispose of financial products are regularly made or accepted; or offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in the making of offers to acquire or dispose of financial products or the acceptance of such offers: s 767A(1); and see 10.7. It may be arguable that this prohibition does not apply where financial products are traded on the over-the-counter markets, because conduct constituted by a person making or accepting offers or invitations to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only, does not constitute ‘operating a financial market’ for the purposes of Ch 7: s 767A(2). That view is supported by the

fact that the exclusion in s 767A(2) applies for the purposes of Ch 7, not merely for the purposes of the requirements for licensing of market operators. The Explanatory Memorandum to the Financial Services Reform Bill is also consistent with that view, stating that the intention of s 767A(2) is to exclude the making or accepting of offers or invitations to acquire or dispose of financial products in circumstances that involve direct negotiation between the parties who each accept the counterparty credit risk; that this is expected to exclude most transactions that are considered to form part of the informal over-the-counter market; and that the ‘financial market’ encompassed in the definition in s 767A(1) would involve multiple buyers and sellers using the facility and the situation described in s 767A(2)(a) would not fit this concept.20 Finally, that view is supported by the distinction drawn in Ch 7 between ‘making a market’ and ‘operating a market’. A person makes a market for a financial product if they regularly state the prices at which they propose to acquire or dispose of financial products on their own behalf, and other persons have a reasonable expectation that they will be able to regularly effect transactions at the [page 673] stated prices, and the actions of the person do not constitute operating a financial market because of the effect of s 767A(2)(a): s 766D. The contrary argument is that there is a distinction between the phrase ‘operating a financial market’ which is used in s 767A(2) and the phrase ‘financial market operated in this jurisdiction’ which is used in s 1041A. It might be argued that, as a matter of fact, a market is operated in the jurisdiction notwithstanding that the conduct of persons trading on that market does not constitute ‘operating’ that market by reason of s 767A(2). The Australian Securities and Investments Commission takes the view that this prohibition does extend to trading on the over-the-counter markets.

Creation of an artificial price 16.7 It is an essential element of a contravention of s 1041A that the transactions have, or are likely to have, the effect of creating an ‘artificial

price’ for trading in financial products or maintaining a price for trading in financial products at a level that is artificial. The use of the concept of ‘artificial price’ in s 1041A contrasts with the reference in former s 997 of the Corporations Act to transactions that either increase, decrease or stabilise the price. The term ‘artificial’ is defined in the Concise Oxford Dictionary as ‘produced by human effort rather than originating naturally’ and in the Macquarie Dictionary as ‘not genuine or fictitious’. The ordinary meaning of the word ‘likely’ requires a real and not remote chance that the transactions will have such an effect, whether or not that chance is greater or less than 50%.21 By contrast with former s 997 of the Corporations Act, a contravention of s 1041A can be established by a single transaction that has or is likely to have the proscribed effect. Also by contrast with former s 997, s 1041A does not contain any requirement that the transactions be entered into with the intent of inducing other persons to sell, buy or subscribe for financial products. Despite the omission of that requirement from s 1041A, it may still be necessary to have regard to intention to determine whether the price created or maintained by trading in financial products is ‘artificial’ for the purposes of s 1041A. In order to demonstrate that the transactions are likely to have the proscribed effect, the prosecution will generally have to lead expert evidence. The concept of an ‘artificial’ price’ in s 1041A functions to distinguish trades falling within the prohibition from genuine trades and requires a comparison of the price at which the transaction occurred with a notional ‘genuine’ price in the market. Whether a price is ‘artificial’ will have to be determined having regard to the facts of the particular transaction. For example, in R v M R Shearer (David J, DCt (SA), No 36/98, 18 June 1998), Shearer had purchased and sold 1.275 million shares in [page 674] Reef Mining NL over a two-week period, with a view to causing the share price to increase and enable him to sell his holding of 100,000 shares into the market at a profit. He was sentenced to 18 months’ imprisonment after pleading guilty to a charge of market manipulation under former s 997.22 Similarly, in R v Chan (2010) 79 ACSR 189; [2010] VSC 312, a client

adviser in a broking firm was sentenced in respect of contraventions of s 1041A, involving late trades and trades at higher prices than existing bids for the securities in a listed company, Bill Express Ltd, purportedly purchased for individual clients of the broking firm but in fact purchased on behalf of associates of that company. He was also banned from providing financial services for five years.23 In Australian Securities and Investments Commission v Soust (2010) 183 FCR 21; 77 ACSR 98; [2010] FCA 68 (as to penalty, see Australian Securities and Investments Commission v Soust (No 2) (2010) 76 ACSR 1; [2010] FCA 388), Soust procured the purchase of shares in a thinly traded stock on the account of his mother, resulting in an increase of the price of the shares by 25% and triggering payment of a short-term performance bonus to him. The Federal Court held that an ‘artificial price’ is a price created when a transaction is undertaken for the sole or primary purpose of setting the market price and, on the facts of that case, the price was ‘artificial’ in that it was constructed or contrived, because the transaction which created it was undertaken for the sole or primary purpose of setting the price as distinct from the sole or primary purpose of a genuine purchase of the shares: at [89]–[93], [95]–[98]. The court noted that s 1041A does not require proof of intent, but the existence of an intent to increase the share price could satisfy the requirement of an ‘artificial price’ for the purposes of s 1041A: at [80]ff. In Australian Securities and Investments Commission v Administrative Appeals Tribunal (2010) 187 FCR 334; [2010] FCA 807, Dowsett J also noted that s 1041A does not expressly require proof of intention, and observed that ‘the relevant mischief is the potentially misleading effect of market transactions which are not between a buyer and seller who are both seeking the most favourable price’: at [48].24 A significantly narrower view of the section was taken in Director of Public Prosecutions (Cth) v JM (2012) 90 ACSR 96; [2012] VSCA 21, where the majority of the Court of Appeal of the Supreme Court of Victoria (Nettle and Hansen JJA) held that this section was directed only to market manipulation by conduct of the kind typified by the American concepts ‘cornering’ and ‘squeezing’ a market: at [324]–[325], [335]. Warren CJ read the section more widely, as directed to a price created or maintained for the sole or dominant purpose of creating or maintaining

that particular price, provided that genuine buyers and sellers had altered the price [page 675] at which they were willing to trade the shares, as against the price at which they would have been willing to trade but for the impugned transaction. On appeal, in Director of Public Prosecutions (Cth) v JM (2013) 298 ALR 615; 94 ACSR 1; [2013] HCA 30, the High Court took a broader view, treating the prohibition as extending to transactions not involving the genuine forces of supply and demand. The court also did not accept Warren CJ’s view that it was necessary to show that the relevant transaction actually affected the behaviour of genuine buyers and sellers in the market and expressed the view (at [72], [76]) that the section is contravened if a person creates an artificial price for entering into a transaction and noted that a sole or dominant purpose of creating or maintaining an artificial price is not necessary to such a contravention but can provide evidence that a transaction is likely to have the prohibited effect. By contrast, the element of deception of other traders which characterises market manipulation is absent in the case of purchases or sales of securities for genuine investment purposes, where any resulting alteration in the price at which the shares are traded on-market reflects the genuine operation of market forces.25 As a United States court noted in Trane Co v O’Connor Securities 561 F Supp 301 at 304 (SDNY 1983), the purpose of a legislative prohibition in market manipulation is ‘not to prohibit market transactions which may raise or lower the price of securities, but to keep an open and free market where the natural forces of supply and demand determine a security’s price’. By way of example, index arbitrage involves the buying or selling of securities against an offsetting position in index futures, and has the capacity to communicate downward pricing pressure between the securities market and futures exchanges. While index arbitrage may increase the volatility of securities, the pricing which results reflects the genuine forces of supply and demand rather than involving an ‘artificial’ price for the purposes of s 1041A. Similarly,

‘portfolio insurance’ which involves buying or selling orders triggered by pre-set price parameters, so that sales are normally triggered in a falling market, may also increase volatility of securities and futures markets but does not create an ‘artificial’ price for the securities or futures. The spread of adverse rumours may also create an artificial price in contravention of s 1041A, and that issue received significant regulatory attention during the global financial crisis (GFC) that commenced in 2008.26 [page 676]

Penalties 16.8 A contravention of s 1041A is an offence punishable by a fine or imprisonment or both: s 1311 and Sch 3. The penalty for individuals for a contravention of the section is the greater of $810,000 or three times the profit gained or loss avoided and/or up to 10 years’ imprisonment; and for corporations the greater of $8,100,000, three times the profit gained or loss avoided, or up to 10% of the body corporate’s annual turnover in the relevant period. A contravention of the section is also classified as a ‘serious offence’ for which telecommunication interception warrants can be issued under the Telecommunications (Interception and Access) Act 1979 (Cth). Section 1041A is also a civil penalty provision, the contravention of which may attract a civil penalty: see 16.19. In certain circumstances, the conduct of a director, employee or agent of a body corporate, acting within his or her actual or apparent authority, and the state of mind of that director, employee or agent, may be attributed to a body corporate so as to establish liability under s 1041A: s 769B.

Stabilising transactions 16.9 As noted above, s 1041A prohibits a person from taking part in or carrying out a transaction or transactions that have or are likely to have the effect of maintaining a level that is an artificial price (whether or not it

was previously artificial) for trading in financial products on a financial market operated in the jurisdiction. This prohibition could apply to stabilising conduct, such as that seen in the facts of Harris v US 48 F 2d 771 (9th Cir 1931), where the defendants’ conduct in purchasing any shares offered for sale in a company, in order to maintain the share price at an artificially high level, was held to amount to manipulative conduct. Whether a contravention is established will depend on whether the price secured by stabilisation can be characterised as ‘artificial’, by contrast with the price that would have existed in the absence of the stabilising conduct. In the particular circumstances of a new issue of securities, it can be argued that stabilisation may be necessary to avoid securities trading at a price which does not reflect their true value, and that a prohibition on stabilising conduct in that situation may be an impediment to simultaneous international issues of security. The increase in the number of securities on issue as a result of a new issue or initial public offering may lead to an artificially low market price of the securities immediately after issue. If the market price of a new issue is higher than the issue price, investors who applied for an allocation in a float with the intention of trading the security shortly after listing will sell for a profit, driving down the market price of the newly-issued security.27 Book-building arrangements can also lead to price inefficiencies following a new issue, since institutions may tender for securities on the assumption that they will be allotted less than requested in the book-build, and sell excess shares if allotted more than expected, creating downward price pressure not related to the [page 677] underlying value of the securities. The contrary view is that, even where the fact of stabilising conduct is required to be disclosed to the market so that it is not misled as to the demand for or price of securities, that conduct may lead to an overpricing of the securities while it continues and expose investors to loss if the market falls after the stabilising conduct ceases. The absence of a requirement in s 1041A for an intention to induce others to buy, sell or subscribe for securities in order to establish a

contravention of that section may increase the risk that stabilisation conduct undertaken by an underwriter in connection with a new issue would contravene s 1041A. By contrast, it was arguable that market stabilisation did not breach former s 997(7) of the Corporations Act because the underwriter did not have a prohibited intention of inducing other persons to sell, buy or trade the relevant securities. By contrast with s 1041A, market stabilisation in respect of new issues is permitted under United Kingdom and American law in certain circumstances. The common features of the stabilisation regimes in the United Kingdom and the United States are that any stabilisation must occur for the purpose of preventing or limiting a decline in the market price of the securities; the fact that a bid is a stabilising bid must be disclosed; priority must be given to nonstabilising bids; and the price range in which stabilising bids can be placed is limited, and generally cannot be higher than the last independent market price. The attitude of the Australian Securities and Investments Commission (ASIC) to stabilising conduct in new issues has varied over time. In September 1997, ASIC issued a no-action letter permitting market stabilisation to be implemented in connection with Telstra’s global public offering, and subsequently issued no-action letters in relation to a series of other public offerings. In September 2000, ASIC published an information release which outlined the circumstances in which it would grant no-action letters in relation to market stabilisation and the conditions which would generally be imposed in such letters. ASIC subsequently issued Consultation Paper 63, Market Stabilisation, in March 2005. That consultation paper notes that the benefits of market stabilisation in relation to new issues include providing a more orderly secondary market following an initial issue or sale and promoting confidence in the market for new issues, so as to facilitate corporate fundraising. ASIC also notes that market stabilisation is permitted in other jurisdictions, including the United States, the United Kingdom and Hong Kong, and notes that permitting stabilisation in Australia will facilitate simultaneous crossborder offers and allow an orderly cross-border market in the securities. The consultation paper suggests that, if a new offering satisfies specified requirements as to its nature and size, an underwriter may undertake the over-allotment or ‘greenshoe’ form of stabilisation28

[page 678] through a stabilisation manager, subject to requirements as to the maximum price of the bid and how it is made; the number of shares which can be purchased from the secondary market; disclosure that stabilisation is being undertaken; reporting and record-keeping, and the maintenance of an information barrier or Chinese wall (see 17.33) to prevent insider trading. These conditions are similar to the common features of international stabilisation regulation, including requirements as to disclosure, priority to independent non-stabilising bids and price limitations. The Australian Securities and Investments Commission may provide a ‘no action’ letter indicating that it will take no regulatory action in respect of stabilising conduct in relation to a new issue of securities which satisfies these requirements.

False trading and market rigging — creating a false or misleading appearance of active trading in or with respect to market or price: s 1041B 16.10 Section 1041B of the Corporations Act prohibits a person doing, or omitting to do, an act (whether in the jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance of active trading in financial products on a financial market operated in the jurisdiction; or a false or misleading appearance with respect to the market for, or the price for trading in, financial products on a financial market operated in the jurisdiction. The scope of this prohibition will again depend on the scope of the concept of a financial market ‘operated’ in the jurisdiction. It may be arguable that this prohibition does not apply where financial products are traded on the over-the-counter markets, because conduct constituted by a person making or accepting offers or invitations to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only does not constitute ‘operating a financial market’ for the purposes of Ch 7: s 767A(2); and see 16.6. However, the Australian

Securities and Investments Commission takes the view that this prohibition does extend to trading on the over-the-counter markets.

Examples of prohibited conduct 16.11 Section 1041B prohibits, for example, the manipulative practice described by the Rae Committee as a ‘pool’, by which a group of share traders would buy shares and sell them successively from one member of the group to another in order to boost reported turnover in the shares.29 That section would also be contravened by the practice described by the Rae Committee as ‘churning’, where a share trader acquired shares in a company and then placed both buying and selling orders for shares in that company at the same price or slightly higher prices, in order to increase turnover and suggest market interest in the shares.30 That section may also [page 679] be contravened by conduct that increases, or is likely to increase, the price at which securities are traded by limiting the number of those securities available for purchase on-market. Conduct of this kind is illustrated by SEC v National Bankers Life Insurance Co 334 F Supp 444, 446 (ND Tex), aff’d 447 F 2d 920, where the court held that s 10(b) of the Securities Exchange Act 1934 (US) had been contravened by selective purchases of securities to decrease the number of securities available on the market. Conduct of that kind is more likely to occur if securities are closely held or infrequently traded. It is less likely that trading by an individual investor would affect the price at which securities are sold on-market, if the securities are widely held, since an increase in demand for the securities may then be met by other sellers, or an increase in supply by other buyers, at current market prices.31

Australian case law 16.12 The scope of the predecessor to s 1041B, s 70 of the Securities Industry Act 1970 (NSW), was considered by the High Court in North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68, where the

appellants, a stockbroking firm, had participated in a scheme to establish a market for shares in Marra Developments Ltd at a price of approximately $16.50, in order to facilitate Marra’s takeover offer for Scottish Australian Holdings Ltd, in which shares of Marra were to be issued as consideration. Had that takeover proceeded without an increase in the then share price of shares in Marra, the takeover would have resulted in a substantial dilution of the interest of existing shareholders in Marra’s capital. The High Court held that the firm was unable to recover its fees for acting in the transaction, which was tainted by the contravention of s 70 of the Securities Industry Act. Justice Mason noted that the object of s 70 of the Securities Industry Act was ‘to protect the market for securities against activities which will result in artificial or managed manipulation’, and that ‘[i]t is in the interests of the community that the market for securities should be real and genuine, free from manipulation’: at 59. His Honour recognised the difficulty of translating the generality of the provision ‘into a specific prohibition against injurious activity while at the same time leaving people free to engage in legitimate commercial activity which will have an effect on that market and price of the securities’, and noted that (at 58–9): … [p]urchases or sales are often made for indirect or collateral motives, in circumstances where the transaction will, to the knowledge of the participants, have an effect on the market for, or the price of, shares. Plainly enough it is not the object of the section to outlaw all such transactions.

His Honour concluded that s 70 of the Securities Industry Act was intended to ensure that the market ‘reflects the forces of genuine supply and demand’, and would be contravened by transactions ‘undertaken for the sole or primary purpose of setting or maintaining the market price’.32 [page 680] Similarly, in R v Lloyd (1996) 19 ACSR 528, a financier made a loan secured on shares in a publicly listed company, Paragon NL. Under the loan agreement, the financier was entitled to further security or repayment of the loan if the price of shares in that company fell below 70 cents. The defendant was convicted of contravening s 124 of the Securities Industry

Code, the predecessor to s 1041B, by having been involved in trading to maintain the price of those shares above that price. In Fenwick v Jeffries Industries Ltd (1995) 13 ACLC 1334, the plaintiff sought declarations, among other things, as to her rights on the conversion of converting preference shares in Jeffries Industries Ltd (Jeffries) to ordinary shares. The terms of issue of the converting preference shares permitted conversion if a dividend was not paid within 10 days of specified dates, including 30 April 1995. The number of shares to be allotted depended on the price of the ordinary shares on the stock exchange for a period of 20 days prior to the conversion date. The directors of Jeffries resolved to exclude transactions on one of the days falling within that 20day period, 28 April 1995, in calculating the number of ordinary shares to be issued on conversion of the converting preference shares, reducing the number of shares to be issued from 42 to 24. On that day, trading had included sales of 94,000 shares at 14 cents and 13 cents immediately prior to the close of trading by a company controlled by the former chairman of Jeffries (former chairman), who was also the holder of converting preference shares. By contrast, the market price of the shares had been 25– 50 cents over the previous two months. It was alleged that the timing of the sales, the number of shares sold and the lack of an attempt to obtain a better price established, among other things, the creation of a false or misleading appearance with respect to the price of the shares contrary to s 998 of the Corporations Law. At first instance, the court found that the former chairman knew the effect that the sale of a reasonably large parcel of shares in a thinly traded market in the last hour of trading would have upon the price of the shares, and had deliberately sold those shares at a price well below the previous sales prices in order to create an artificially low price for determining the number of shares to be allotted on conversion of the redeemable preference shares. While the former chairman sought to explain the circumstances of the sale of the shares on the basis that he needed funds to pay certain debts and make a loan to a third party, Cohen J found that moneys were available to the former chairman from other sources, and that there was no reason to sell the shares at the lowest bid prices of 13–14 cents. His Honour cited North v Marra Developments Ltd, above, and held that the sales were not:

… an indication of genuine supply and demand. Rather, they were sales brought about by a seller not looking for a genuine demand. The result was to give an appearance of a sale brought about by ordinary market methods. The intention was to give a misleading appearance as to the real price of the shares.

His Honour held that the sales had created a misleading appearance as to the price of the shares, in contravention of s 998. His Honour also found that there was to be implied, in the formula for ascertaining the number of shares to be issued on conversion of the preference shares, a term that the sales to be considered did not include any which were shown to be illegal or otherwise in breach of a statutory [page 681] provision. The shares traded in contravention of s 998 were therefore properly excluded from that calculation. That decision was upheld by the Court of Appeal in Fame Decorator Industries Pty Ltd v Jeffries Industries Ltd (1988) 28 ACSR 58; 16 ACLC 1235. Chief Justice Gleeson, with whom Powell JA concurred, observed: Section 998 aims to preserve the integrity of the share market. Markets, in reflecting the interaction of forces of supply and demand, may suffer from a variety of imperfections, including mismatches of information, without such imperfections destroying their integrity.

Their Honours also observed: The conduct of a seller of thinly traded shares, calculated to effect sales at the lowest, rather than the highest, obtainable price, and timed so as to deflect the possibility of some purchasers bidding up the price, had both the purpose and the effect of creating, temporarily, an artificial market and price.

Their Honours held that the effect of the relevant conduct upon the market for shares in the Company, and the market price, was not merely incidental, and the central object of that conduct was to influence that market price.33 Priestley JA dissented, observing that, while the seller’s purpose was to bring about a closing market price that was to its advantage under the conversion formula for the preference shares, it was doing no more than selling its shares in accordance with market procedures without collusion, connivance, pre-arrangement or communication with any buyer. His Honour also noted the difficulty in

determining the price at which it would become unlawful for a seller of shares to do nothing more than accept otherwise lawful offers to buy those shares on market. It might be noted, however, that the reasoning of Priestley JA would leave little room for the operation of s 1041B, in circumstances that shares were ‘dumped’ on-market with the objective, or at least the necessary consequence, of causing a decline in the market price of those shares. The scope of s 1041B may also be illustrated by the decision of the Federal Court of Australia in Australian Securities Commission v Nomura International Plc (1998) 89 FCR 301; 29 ACSR 473. Nomura held a large sold position in the March 1996 All Ordinaries Share Price Index Contracts (SPI Contracts) traded on the Sydney Futures Exchange (SFE), and held a large holding of each of the shares included in the All Ordinaries Index on the Australian Securities Exchange (ASX), in order to hedge its exposure on the SFE. In late March 1996, Nomura determined to go to expiry on the SPI Contracts and sought to sell its shares on the ASX at the same time and, on 29 March 1996, Nomura placed orders to sell securities worth A$600m in the last half-hour or so of trading on the ASX. The court noted that ASIC did not contend that it was illegal for a trader simply to dispose of a large quantity of stock within a very short time, even where the trader knew that the likely effect of such a heavy volume of selling would be to cause the market price of most securities [page 682] to fall and this would lead to a fall in the All Ordinaries Index.34 However, ASIC contended that, as implemented, Nomura’s trading strategy had contravened the Corporations Law. Nomura had given initial instructions for sale orders (March Sale Orders) from about 2.10 pm on 29 March 1996, which it varied between 3.07 pm and 3.57 pm. At 11.18 am on 29 March 1996, Nomura had also instructed a broker to place orders to buy the same securities (Bid Basket) in almost precisely the quantities contemplated by the March Sale Orders. However, the prices at which the Bid Basket was to be placed were between 5% and 20% lower than the closing price of the relevant

securities on the previous day, the percentage discount depending on the degree of liquidity of those securities. ASIC contended that Nomura intended that the March Sale Orders would bring about a reduction in the price of the securities in its basket, particularly the illiquid securities, and intended to bring about sales to itself at depressed prices, should insufficient or no demand emerge for the securities during the last halfhour of trading. ASIC also alleged that wash sales in two securities, which resulted when sell orders in the March Sale Orders were matched with bids in the Bid Basket, contravened former s 998(1) and (3) of the Corporations Law: see 16.15. Nomura had also instructed the broker that placed the Bid Basket to place sell orders for the same securities as in the Bid Basket, between 5% and 20% above the previous day’s closing price (Ask Basket). At about 3.20 pm on 29 March, Nomura officers in London also instructed a broker to sell 10,000 of each of the top 10 securities in the All Ordinaries Index as assessed by market capitalisation (London Bid Side Sell Orders), which required a broker to effect the sale as the last trade of the day and do so by hitting the bids (that is, offers to buy) recorded on the bids schedule of the Stock Exchange Automated Trading System (SEATS). ASIC alleged that by hitting the bids Nomura sought to increase the chances that the closing price of the 10 securities would be lower. Finally, Nomura had placed sell orders for greater volumes than London Bid Side Sell Orders (London Offer Side Sell Orders). A broker was required to place those sell orders on SEATS at the level of the best ask (that is, lowest offer to sell). ASIC alleged that, because of the London Offer Side Sell Orders, the market price for securities would meet a barrier on the way up. Nomura contended that, in implementing the transactions set out above, it wished to achieve volume convergence and also avoid the risk of ‘high ticking’, by which the securities price moved up and out of alignment with the futures price as a result of buy orders in small quantities placed by other traders at the close of trading.35 Nomura contended that the purpose of the Bid Basket was to provide a mechanism by which a closing price could be achieved for securities in the March Sale Orders, if demand for the securities failed to emerge once the orders were placed, and that the time available for sale of the securities was sufficient for latent demand from perspective purchasers to absorb the volume of Nomura’s sale orders. Nomura contended that the purpose of the Ask Basket was to ensure that the relevant broker

[page 683] did not know whether Nomura planned to buy or sell securities at expiry, and that Nomura was a genuine seller, had anyone chosen to sell at the prices recorded in the Ask Basket. Nomura contended that its intention in respect of the London Bid Side Sell Orders and the London Offer Side Sell Orders was to increase the prospect that, for the top 10 securities in the All Ordinaries Index, the last sale would be in the bid side and Nomura would not be exposed to an ‘offer side high tick’, and that Nomura was again a genuine seller and its orders gave no false or misleading appearance with respect to the relevant market. Sackville J held that, although Nomura’s objective of seeking to realise a profit from its arbitrage position could be described as economically legitimate, that did not necessarily mean that all strategies consistent with that objective were lawful. His Honour found that, by placing the Bid Basket in combination with the other elements of Nomura’s strategy, Nomura sought to ensure that the price of the All Ordinaries Index would decline at the close of trading on 29 March 1996, providing Nomura with profit opportunities. His Honour also found that Nomura intended to determine unilaterally the closing price for some illiquid stocks within the All Ordinaries Index on 29 March 1996, and knew and intended that this would have an impact on the closing price of that index and consequently the cash settlement price of futures contracts on the share price index going to expiry on 29 March 1996. His Honour held that, in placing the Bid Basket and giving instructions for the March Sale Orders, Nomura engaged in conduct which was intended to create, or, alternatively, likely to create, a false or misleading appearance of active trading on the ASX in illiquid securities held by it on 29 March 1996, and a false or misleading appearance with respect to the price of illiquid securities held by it on that day, in contravention of former s 998(1) of the Corporations Law. His Honour also held that Nomura also intended to create a false and misleading appearance with respect to the price for dealings in futures contracts in a futures market, thereby contravening former s 1260(1)(b) of

the Corporations Law. On the relevant factual findings, that conduct would also contravene s 1041B. Some market manipulation cases have involved relatively straightforward trade-based manipulations. For example, in Donald v Australian Securities and Investments Commission (2000) 104 FCR 126; 35 ACSR 383; [2000] FCA 1142, the court held that a trader’s conduct in arranging for securities to be purchased at a higher price than the previous trading price, for the purpose of increasing the market price, created a false or misleading appearance with respect to the price of the securities and contravened this section. In Brown v R (2006) 202 FLR 98; 58 ACSR 290; [2006] WASCA 145, a shareholder in a listed company traded on both sides of the market, had more than one bid on the market simultaneously through different brokers, gave instructions to the brokers so that his own bids would increase over each other, and did not inform the brokers that he was placing bids through other brokers. He was found to have contravened s 998 of the Corporations Law at trial and an appeal in respect of the penalty was dismissed. Wheeler JA (with whom Martin CJ and Buss JA agreed) observed that (at [28]): A person who, as the appellant did, deliberately and dishonestly engages in behaviour which he expects will mislead the market, is behaving in a manner which has the potential adversely to affect many members of the community

[page 684] and has the potential to undermine confidence in the share market, which is an important institution in the functioning of the economy.

His Honour also noted the difficulty of detection of such conduct and emphasised that it may warrant a term of imprisonment, although he observed that term would have been of relatively short duration in that case having regard to several mitigating factors. In other proceedings, a trader pleaded guilty to charges of market manipulation by trading shares through several brokers under various account names, to create an artificial price for the shares of two companies and maintain that price at an artificial level;36 two stockbrokers were convicted of market manipulation in placing orders on the instructions of a

company executive to maintain an artificial price for trading in its shares;37 and the chief operating officer of that company was also convicted for market manipulation in the same matter.38 In R v Chan (2010) 79 ACSR 189; [2010] VSC 312, a client adviser in a broking firm participated in transactions to create an artificial trading price for securities in a listed company involving late trades and trades at higher prices than existing bids for the securities, purportedly purchased for individual clients of the broking firm but in fact purchased on behalf of associates of that company.

Whether a false or misleading appearance is created 16.13 In order to determine whether s 1041B has been contravened, it will be necessary to determine whether the appearance created by the relevant act or omission is false or misleading. In Australian Securities and Investments Commission v Soust (2010) 183 FCR 21; 77 ACSR 98; [2010] FCA 68 (the facts of which were noted in 16.7 above), Goldberg J noted that, although intent did not need to be established to prove a contravention of this section, the existence of an intent to increase the share price could establish a false or misleading appearance with respect to price for the purposes of the section: at [80]ff. For example, a sale of a large parcel of shares over a short time may lead to a reduction in the price of securities on-market, by satisfying demand for the securities at the then market price. However, the mere fact that the sale gives rise to an appearance as to the price of securities which differs from that which might exist in the absence of that sale does not give rise to a contravention of s 1041B(1). Equally, the fact that the price of securities may increase where an on-market bidder is standing in the market to acquire securities does not give rise to a contravention of s 1041B(1), even if the price of the securities would have been lower had that bid not been made. On the other hand, acquisitions of shares in a target company during a takeover bid are likely to contravene s 1041B(1), if the real purpose of the acquirer [page 685]

is to support the market price of shares in the company so as to either frustrate the takeover bid or force the bidder to increase its offer price. A contravention of s 1041B(1) would not be established merely because the sale or purchase of financial products on a financial market leads to a change in the price at which those products are traded on that market, if the trader’s purpose in undertaking that transaction is a legitimate one. For example, if a trader buys or sells shares in circumstances where he or she could have profited by an arbitrage between the securities and futures markets, then that transaction is likely to fall within the class of legitimate transactions recognised in North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68, even if his or her purchase or sale of those shares in fact affected their market price. On the other hand, if an arbitrage profit would not have been available unless the price at which the shares were trading on the stock market was changed by the trader’s purchase or sale of shares, a court may be prepared to infer that the trade created a ‘false or misleading appearance’ with respect to the price for trading in financial products on that financial market, in contravention of s 1041B(1). A contravention of s 1041B(1) will be established if the relevant act or omission has created or is likely to create, or cause the creation of, a false or misleading appearance with respect to the relevant matters. Whether conduct has in fact created a false or misleading appearance of active trading or with respect to the market for, or the price for trading in, financial products may be established by expert evidence. A comparison of the performance of the particular financial products on-market, before the alleged manipulative trading had commenced and after it had ceased, may also support a finding that the trading had given rise to a false or misleading appearance of active trading in, or with respect to the market for or the price for trading in, the financial product. For example, the collapse of the price of the financial products once a trader withdraws from the market may give rise to an inference of manipulation.39 However, such a finding would not be available if it were shown that a decline in the price of the securities, although it took place after the withdrawal of that trader from the market, resulted from the operation of market forces following a reduction in demand for the securities. Conduct which is ‘likely to create’ a false or misleading appearance of active trading or with respect to the market for, or the price for trading in, financial products, also

contravenes s 1041B(1). The test of ‘likely to create’ is objective in character. Regulatory attention has also recently been directed to whether several trading strategies and forms of order that may be adopted in high frequency trading (see 10.5), [page 686] such as ‘momentum ignition’,40 ‘quote stuffing’,41 and ‘layering’ or ‘spoofing’,42 may give rise to a false or misleading appearance as to the market for or price of securities. In 2009, the Financial Services Authority (UK) expressed the view that ‘layering’ or ‘spoofing’ could constitute market abuse, in the nature of manipulation, under s 118(5) of the Financial Services and Markets Act 2000 (UK), and emphasised that market participants had the obligation to exercise adequate control over activities taking place on direct market access platforms.43 A Consultation Report issued by the Technical Committee of the International Organization of Securities Commissions (IOSCO) in July 2011 also noted a question whether high frequency trading raised: … the possibility of engaging in abusive practices on a larger scale than would have previously been possible. Momentum ignition, quote-stuffing, spoofing and layering are some examples of existing trading practices which may have an abusive and manipulative purpose, and that may benefit from the edge of H[igh] F[requency] T[rading]-style technology and the complex and fragmented nature of modern financial markets.44

This observation recognises that these are neither novel forms of manipulation nor unique to high frequency trading and the challenge raised by such trading arises primarily from the potential scale of the activity and the difficulty of detecting it. ASIC Report 331, Dark Liquidity and High-Frequency Trading, March 2013 similarly noted that trading practices such as, among other things, ‘layering’ or ‘spoofing’, [page 687] ‘quote stuffing’, abusive liquidity detection45 and ‘momentum ignition’

could be considered predatory and pointed to an international consensus that these forms of trading were forms of market manipulation.46 ASIC has addressed these issues by amendment of the Market Integrity Rules (see Chapter 11) to address, among other things, manipulative trading practices through high frequency or algorithmic trading. Conduct such as ‘spoofing’, ‘layering’ or ‘quote stuffing’ would likely fall within the prohibition in s 1041B of the Corporations Act, since an order placed without any real intention to execute it is likely to create a false or misleading appearance as to the market for the relevant financial products, and English case law has held that ‘layering’ contravenes s 118(5) of the Financial Services and Markets Act 2000 (UK), which broadly corresponds to s 1041B of the Corporations Act.47 The position in respect of small orders entered with a purpose of liquidity detection is less clear, if those orders are intended to trade but also arguably have a collateral motive.

Penalties 16.14 A contravention of s 1041B is an offence punishable by a fine or imprisonment or both: s 1311 and Sch 3. The Criminal Code 1995 applies to an offence arising from a contravention of this section and, in order to establish an offence, the prosecution must prove that the defendant intended to do the prohibited act or the omission and was reckless as to whether that act or omission would have or be likely to have the effect of creating or causing the creation of a false or misleading appearance of active trading in, or with respect to the market for or price for trading in, financial products on a financial market operated in the jurisdiction.48 The penalty for individuals for a contravention of the section is the greater of $810,000 or three times the profit gained or loss avoided and/or up to 10 years’ imprisonment; and for corporations the greater of $8,100,000, three times the profit gained or loss avoided, or up to 10% of the body corporate’s annual turnover in the relevant period. A contravention of the section is also classified as a ‘serious offence’ for which telecommunication interception warrants can be issued under the Telecommunications (Interception and Access) Act 1979 (Cth). Section 1041B is also a civil penalty provision, the contravention of

which may attract a civil penalty: see 16.19. The court has jurisdiction to relieve the defendant [page 688] from liability in civil penalty proceedings in respect of a contravention of the section, if it appears to the court that he or she has acted honestly and, having regard to all the circumstances of the case, he or she ought fairly to be excused for the contravention: s 1317S. The conduct of a director, employee or agent of a body corporate, acting within his or her actual or apparent authority, and the state of mind of that director, employee or agent, may be attributed to a body corporate so as to establish liability under s 1041B: s 769B. ASIC may also make banning orders under ss 920A–920F (see 13.56) in respect of manipulative conduct. For example, banning orders were made against a trader who purchased securities at higher prices than the previous trading price in order to manipulate the securities price upwards and against a broker who assisted a client in placing orders to maintain an artificial price for trading in company shares.49 On the other hand, a banning order made in respect of off-market crossings was overturned by the Administrative Appeals Tribunal on the basis that those transactions did not give rise to a false or misleading appearance of active trading on a financial market where they were executed off-market, and did not give rise to a misleading appearance as to price where persons who had access to information concerning the trades would know that special crossings could properly be executed at prices other than current market prices.50

Wash sales 16.15 Section 1041B(2)(a) deals with ‘wash sales’. A wash sale occurs where a person or his or her associate is both buyer and seller in the same transaction. A person is taken to have created a false or misleading appearance of active trading in particular financial products on a financial market, for the purposes of s 1041B(1), if that person enters into, or carries out, either directly or indirectly, any transaction or acquisition or

disposal of any of those financial products that does not involve any change in the beneficial ownership of the product: s 1041B(2)(a). An acquisition or disposal of financial products does not involve a change in beneficial ownership if a person who had an interest in the financial products before the acquisition or disposal, or an associate51 of that person, has an interest in the financial products after the acquisition or disposal: s 1041B(3). The reference to a transaction or acquisition or disposal of financial products in s 1041B(2)(a) includes a reference to the making of an offer to acquire or dispose of financial products and the making of an invitation, however expressed, that expressly or impliedly invites a person to offer to acquire or dispose of financial products: s 1041B(4). [page 689] The United States courts have noted that wash sales are manipulative in character since they create an appearance of actual market activity, which may induce other persons to purchase securities, when in reality no genuine sales or purchases took place.52 The application of earlier sections corresponding to s 1041B(2)(a) has been considered in the case law. In R v M [1980] 2 NSWLR 195; (1979) ASLC 75-024; 4 ACLR 610, Mineral Securities Australia Ltd sold shares to its broker, which shortly afterwards resold those shares to another company within the Mineral Securities Group, with no scrip changing hands. In Australian Securities Commission v Nomura International plc (1998) 89 FCR 301; 29 ACSR 473, the facts of which were noted at 16.12 above, Sackville J found that Nomura expected and intended that the combination of the March Sale Orders, the aggressive sales of illiquid stocks near the close of trading and the existence of the discounted Bid Basket would result in Nomura acquiring a substantial volume of the shares which it had sold, by means of the March Sale Orders hitting its bids for illiquid stocks in the Bid Basket. His Honour held that, by the combined operation of the March Sale Orders and the Bid Basket, Nomura had in two cases sold and purchased securities in a manner that involved no change of beneficial ownership, contravening former s 998(1) and (3) of the Corporations Law.

The Criminal Code 1995 applies to an offence under s 1041B(1) arising from the application of s 1041B(2)(a) to a wash sale: s 1308A. Although a wash sale is deemed to have created a false or misleading appearance of active trading by the operation of s 1041B(2)(a), it appears that the prosecution would still need to prove the specified fault element for an offence under s 1041B(1); namely, that the defendant intended to do or omit to do the prohibited act or the omission and was reckless as to whether that act or omission would have or be likely to have the effect of creating or causing the creation of a false or misleading appearance of active trading in financial products on a financial market operated in the jurisdiction.53 The court has jurisdiction to relieve the defendant from liability in civil penalty proceedings in respect of a contravention of s 1041B(1) arising from a wash sale, if it appears to the court that he or she has acted honestly and, having regard to all the circumstances of the case, he or she ought fairly to be excused for the contravention: s 1317S. [page 690]

Matched orders 16.16 A ‘matched order’ occurs where a person and his or her associates place, buy and sell orders at the same time, for substantially the same number of securities at substantially the same price.54 Section 1041B(2)(b) deals with matched orders. A person is taken to have created a false or misleading appearance of active trading in particular financial products on a financial market, for the purposes of s 1041B(1), if the person makes an offer (regulated offer) to acquire or dispose of any of those financial products, where: the offer is to acquire or dispose of those financial products at a specified price; that person has made or proposes to make, or knows that his or her associate has made or proposes to make, an offer to dispose of or acquire the same number or substantially the same number of those financial products; or

at a price that is substantially the same as the price at which the offer to acquire or dispose of the financial products is made. In determining whether a contravention of s 1041B(1) is established by reason of s 1041B(2)(b), it is necessary to determine whether the defendant or his or her associate made or proposed to make an offer to acquire or to dispose of the same number or ‘substantially’ the same number of the financial product on a financial market. The United States case law gives some guidance as to the use of the term ‘substantial’ in this context. In Wright v SEC 112 F 2d 89, 93 (1940), the court held that a matched order was not established by an order to buy 10,000 shares placed at the same time as two orders to sell 2500 shares, although the transaction was partly executed by the crossing of 4600 shares. On the other hand, in SEC v Commonwealth Chemical Securities Inc 574 F 2d 90, 101 (2d Cir 1978), the court held that a transaction by which a corporation had shares onmarket, where the wife of its president purchased shares on-market immediately afterwards, and the wife resold those shares to the corporation at substantially the same price several weeks later, was a matched order and had contravened s 10(b) of the Securities Exchange Act 1934 (US).

FICTITIOUS AND ILLEGAL TRANSACTIONS Fictitious transactions: s 1041C 16.17 Section 1041C(1) provides that a person must not, by any fictitious or artificial transactions or devices (whether in this jurisdiction or elsewhere) maintain, inflate, depress or cause fluctuations in the price for trading in financial products on a financial market operated in the jurisdiction. The activity in R v De Berenger (1814) 3 M&S 66; 105 ER 536 (see 16.4) would fall within the scope of s 1041C. A transaction such as R v M [1980] 2 NSWLR 195; (1979) ASLC 75-024; [page 691]

4 ACLR 610, in which a company sold shares to a buyer on the understanding that the buyer would sell them back to a subsidiary, could also fall within the scope of that provision. A purchase or sale of financial products may also satisfy the description of a ‘fictitious’ transaction where it is a ‘sham’ in the sense that it is the common intention of the buyer and seller that the transaction would not give rise to the legal rights and obligations that it appears to create between them. However, in determining whether a transaction is fictitious or artificial for the purposes of s 1041C(1), the fact that the transaction is, or was at any time, intended by the parties who entered into it to have effect according to its terms is not conclusive: s 1041C(2). A similar prohibition on manipulative devices including fictitious devices or deception or contrivance is contained in s 118(6) of the Financial Services and Markets Act 2000 (UK) and the Financial Services Authority has expressed the view that conduct within that prohibition would include expressing an opinion which will generate demand for the securities without disclosure of a position in the securities; release of positive information to increase the price of investment (pump and dump); or the holder of a short position disseminating misleading negative information to decrease the price of the investment. Conduct of that kind may also contravene s 1041E of the Corporations Act: see 16.22. The penalty for individuals for a contravention of the section is the greater of $810,000 or three times the profit gained or loss avoided and/or up to 10 years’ imprisonment; and for corporations the greater of $8,100,000, three times the profit gained or loss avoided, or up to 10% of the body corporate’s annual turnover in the relevant period. A contravention of the section is also classified as a ‘serious offence’ for which telecommunication interception warrants can be issued under the Telecommunications (Interception and Access) Act 1979 (Cth). Section 1041C is also a civil penalty provision, the contravention of which may attract a civil penalty: see 16.19.

Dissemination of information about illegal transactions: s 1041D

16.18 Section 1041D prohibits a person (whether in this jurisdiction or elsewhere) circulating or disseminating, or being involved in the circulation or dissemination of, any statement or information to the effect that the price for trading in financial products on a financial market operated in the jurisdiction will, or is likely to, rise or fall or be maintained, because of a transaction or other act or thing done in relation to those financial products, if: the transaction or thing done constitutes or would constitute a contravention of s 1041A, s 1041B, s 1041C, s 1041E or s 1041F; and the person, or an associate of the person, has entered into such a transaction or done such an act or thing; or has received, or may receive, directly or indirectly, a consideration or benefit for circulating or disseminating, or authorising the circulation or dissemination of, the statement or information. The scope of that prohibition will again depend on the scope of the concept of a financial market ‘operated’ in the jurisdiction. It may be arguable that this prohibition does not apply where financial products are traded on the over-the-counter markets, [page 692] because conduct constituted by a person making or accepting offers or invitations to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only, does not constitute ‘operating a financial market’ for the purposes of Ch 7: s 767A(2); and see 16.6. However, the Australian Securities and Investments Commission takes the view that this prohibition does extend to trading on the over-the-counter markets. The penalty for individuals for a contravention of the section is the greater of $810,000 or three times the profit gained or loss avoided and/or up to 10 years’ imprisonment; and for corporations the greater of $8,100,000, three times the profit gained or loss avoided, or up to 10% of the body corporate’s annual turnover in the relevant period. A

contravention of the section is also classified as a ‘serious offence’ for which telecommunication interception warrants can be issued under the Telecommunications (Interception and Access) Act 1979 (Cth). Section 1041D is also a civil penalty provision, the contravention of which may attract a civil penalty: see 16.19.

OTHER MATTERS Civil penalties for contraventions of ss 1041A–1041D 16.19 Sections 1041A–1041D are civil penalty provisions. If a court is satisfied that a person has contravened any of those sections, it must make a declaration of contravention which is conclusive evidence of the matters referred to in it: ss 1317E(1)–(2), 1317F. A court may order a person who contravened any of those sections to pay the Commonwealth a pecuniary penalty of up to $200,000 if the contravention materially prejudiced the interests of acquirers or disposers of the relevant financial products; or materially prejudiced the issuer of the relevant financial products or, if that issuer is a corporation or scheme, the members of that corporation or scheme; or is serious: s 1317G(1A). Proceedings for a declaration of a contravention or pecuniary penalty order or compensation order may be started within six years after the contravention: s 1317K. The court must apply the rules of evidence and procedure for civil matters in proceedings for a declaration of a contravention of a civil penalty provision or a pecuniary penalty order: s 1317L. The standard of proof in civil penalty proceedings is therefore that of the balance of probabilities and not the criminal standard of proof beyond reasonable doubt, although the court will take into account the seriousness of the allegation in determining whether a matter has been proved on the balance of probabilities in civil penalty proceedings.55 If penalties are sought against the [page 693] defendants in civil penalty proceedings, they may also rely on the privilege

against exposing themselves to a penalty to file limited defences and defer giving discovery until after the close of the case against them.56 Proceedings for a declaration of a contravention or pecuniary penalty order are stayed if criminal proceedings are begun against a person for an offence constituted by conduct which is substantially the same as the alleged contravention of the civil penalty provision: s 1317N(1). Such proceedings may be resumed if the person is not convicted of the offence, and are dismissed if the person is convicted of that offence: s 1317N(2). The court may also order a person who contravened any of the civil penalty provisions to compensate another person (including a corporation), or a registered scheme, for damage suffered by that person or scheme resulting from the contravention, including profits made by any person resulting from that contravention: s 1317HA(1)–(2). Any person who suffers damage in relation to a contravention or alleged contravention of a financial services provision may apply for a compensation order under s 1317HA: s 1317J(3A). The application of the compensation regime under the civil penalty provisions to market manipulation does not resolve the difficulties in determining the extent of civil liability for market misconduct, which will depend upon the range of persons who can be said to have suffered loss resulting from the contravention. There is little justification in principle for limiting recovery of damages for market manipulation to persons who by chance trade with the manipulator in a public market, since the manipulative activity will have affected the price at which all trades have taken place in that market within the relevant time period. On the other hand, if damages can be recovered by all other persons who traded within the relevant period, those damages may be quite out of proportion to the scale of the manipulation or the profits that the manipulator has made. It will also be necessary to determine the point at which the effect of any manipulative activity on market prices has been dissipated, since traders after that point should have no entitlement to compensation. For discussion of the similar difficulties arising in quantifying damages for insider trading, see 17.42.

Extraterritorial application of ss 1041A–1041D

16.20 The question whether the market manipulation provisions in the Corporations Act have extraterritorial effect has considerable practical importance, since the internationalisation of the securities markets increases the likelihood that conduct in an overseas market could affect the Australian securities market. The market manipulation provisions now expressly specify the extent of their extraterritorial effect. Thus: section 1041A, dealing with market manipulation, prohibits conduct, whether in Australia or elsewhere, which creates an artificial price for trading [page 694] in financial products on a financial market operated in this jurisdiction, or maintaining the price for trading in financial products on a financial market operated in this jurisdiction at an artificial level; section 1041B, dealing with false trading and market rigging, deals with an act or omission, whether in Australia or elsewhere, which is likely to have the effect of creating, or causing the creation of, the false or misleading appearance of active trading, or with respect to the market for or the price for trading in, financial products on a financial market operated in this jurisdiction; section 1041C deals with fictitious or artificial transactions or devices, whether in Australia or elsewhere, which affect the price for trading in financial products on a financial market operated in this jurisdiction; and section 1041D deals with the circulation or dissemination of information, whether in Australia or elsewhere, to the effect that the price for trading in financial products on a financial market operated in this jurisdiction would be affected by the transactions otherwise prohibited by ss 1041A, 1041B, 1041C, 1041E and 1041F. Sections 1041A–1041D therefore focus on the purpose of maintaining the integrity of the Australian financial markets, and do not extend to

conduct which has an effect on an overseas financial market merely because one party to the trade may be an Australian investor. In some circumstances, the market manipulation provisions may also be given extraterritorial effect under s 1313A. That section has the effect that a person is guilty of an offence under the Corporations Act if he or she does or omits to do an act outside the jurisdiction and, if he or she had done or omitted to do that act in the jurisdiction, he or she would have been guilty of that offence by reason of also having done or omitted to do that act in the jurisdiction. The operation of s 1313A would be relatively straightforward where, for example, a person undertook a sequence of trades on the ASX and the New Zealand Stock Exchange, which together had the effect of increasing the price of securities on the ASX, with the intent to induce other persons to buy or subscribe for the securities. Since that conduct would contravene s 1041A if all the relevant trades had occurred in an Australian jurisdiction, s 1313A will allow the acts undertaken in New Zealand to be combined with the acts undertaken in Australia to establish the contravention. However, the terms of s 1313A make clear that the section can only apply where an act done in Australia forms part of the offence.

Application of ss 1041E–1041I to market misconduct 16.21 Sections 1041E (false or misleading statements), 1041F (inducing persons to deal), 1041G (dishonest conduct) and 1041H (misleading or deceptive conduct) are generally considered in Chapter 8 in relation to liability for misstatements and non-disclosures, but also have specific application to market misconduct. [page 695]

False or misleading statements 16.22 Section 1041E prohibits a person from making a statement, or disseminating information (whether in the jurisdiction or elsewhere) that is false in a material particular or is materially misleading; and is likely to:

induce persons in the jurisdiction to apply for financial products; or induce persons in the jurisdiction to dispose of or acquire financial products, or have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in the jurisdiction;57 if, when making the statement or disseminating the information, the person does not care whether the statement or information is true or false, or knows or ought reasonably to have known that the statement or information is false in a material particular or is materially misleading. A statement is ‘materially’ misleading if its likely effect is to induce investors to purchase a company’s securities, and whether a person ought reasonably to have known that a statement is false in a material particular or is materially misleading is an objective question.58 This section is considered generally at 8.59. Examples of contraventions of this section include R v Wright [1980] VR 593; (1980) 4 ACLR 931, where a letter sent to the Melbourne Stock Exchange falsely stated that a company had significant ore reserves worth a substantial sum; National Companies and Securities Commission v Monarch Petroleum NL [1984] VR 733; (1984) 8 ACLR 785; 2 ACLC 256, where a letter sent to the Perth Stock Exchange falsely stated that directors of a corporate group were in discussion with a large company interested in acquiring a percentage of the group and the group had acquired an interest in a valuable oil discovery; Endresz v Whitehouse [1998] 3 VR 461; (1997) 24 ACSR 208; 139 FLR 359, where misleading information was provided to the ASX which did not disclose a wash sale undertaken by a director; R v Loiterton (2005) 54 ACSR 728; [2005] NSWSC 905, where a misleading statement was made as to a company having reached agreement with an overseas company; and R v Adler (2005) 53 ACSR 471; 23 ACLC 590; [2005] NSWSC 274, where a company director stated he was purchasing shares because of his confidence [page 696]

in an insurance company without disclosing that the purchase was made using funds advanced by that company. This section may be contravened by the making of false or misleading statements as to the demand for, or attractiveness of investment in, traded financial products in the course of a ‘pump and dump’ scheme, where a person seeks to talk up the market for a particular security until its market price increases sufficiently to allow that person to sell that financial product at a profit, or to talk down the market to allow that person to profit on short sales of that financial product.59 The development of the Internet has provided a contemporary vehicle for the ‘pump and dump’ scheme, allowing persons situated in unregulated jurisdictions to promote particular stocks, possibly using different names and more than one internet access provider, so as to create an illusion of widespread interest in the stock.

Benchmark manipulation 16.23 There is an open question whether the Australian prohibitions on market manipulation, which generally require an impact on the application for or acquisition or disposal of relevant financial products or on the price or market for the products, are sufficiently wide to prohibit the manipulation of market benchmarks. The risk of manipulation of that kind is highlighted by the manipulation of the London Interbank Offered Rate (LIBOR) benchmark from 2012, in respect of which several major banks have paid substantial monetary penalties to international regulators. It appears that bank submissions used in calculating that benchmark were initially manipulated by inflating or reducing reported interest rates to increase profits on derivative positions within individual banks. During the global financial crisis, at least one of those banks also submitted understated interest rates to reduce the apparent cost of its borrowing, and to seek to avoid a perception that it was required to pay high interest rates on inter-bank borrowings by reason of the market’s assessment of risks to its liquidity.60 Conduct of that kind would likely fall at least within the statutory prohibitions on misleading or deceptive conduct under Australian law. In response to these issues, IOSCO issued Principles for Financial Benchmarks in July 2013 which deal with issues of governance of

benchmarks by their administrators, benchmark quality, methodologies, conduct of parties submitting information in respect of benchmarks, and accountability. The Financial Services and Markets Act 2000 (UK) was amended in 2013 to bring the administration of the [page 697] LIBOR benchmark within the scope of the Act; further amendments were made by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2015 (UK) to bring several additional benchmarks within the scope of the Act; and the Financial Conduct Authority provided further rules and guidance applicable to benchmark administrators. Since July 2016, the European Union has also prohibited manipulation of benchmarks, including transmitting false or misleading information or providing false or misleading inputs in relation to a benchmark, where a person knew or ought to have known that that information or input was false or misleading, and other behaviour that manipulates the calculation of a benchmark.61 ASIC Report 440, Financial Benchmarks, July 2015 in turn addressed the regulation of benchmarks of systemic importance in Australia, including the bank bill swap rate and several other indices; noted the then status of ASIC’s investigation as to whether there had been misconduct in respect of financial benchmarks in Australian financial markets; identified provisions of the Corporations Act and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) with potential application to benchmark manipulation, including provisions dealing with the obligations of Australian financial services licensees (Corporations Act s 912A: see 13.18ff), market misconduct and other prohibited conduct relating to financial products and financial services (Corporations Act s 1041A), unconscionable conduct (ASIC Act ss 12CA–12CB) and misleading or deceptive conduct (Corporations Act s 1041H, ASIC Act s 12DA); and noted that it had accepted enforceable undertakings from several financial intermediaries in relation to financial benchmarks. In the first half of 2016, the Australian Securities and Investments Commission commenced proceedings against each of Australia and New Zealand

Banking Group Ltd, Westpac Banking Corporation and National Australia Bank Ltd, alleging unconscionable conduct and market manipulation in respect of the bank bill swap reference rate, in contravention of s 912A of the Corporations Act (obligations of Australian financial services licensees), s 1041A of the Corporations Act (market manipulation) and ss 12CA–12CB and former s 12CC of the ASIC Act (unconscionable conduct).

Inducing persons to deal 16.24 Section 1041F prohibits a person, in the jurisdiction, inducing another person to deal in financial products by making or publishing a statement, promise or forecast which he or she knows is misleading, false or deceptive, or if he or she is reckless as to whether the statement is misleading, false or deceptive, or by a dishonest concealment of material facts: s 1041F(1)(a)–(b). A person is also prohibited from recording or storing information that he or she knows to be false or misleading in a material particular or materially misleading if that information is recorded or stored in, or by means of, a mechanical, electronic or other device; and, when the information was so recorded or stored, that person had reasonable grounds for expecting that it would be available to another person or a class of persons including that other person: s 1041F(1)(c). This section is considered at 8.64. [page 698]

Dishonest conduct 16.25 Section 1041G prohibits a person from, in the course of carrying on a financial services business in the jurisdiction, engaging in dishonest conduct in relation to a financial product or financial service. This section is directed to reinforcing the requirement for integrity in the financial services industry by imposing criminal and civil penalties for ‘dishonest’ conduct.62 The definition of ‘dishonest’ in this section refers to the standards of ordinary people and reflects the holding in R v Ghosh [1982] QB 1053; [1982] 2 All ER 689; [1982] 3 WLR 110; (1982) 75 Cr App Rep

154 that a finding of ‘dishonesty’ was available where the jury found that what was done was dishonest according to the ordinary standards of reasonable people, and the defendant must have believed that what he or she was doing was dishonest according to those standards.63 For example, this section can be contravened by an adviser who sends false reports to investors concerning the performance of their investments.64

Penalties for a contravention of ss 1041E–1041G 16.26 The penalty for individuals for a contravention of ss 1041E– 1041G is the greater of $810,000 or three times the profit gained or loss avoided and/or up to 10 years’ imprisonment; and for corporations the greater of $8,100,000, three times the profit gained or loss avoided, or up to 10% of the body corporate’s annual turnover in the relevant period.

Misleading and deceptive conduct 16.27 Section 1041H prohibits a person from engaging in conduct, in the jurisdiction, in relation to a financial product or financial service that is misleading or deceptive or is likely to mislead or deceive. That section is considered at 8.37. Section 1041H may be contravened, for example, by the practice of ‘scalping’, by which an investment adviser recommends a financial product traded on-market to its clients and then sells that financial product at a profit when its market price rises following that recommendation. In the United States, such conduct has been held to have contravened the prohibition on fraud by investment advisers in s 206 of the Investment Advisers Act 1940 and r 10b-5 of the Securities Exchange Act 1934.65 That conduct may also involve a breach of any fiduciary duty owed by the financial intermediary to its client, so far as it has an undisclosed personal interest in its recommendation: see 14.6. A person who suffers loss or damage by conduct of another person involving a contravention of ss 1041E–1041H may recover the amount of that loss or damage by action against the person who contravened that section or any other person involved [page 699]

in the contravention, whether or not that person has been convicted of an offence in respect of the contravention: s 1041I(1). An action under s 1041I(1) may be begun within six years after the date on which the cause of action arose. The court may relieve a person from liability under s 1041I if it appears to the court that he or she may have contravened s 1041E, s 1041F, s 1041G or s 1041H but that he or she has acted honestly and ought fairly to be excused for the contravention, having regard to all the circumstances of the case: ss 1041I(4) and 1317S. The scope of s 1041I is considered in Chapter 9.

Order setting aside a transaction under s 1101B 16.28 A transaction that contravenes ss 1041A–1041G may be set aside in the exercise of the court’s powers under s 1101B. For example, in NCSC v Monarch Petroleum NL [1984] VR 733; 8 ACLR 785; 2 ACLC 256, a forged letter was sent to the Perth Stock Exchange announcing the settlement of litigation in which the Magnet Group of companies was involved. The volume of sales traded, and the price at which shares of companies in the group were traded, increased in trading immediately following the announcement. The court declared contracts in relation to the sale and purchase of shares effected after the announcement to be void under s 14 of the Securities Industry (Victoria) Code, which corresponds to s 1101B of the Corporations Act. Nicholson J accepted counsel’s argument that ‘transactions which take place in a misinformed market should be set aside provided that this can be done with a minimum of injustice to innocent persons’, since ‘it was not in the public interest that numerous persons should be forced to bear losses as a result of deliberate public misinformation or fraud’: at 261.

Orders under s 1324 16.29 If a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute, among other things, a contravention or attempted contravention of the Corporations Act, the court may grant an injunction restraining that person from engaging in that conduct or requiring that person to do any act or thing: s

1324(1). An application for such an injunction may be made by ASIC or by a person whose interests have been, are or would be affected by the conduct. The court may also grant an interim injunction pending its determination of an application for an injunction under s 1324(1): s 1324(4). Where the court has power under s 1324 to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, it may order that person to pay damages to another person, either in addition to or in substitution for the grant of the injunction: s 1324(10). In Australian Securities Commission v Paneth (FCA, Olney J, VG 3301/96, 11 July 1996, unreported), the Federal Court granted interim injunctions under s 1324 to restrain alleged wash trading in securities of MRI Holdings, involving buying and selling those securities at the same time through different brokers so as to create the appearance of active trading, and the defendants subsequently consented to the grant of final injunctions.66 [page 700]

SHORT SELLING Short selling generally 16.30 Short selling of financial products occurs where a person sells products which he or she does not own at the time of the transaction, expecting that the price of the financial products on the market will decline and that he or she will be able to purchase them at a lower price to allow delivery to the purchaser. The financial markets distinguish between two forms of short selling: the ‘naked’ and the ‘covered’ short sale. A ‘naked’ short sale occurs when a market participant, either in proprietary trading or on behalf of a client, enters an order in the market and does not have arrangements in place for delivery of the security. Naked short selling can give rise to settlement and systemic risk, if liquidity in the securities is limited and short sellers are unable to acquire the securities to settle transactions, with the risk that a settlement failure may trigger defaults by other market participants.67 A ‘covered’ short sale occurs when a market

participant enters an order in the market and has in place arrangements for delivery of the securities, typically by borrowing those securities.68 As a matter of policy, short selling may operate to ‘smooth’ variations in market prices by placing a ceiling on a rising market in a particular stock or giving price support on a falling market. Short sales are traditionally also seen as contributing to market liquidity and price formation and there is some evidence that restrictions on short sales in the global financial crisis in 2008 were detrimental to liquidity and price formation.69 On the other hand, opponents of short selling argue that it can unsettle a market, accelerate a decline in market prices and has no economic value or justification.70 The risk of downward price spirals is exacerbated if short sales are combined with false rumours or take place in significant volume.71 Short selling of securities has been regarded as acceptable under the general law. In Hibblewhite v McMorine (1839) 5 M & W 462; 151 ER 195, a seller of shares sued a buyer on a contract for the sale of 50 shares in the Brighton Railway Company. The buyer pleaded that the seller had no right to sue because at the time of the contract he did not have 50 shares in the Brighton Railway Company. The Court of Exchequer, after considering both the laws as to the sale of tangibles and intangibles, held that the seller could maintain the action. Baron Alderson observed (M & W at 467; ER at 197) that if the buyer’s plea were upheld ‘[i]t would put an end to half the contracts made in the course of trade’. [page 701] Short selling has, however, from time to time been productive of difficulties illustrated in the case law.72 The scope of permitted short selling also generated controversy during the global financial crisis in 2008–09, with suggestions that short sellers relying on borrowed stock to meet their delivery obligations had short sold several securities, arguably depressing the prices of those securities and potentially triggering default provisions in the relevant company’s financing arrangements or in shareholders’ margin loan arrangements.73 The Securities Exchange Commission (US) initially restricted short sales in several financial stocks

in July 2007 and extended that prohibition to short sales of a larger range of financial sector stocks in September 2008, and subsequently introduced requirements for disclosure of short sale positions and a ban on naked short selling. The Financial Services Authority (UK) also introduced a prohibition on short selling of financial sector stocks in 2008 and also introduced disclosure obligations in respect of short positions, in response to the risk that short selling would destabilise shares of financial institutions.74 ASIC also took controversial steps to restrict short selling in late 2008, and continued a ban on short selling of financial stocks until 24 May 2009. Principles for the regulation of short selling issued by IOSCO’s Technical Committee in June 2009 provide that short sales should be regulated by appropriate controls to minimise potential risks that could affect the orderly and efficient function and stability of financial markets; a reporting regime that provides timely information to markets or market authorities; effective compliance and enforcement systems; and appropriate exceptions to permit specified transactions that promote efficient market function, such as good faith hedging and arbitrage. The Corporations Amendment (Short Selling) Act 2008 (Cth) significantly amended the short selling provisions, including prohibiting naked short selling (that is, short sales by persons who did not have a legally enforceable right to borrow the relevant securities at the time of the short sale) and introducing disclosure requirements for covered short sales. We deal with the current statutory regime in 16.31 below.

Legislative restriction on short selling 16.31 Short selling of certain financial products is prohibited under s 1020B, subject to a number of exceptions. A person must only, in the jurisdiction, sell s 1020B products (as defined)75 to a buyer if, at the time of that sale, the person has (or, if that person is selling on behalf of another person, that other person has) or believes on reasonable grounds that he or she has (or, if he or she is selling on behalf of another person, that the other person has) ‘a presently exercisable and unconditional right to vest the products in the buyer’: s 1020B(2). A person is deemed to have a

presently exercisable and unconditional right to vest the s 1020B products in another [page 702] person where he or she has a presently exercisable and unconditional right to have those products vested in that person or in accordance with his or her directions: s 1020B(3)(a). The right of a person to vest s 1020B products in another person is not treated as conditional merely because the products are subject to a charge or pledge in favour of another person to secure the payment of money: s 1020B(3)(b). The prohibition on short selling does not apply to a sale of s 1020B products by a person who, before the time of sale, has entered into a contract to buy those products and who has a right to have those products vested in that person that is conditional only on payment of the consideration in respect of the purchase; receipt by the person of a proper instrument of transfer in respect of the products; and receipt by the person of documents that are the products or documents of title to them: s 1020B(4). ASIC has set out its views as to what is required to satisfy this requirement in ASIC Regulatory Guide 196 — Short Selling. A contravention of the prohibition on short selling in s 1020B(2) is subject to a fine of up to 25 penalty units or imprisonment for six months or both in the case of a first offence, and a fine of up to 100 penalty units or imprisonment for two years or both in respect of a subsequent offence. For a body corporate the maximum fine is five times that amount: s 1312. There are no express civil remedies for a contravention of s 1020B. However, a court could declare a contract void or voidable on the application of ASIC where s 1020B is contravened: s 1101B. A court may also grant an injunction under s 1324 to restrain a contravention of s 1020B. Disclosure of covered short sale transactions (as permitted under s 1020B) is required under ss 1020AB–1020AF and associated regulations and class orders.76 Financial services licensees must inquire of the client whether a sale is a covered short sale when a client places an order; short

sellers must provide particulars of short sales (as specified in Corporations Regulations 2001 (Cth) reg 7.9.100) and market operators must publicly disclose short selling information provided to them by financial services licensees. ___________________________ 1.

D R Fischel and D J Ross, ‘Should the Law Prohibit Manipulation in Financial Markets’ (1991) 105 Harvard LR 503 at 509. For a selection of the voluminous academic writing concerning this subject see P W R Meyer, ‘Fraud and Manipulation in Securities Markets: A Critical Analysis of Sections 123 to 127 of the Securities Industry Code’ (1986) 4 C&SLJ 92; S Thel, ‘$850,000 in Six Minutes — The Mechanics of Securities Manipulation’ (1994) 79 Cornell LR 219; A J Black, ‘Regulating Market Manipulation: Section 997–999 of the Corporations Law’ (1996) 70 ALJ 987; V Goldwasser, ‘The Enforcement Dilemma in Australian Securities Regulation’ (1999) 27 Australian Business LR 482; A F H Loke, ‘The Investors’ Protected Interest against Market Manipulation in the United Kingdom, Australia and Singapore’ (2007) 21 AJCL 22; E Armson, ‘False Trading and Market Rigging in Australia’ (2009) 27 C&SLJ 411; A J Black, ‘Insider Trading and Market Misconduct’ (2011) 29 C&SLJ 313.

2.

E Avgouleas, The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis, 2005, pp 119, 129–32.

3.

Avgouleas, The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis, above pp 12– 13.

4.

Avgouleas, The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis, above pp 116–17.

5.

Section 10(b) of the Securities Exchange Act 1934 (US) makes it unlawful for any person, by the use of any means or instrumentality of interstate commerce or of the mails or any facility of any national securities exchange, to use or employ any manipulative or deceptive device or contrivance, in contravention of the rules and regulations of the Securities and Exchange Commission, in connection with the purchase or sale of any security whether or not that security is listed on any exchange.

6.

Sullivan & Long, Inc v Scattered Corp 47 F 3d 857 (7th Cir 1995) (Posner J); US v Hall 48 F Supp 2d 386, 387 (SDNY 1999).

7.

Fischel and Ross, ‘Should the Law Prohibit Manipulation in Financial Markets’, above at 510.

8.

See, for example, US v Mulheren 938 F 2d 364 (2d Cir 1991).

9.

See, for example, Crane Co v Westinghouse Air Brake Co 419 F 2d 787, 792–9 (2d Cir 1969), cert denied 400 US 822.

10.

See, for example, Davis v Pennzoil Co 264 A 2d 597, 603 (1970); Schlick v Penn-Dixie Cement Corp 507 F 2d 374, 378–81 (2d Cir 1974); and North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68.

11.

See, for example, Fenwick v Jeffries Industries Ltd (1995) 13 ACLC 1334; and on appeal Fame Decorator Industries Pty Ltd v Jeffries Industries Ltd (1988) 28 ACSR 58; 16 ACLC 1235.

12.

G G Lynch and W E Morse (Division of Enforcement, US Securities and Exchange Commission), Insider Trading and Market Manipulation in the International Arena: A Challenge to Territorial Enforcement,

paper delivered at the Annual Conference of the International Organization of Securities Commissions, November 1988, p 26. 13.

The efficient capital market hypothesis is to the effect that, at any point in time, the market price of a security indicates an ‘informed public consensus as to its true value’, and that in a fully efficient market no individual analyst or investor is able systematically to earn abnormal returns. In its strong form, the efficient capital market hypothesis suggests that prices at which securities are traded on a securities market reflect all information as to those securities, whether publicly available or not. In its ‘semi-strong’ form, the efficient capital market hypothesis suggests that the prices at which securities are traded accurately reflects all publicly available information, provided that informed traders engage in a sufficient amount of trading. See C P Saari, ‘The Efficient Capital Market Hypothesis, Economic Theory and the Regulation of the Securities Industry’ (1977) 29 Stanford LR 1031 at 1044, 1050; R J Gilson and R H Kraakman, ‘The Mechanisms of Market Efficiency’ (1984) 70 Virginia LR 549; W K S Wang, ‘Some Arguments that the Stock Market Is Not Efficient’ (1986) 19 UC Davis LR 341; and see 9.40 above.

14.

L Loss, ‘The Fiduciary Concept as Applied to Corporate Insiders in the United States’ (1970) 33 Mod LR 34 at 36; V Brudney, ‘Insiders, Outsiders and Informational Advantages under the Federal Securities Laws’ (1979) 93 Harvard LR 322 at 335–6

15.

Fischel and Ross, ‘Should the Law Prohibit Manipulation in Financial Markets’, above.

16.

Thel, ‘$850,000 in Six Minutes — the Mechanics of Securities Manipulation’, above; C R Korsmo, ‘Mismatch: The Misuse of Market Efficiency in Market Manipulation Class Actions’ (2011) 52 Wm & Mary L Rev 1111.

17.

Fischel and Ross, ‘Should the Law Prohibit Manipulation in Financial Markets’, above at 519; E Avgouleas, The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis, 2005, pp 131–2; Korsmo, ‘Mismatch: The Misuse of Market Efficiency in Market Manipulation Class Actions’, above at 1145–6.

18.

Facts additional to the outline in 3 M & S 66 are set out in L Loss, Securities Regulation, Little Brown & Company, Boston, 1989, vol 3, p 1531.

19.

Manasseh v R (2002) 167 FLR 44; 40 ACSR 593; [2002] NSWCCA 27 at [57] (considering a predecessor section, s 997 of the Corporations Law).

20.

Explanatory Memorandum to the Financial Services Bill, [7.15].

21.

Boughey v R (1986) 161 CLR 10; 60 ALJR 422 at 426; [1986] HCA 29; James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85; 81 ACSR 1; [2010] NSWCA 332 (dealing with s 1041E: see Chapter 9). By contrast, in Australian Securities Commission v Nomura International plc (1998) 89 FCR 301; 29 ACSR 473 at 561, Sackville J held that the ‘likely to create’ limb of former s 998 required that there was more than a 50% chance that the relevant trading would create a false or misleading appearance with respect to the price of the securities, and that it was not sufficient to establish that limb that there was a real and not remote chance that such trading might do so.

22.

Goldwasser, fn 1, at 484–5.

23.

ASIC AD09-147 (Chan).

24.

This observation should not be read as suggesting that attempting to secure the most favourable price is the only legitimate trading strategy, since that is obviously a question of fact in the particular case. For example, participants in more complex market transactions, such as hedging or arbitrage, may be indifferent to the price of the securities leg of the transaction, and traders can properly be prepared to pay higher prices to acquire a parcel of securities where there is a commercial reason

to do so within a shorter time frame; for example, to acquire a pre-bid stake before launching a takeover bid, or to become ‘set’ in a particular stock. 25.

N S Poser, ‘Stock Market Manipulation and Corporate Control Transactions’ (1986) 40 University of Miami LR 671 at 704.

26.

See, for example, Financial Services Authority, Market Watch, Issue no 30, UK, November 2008 and FINRA Regulatory Notice 09-29, Origination and Circulation of Rumors, US, June 2009. A report of the Corporations and Markets Advisory Committee, Aspects of Market Integrity, June 2009 noted that there did not seem to be an obvious gap in the application of the existing provisions to the spread of false rumours, while recognising that it could be difficult to track down the instigators of rumours as a practical matter and that there were challenges to effective investigation and enforcement. ASIC Consultation Paper 118, Responsible Handling of Rumours, September 2009, noted that the communication of rumours could, among other things, breach the prohibition on market manipulation under s 1041A. That consultation paper proposed a number of relatively prescriptive requirements as to the manner in which financial services licensees should deal with rumours, but ASIC has not proceeded to implement that proposal. See A J Black, ‘Rumourtrage — Some Comments on ASIC Consultation Paper 118, Responsible Handling of Rumours, September 2009’ in J Overland (ed), The Many Aspects of Market Integrity, Australian Scholarly Publishing, North Melbourne, 2010.

27.

E Armson, ‘Market Stabilisation in Australia’ (1995) 13 C&SLJ 81; A Trichardt, ‘Australian Green Shoes, Price Stabilsations and IPOs’ (2003) 21 C&SLJ 26 (Pt 1), 75 (Pt 2).

28.

The over-allotment or ‘greenshoe’ form of stabilisation involves an underwriter or stabilisation broker acting for the underwriter being provided with an option from the issuing company to be issued additional shares by the issuer equivalent to no more than 15% of the total number of shares made available under the offer. Following the close of the offer, the underwriter will allocate more shares to subscribers than made available under the original offer, up to the size of the overallotment option held by it. If the market price declines after the issue of the securities, the underwriter or stabilising broker will acquire the over-allotted shares by buying on-market. If the price increases on-market, the underwriter or stabilising broker will exercise the over-allotment option in order to issue the additional securities, avoiding the risk that the underwriter would otherwise suffer a loss in covering its short position in that situation

29.

Senate Select Committee on Securities and Exchange, Australian Securities Markets and their Regulation, 1974, [8.1]–[8.2].

30.

This usage of the term ‘churning’ is idiosyncratic, and differs from the more usual usage of that term to refer to the conduct of a securities broker in undertaking excessive trading in a discretionary account.

31.

Fischel and Ross, fn 1, at 513.

32.

Compare Cargill, Inc v Hardin 452 F 2d 1154 at 1163 (8th Cir 1971), where the Eighth Circuit observed that market manipulation was characterised by ‘conduct [which] has been intentionally engaged in which has resulted in a price which does not reflect basic forces of supply and demand’.

33.

The significance of the requirement that a price resulting from trading, in order to be manipulative, should be different from that ‘resulting from the operation of genuine supply and demand’ was also recognised in Donald v Australian Securities and Investments Commission (2000) 104 FCR 126; 35 ACSR 383; [2000] FCA 1142.

34.

Such a contention would, of course, have been inconsistent with the observations of Mason J in North v Marra Developments Ltd (1981) 148 CLR 42; [1981] HCA 68.

35.

Conduct of other traders in placing orders in this manner could itself be a form of market manipulation in contravention of s 1041A or s 1041B.

36.

ASIC, Sydney Securities Dealer Jailed, media release AD04-289, 9 September 2004.

37.

ASIC, Brokers Sentenced Over Market Manipulation, media release 09-19, 16 February 2009.

38.

ASIC, Executive Sentenced Over Market Manipulation, media release 10-58AD, 19 March 2010.

39.

SEC v Resch-Cassin & Co, Inc 362 F Supp 964, 976 (SDNY 1973); L D McCabe, ‘Puppet Masters for Marionettes: Is Program Trading Manipulative as Defined by the Securities Exchange Act of 1934?’ (1993) 61 Fordham LR S207.

40.

Technical Committee of IOSCO, Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, July 2011 defines ‘momentum ignition’ as the initiation of a series of orders and trades, possibly combined with false rumours, in an attempt to ignite an upward or downward price movement. ASIC Report 331, Dark Liquidity and High-Frequency Trading, March 2013 describes ‘momentum ignition’ as involving a strategy of provoking other investors to trade aggressively in response to a pricing signal, in the hope that the trader can profit from a position opened prior to the market movement.

41.

ASIC Report 331, Dark Liquidity and High-Frequency Trading, March 2013 describes ‘quote stuffing’ as involving entry of small variations in position in the order book so as to create uncertainty for other participants, slow down the order process and hide a trader’s strategy.

42.

Technical Committee of IOSCO, Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, July 2011 defines ‘layering’ as a strategy that layers the order book with multiple bids and offers at different prices and sizes, generating a high volume of orders which may have an extremely short duration and high cancellation rates, and defines ‘spoofing’ as the use of displayed limit orders to manipulate prices. ASIC Report 331, Dark Liquidity and High-Frequency Trading, March 2013 describes ‘layering’ as the creation of a large number of orders to create a false impression of demand or supply which are deleted or moved as they move closer to trading, and ‘spoofing’ as the entry of large volumes of orders which are deleted shortly after entry. In Financial Conduct Authority v Da Vinci Invest Ltd [2015] EWHC 2401 at [22], Snowden J described ‘layering’ as ‘the placing of multiple orders that are designed not to trade on one side of the order book’.

43.

FSA, Market Watch, Issue No 33, August 2009; S Tregillis, ‘ASIC’s Agenda for Market Integrity’, paper delivered at the 2011 Supreme Court Corporate Law Conference, 23 August 2011; M Prewitt, ‘High-Frequency Trading: Should Regulators Do More’ (2012) 19 Mich Telecomm & Tech L Rev 131 at 147–8; C R Korsmo, ‘High Frequency Trading: A Regulatory Strategy’ (2014) 48 U Rich L Rev 523 at 548–9.

44.

Technical Committee of IOSCO, Regulatory Issues Raised by the Impact of Technological Changes on Market Integrity and Efficiency, July 2011, p 28.

45.

ASIC Report 331, Dark Liquidity and High-Frequency Trading, March 2013 describes abusive ‘liquidity detection’ as a strategy to determine the direction of fundamental investor demand so as to front run that demand.

46.

ASIC Report 331, Dark Liquidity and High-Frequency Trading, March 2013, [378]–[395].

47.

772 2656 Canada Inc (t/as Swift Trade) v Financial Services Authority [2013] Ll LR 381 (Upper Tribunal (UK)) (upholding a penalty of £8 million for market abuse contrary to FSMA s 118(5) involving layering), appeal as to law dismissed by the Court of Appeal [2013] EWCA (Civ) 1662; Financial Conduct Authority v Da Vinci Invest Ltd above (holding that layering of an order book contravened s 118(5) of the Financial Services and Markets Act, by transactions or orders to trade that gave or were likely to give a false or misleading appearance as to the supply of or demand or as to the price

of listed securities). 48.

Corporations Act ss 1041B(1A), introduced by the Corporations Amendment (No 1) Act 2010 (Cth), and Criminal Code s 3.2. The concept of intention is dealt with in Criminal Code s 5.2 and the concept of recklessness in Criminal Code s 5.4.

49.

Donald v Australian Securities and Investments Commission (2000) 104 FCR 126; 35 ACSR 383; [2000] FCA 1142; Musumeci v Australian Securities and Investments Commission (2009) 109 ALD 677; [2009] AATA 524.

50.

Rosenberg v Australian Securities and Investments Commission (2010) 117 ALD 582; [2010] AATA 654.

51.

The associates of a person under s 15 include, in the case of a body corporate, a director or secretary of the body, a related body corporate and a director or secretary of the related body corporate (s 11); a person in concert with whom the person is acting or proposes to act (s 15(1) (a)); a person with whom the person is or proposes to become associated in any way (s 15(1)(c)); and a person with whom the person has entered into any transaction or does or proposes to do any act or thing with a view to becoming associated with that person: s 15(2).

52.

US v Brown 79 F 2d 321, 325 (2d Cir 1935), observing that wash sales were in the nature of deceit since they ‘broadcast the fact that a buyer and a seller have agreed to exchange the shares at a published price, when they have not done so’; Thornton v SEC 171 F 2d 702 (2d Cir 1948).

53.

Criminal Code s 3.2 and Corporations Act s 1041B(1A). The intent requirements as to the predecessor of this provision, s 998(5) of the Corporations Law and subsequently the Corporations Act, were considered in Manasseh v R (2002) 167 FLR 44; 40 ACSR 593; [2002] NSWCCA 27. Prior to the commencement of the Financial Services Reform Act 2001 (Cth), a defence to a prosecution for a wash sale was available if the defendant proved that the purpose of the transaction was not or did not include a purpose of creating a false or misleading appearance of active trading in securities on a stock market. That defence was considered in Braysich v R (2011) 243 CLR 434; 83 ACSR 1; [2011] HCA 14. A separate defence of that kind is no longer necessary given the fault requirements specified in the Criminal Code and s 1041B(1A).

54.

Compare the definition of ‘matched order’ in s 9(a)(1)(B)–(C) of the Securities Exchange Act 1934 (US) as an offer for the purchase or sale of a security entered with the knowledge that an order or orders of substantially the same size at substantially the same price have been or will be entered at substantially the same time for the sale or purchase of that security respectively.

55.

Evidence Act (Cth, NSW, Vic, Tas) s 140; Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34; Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; 41 ACSR 72; [2002] NSWSC 171; aff’d Adler v Australian Securities and Investments Commission (2003) 179 FLR 1; 46 ACSR 504; [2003] NSWCA 131 at [146]–[148]; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; 46 ACSR 126; [2003] VSC 123; aff’d Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; 185 FLR 245; 48 ACSR 621; [2004] VSCA 54 at [161]; Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1; 71 ACSR 368; [2009] NSWSC 287 at [186]; and see generally T Middleton, ‘The Difficulties of Applying Civil Evidence and Procedure Rules in ASIC’s Civil Penalty Proceedings under the Corporations Act’ (2003) 21 C&SLJ 507.

56.

Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; 50 ACSR 242; [2004] HCA 42; Australian Securities and Investments Commission v Mining Projects Group Ltd (2007) 164 FCR 32; 65 ACSR 264; [2007] FCA 1620; MacDonald v Australian Securities and Investments Commission (2007) 73 NSWLR 612; 65 ACSR 299; [2007] NSWCA 304; P Spender, ‘Negotiating the Third Way: Developing Effective Process in Civil Penalty Litigation’ (2008) 26 C&SLJ 249; M Duffy, ‘Insider Trading: Addressing the Continuing Problems of Proof’ (2009) 23 AJCL 149 at 154.

57.

The scope of this limb of s 1041E depends on the scope of the concept of a financial market ‘operated’ in the jurisdiction. As noted in 16.6 above, it may be arguable that this prohibition does not apply where financial products are traded on the over-the-counter markets, because conduct constituted by a person making or accepting offers or invitation to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only does not constitute ‘operating a financial market’ for the purposes of Ch 7: s 767A(2). The Australian Securities and Investments Commission takes the view that this prohibition does extend to trading on the over-the-counter markets.

58.

Australian Securities Commission v Macleod (2000) 22 WAR 255; 34 ACSR 135; [2000] WASCA 101; rev’d on other grounds: Macleod v Australian Securities and Investments Commission (2002) 211 CLR 187; 191 ALR 543; [2002] HCA 37.

59.

For example, the Rae Committee described the practice of ‘organised runs’, which involved ‘groups of people creating activity in a share either by their own buying or by the dissemination of rumours in order to bring about a sharp increase in prices of the shares. This in turn attracted further buyers and so higher prices. The purpose of attracting buyers into the market and rising prices was to enable the organisers of the run to sell their shares for a quick profit’.

60.

Financial Services and Markets Act 2000 (UK) s 91; Graiseley Properties Ltd v Barclays Bank plc [2012] EWHC 3093 (Comm), on appeal [2013] EWCA Civ 1372; Deutsche Bank AG v Unitech Global Ltd [2013] EWHC 2793 (Comm); [2014] 2 All ER 268; G Walker, ‘Reference Rate Regulation and LIBOR’ (2013) 28 BFLR 351; C Cowden and W Rayburn, ‘The LIBOR Scandal and Litigation: How the Manipulation of LIBOR Could Invalidate Financial Contracts’ (2013) 17 N C Bank Inst 221; A Theodosopoulou, ‘Interest Rate Benchmarks Regulation: Work in Progress’ (2014) 29 JIBLR 536; A Verstein, ‘Benchmark Manipulation’ (2015) 56 B C L Rev 215.

61.

Regulation (EU) 596/2014; ASIC Report 440, Financial Benchmarks, July 2015, [97]; G Walker and R Purvis (eds), Financial Services Law, 3rd ed, Oxford University Press, Oxford, 2014, p 30.

62.

Braun v R (2008) 68 ACSR 539; 190 A Crim R 497; [2008] NSWCCA 269 at [74].

63.

See also Peters v R (1998) 192 CLR 493; 151 ALR 51; Australian Securities and Investments Commission v Heydon Park Ltd [2005] FCA 1583; Re Dollas-Ford and Australian Securities and Investments Commission (2006) 91 ALD 747; [2006] AATA 704.

64.

Braun v R above.

65.

SEC v Capital Gains Research Bureau Inc 375 US 180 (1963); Zweig v Hearst Corporation 594 F 2d 1261 (9th Cir 1979).

66.

Goldwasser, ‘The Enforcement Dilemma in Australian Securities Regulation’, above at 485–6.

67.

I MacNeil, An Introduction to the Law on Financial Investment, 2nd ed, Hart Publishing, Oxford, 2012, p 426.

68.

A borrowing arrangement will typically involve the transfer of securities from the lender to the borrower, with the borrower obliged to return securities or equivalent securities on demand or at the end of an agreed term.

69.

N Moloney, EU Securities and Financial Markets Regulation, 3rd ed, Oxford University Press, Oxford, 2014, p 539.

70.

See, for example, V R Goldwasser, ‘Shortselling Revisited — The Need for a New Direction’ (1994) 12 C&SLJ 277.

71.

E Avgouleas, ‘A New Framework for the Global Regulation of Short Sales: Why Prohibition Is Inefficient and Disclosure Insufficient’ (2010) 15 Stan J L Bus & Fin 376 at 403–4, 408.

72.

Osborne v Australian Mutual Growth Fund [1972] 1 NSWLR 100; Utz v Javor [1973] 2 NSWLR 1.

73.

See generally P Ali, ‘Short Selling and Securities Lending in the Midst of Falling and Volatile Markets’ (2009) 24(1) JIBLP 1.

74.

I MacNeil, An Introduction to the Law on Financial Investment, above p 426.

75.

The term ‘section 1020B products’ is defined as securities; managed investment products; debentures, stocks or bonds issued or proposed to be issued by a government; and financial products of any other kind prescribed by regulation: s 1020B(1).

76.

Corporations Regulations Pt 7.9 Div 15 requires reporting of short positions to ASIC and provides for ASIC to disclose the total of short positions reported to it. [CO 10/135] allows an exemption from a seller’s obligation to report short positions in relation to securities or managed investment products which do not exceed specified value and volume limits. [CO 10/288] exempts a marketmaker from reporting covered short sale transactions in the course of hedging risks arising from market-making activities during the course of performing functions as a market-maker of ETF securities; see also ASIC Consultation Paper 106: Short Selling to Hedge Risk from Market-Making Activities.

[page 703]

Chapter 17 INSIDER TRADING Introduction Policy justifications for the regulation of insider trading Insider trading and the economics of the market Regulation of insider trading in United States law Scope of the Insider Trading Prohibition Key questions in the application of the insider trading prohibition When the primary prohibition on insider trading applies: s 1043A(1) Materiality of information Information known to bodies corporate and partnerships Whether information is generally available Prohibited acts under s 1043A Communication of inside information Treatment of tippees Exceptions and Defences Exception for withdrawal from registered scheme Exception for underwriters Chinese walls within bodies corporate and partnerships Exception for knowledge of person’s own intentions or activities Exception for bodies corporate Exception for holders of financial services licences and their representatives Criminal and Civil Penalties and Civil Liability for Insider Trading Criminal penalties for insider trading Defences to a prosecution

17.1 17.2 17.6 17.7 17.8 17.8 17.9 17.15 17.20 17.23 17.28 17.29 17.30 17.31 17.31 17.32 17.33 17.34 17.35 17.36 17.37 17.37 17.38



Civil penalty liability Compensation for insider trading Specific situation in which a compensation order may be made under s 1317HA Other orders that may be made by the court

17.41 17.42 17.43 17.50 [page 704]

INTRODUCTION 17.1 Insider trading may be characterised as trading by a trader who possesses information that is ‘material’ to the price of financial products which are traded, which is not already known to other traders in the market, and which is not the product of the analysis of publicly available information by that trader.1 A trader may obtain access to information of that nature as a result of his or her relationship with the issuer of the financial products or with a prospective bidder for those financial products; or as a result of a professional relationship with the issuer or a bidder for those financial products; or by receiving the information from a person who has such a relationship.2 The opportunity to undertake insider trading will be available to a person who has access to material information so long as the information has not been announced to the market; for example, because the information is not yet sufficiently certain to be the subject of an announcement, or because the information cannot be released prior to completion of a transaction for reasons of commercial sensitivity or confidentiality. However, the results of research into the extent of insider trading in Australia3 are somewhat inconclusive. Tomasic and Pentony concluded that the precise extent of insider trading cannot be quantified; that the level of insider trading is probably slightly lower than in the period prior to its prohibition by legislation; that insider trading occurs predominantly, but not exclusively, in lower level stocks; [page 705]

and that insider trading is more likely to be undertaken by persons associated with the relevant company.4 Tomasic and Pentony also found that insider trading generally took place in the market for shares rather than for options; and was frequently related to takeover activity.5 The weight to be given to those conclusions may be limited by the fact that the underlying research methodology is open to criticism. Insider trading has been prohibited in Australia at least since the introduction of s 75A of the Securities Industry Act 1970 (NSW), which imposed criminal and civil liability for trading by a person associated with a corporation, for the purpose of obtaining a financial advantage, if that person possessed specific price-sensitive information relating to the corporation which was not generally known. That prohibition was extended in s 112 of the Securities Industry Act 1975 (NSW) and corresponding provisions in Queensland, Victoria and Western Australia. The latter provision was in turn continued in s 128 of the Securities Industry Act 1980 and in s 1002 of the Corporations Law 1990. The insider trading provisions were substantially amended by the Corporations Legislation Amendment Act 1991, as a result of recommendations made by the Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs (Griffiths Committee), published in October 1989.6 The provisions introduced by the Corporations Legislation Amendment Act 1991 have been substantially continued in Pt 7.10 Div 3 of the Corporations Act 2001 (Cth) (Corporations Act), introduced by the Financial Services Reform Act 2001 (Cth) (FSR Act).

Policy justifications for the regulation of insider trading 17.2 There has been a good deal of academic argument in relation to the question whether insider trading should be prohibited. The Griffiths Committee noted that various justifications have been offered to support the prohibition on insider trading, including that of fairness, based on the proposition that market participants should have equal access to information from an issuer of securities; that of fiduciary duty, based on the proposition that a person who holds a position of trust should not make a personal profit from that position without the informed consent of his or her beneficiaries; that of economic efficiency, which suggests that

insider trading is damaging to the integrity of the financial markets; and that of corporate injury, based on the proposition that insider trading injures the company which issued the securities, the shareholders in the company and investors who deal with insiders.7 [page 706]

Fiduciary theory 17.3 The prohibition on insider trading might be supported by reference to the fiduciary obligations of company officers. It might be argued that an officer of a company — who has access to price-sensitive information by virtue of his or her position, or is able to control or influence the disclosure of such information on behalf of the company — should be required to refrain from trading on that information, to ensure that he or she is free from self-interest in deciding whether to disclose that information. If this view is adopted, trading by company officers on inside information should be prohibited whether or not the officer deals with a person who is then a shareholder in the company. This approach narrows the categories of persons who would be under an obligation to disclose material pricesensitive information prior to the purchase or sale of shares. For example, a substantial shareholder is not in Australian law a fiduciary of the company in which it holds shares.8 An alternative rationale for the prohibition on insider trading might be based on a fiduciary duty assumed by the vendor toward the purchaser of securities, at least in a closely held corporation.9 However, that rationale is not readily applicable to transactions on a stock exchange, where purchasers and sellers of shares typically deal on the basis of market information without knowing the identity of the other party to the transaction. Other traders on the market are not themselves beneficiaries of any fiduciary duty owed by the insider, whether to the company or its shareholders. In a transaction occurring on a stock exchange, the buying or selling insider will rarely have induced the other party to trade, while the fact that a trade occurs with an insider rather than with other persons in the market at the same time is essentially random. If a transaction in shares in a listed company takes place off-market, the insider and the other party

are more likely to deal directly, and the insider’s conduct is more likely to induce the other party to trade. However, the previous relationship necessary to establish a fiduciary duty may still be absent in an off-market transaction.

Misappropriation theory 17.4 Under another view, the misappropriation theory, information acquired by an officer by virtue of his or her fiduciary position might be regarded as being analogous to property of the company which the officer is not free to use for his or her own purposes. In order to give effect to this policy, the law must prohibit trading on inside information not only by officers of a company, but also by other persons who acquire inside information by virtue of a fiduciary relationship with the company, such as its professional advisers. This approach would extend to persons who are not fiduciaries to a company, but who receive information from a fiduciary of the company in circumstances such that they are or should be aware [page 707] that that information has the character of inside information. This approach has been criticised on the grounds that it presupposes the allocation of property rights in information to the company or its shareholders, which may not be optimal from a wealth maximisation perspective; and that a company officer’s use of information will typically cause no loss to the company, at least outside the takeover context where trading on confidential information concerning an impending offer may leak that information to the market, and increase the market price of shares in the target company and the bidder’s cost of acquiring those shares.10

Access to information theory 17.5 On the widest view of the ‘access to information’ theory, investors in a market should have an equal opportunity to obtain and evaluate information relevant to trading decisions.11 That theory suggests that

insider trading should be prohibited since it enables the insider to deal in securities of companies with the advantage of information which is not available to other persons, which would affect the trading decisions of those other persons, and which could not be obtained by research or analysis undertaken by those other persons. One commentator has observed that the access to information approach, in effect, treats information as a public good rather than as corporate property, and requires the insider to abstain from trading on inside information while any trading gains from that information are disseminated between market participants.12 In Exicom Ltd v Futuris Corporation Ltd (1995) 123 FLR 349; 18 ACSR 404; 13 ACLC 1758, Young J provides some support for each of these approaches, observing that the ‘theory behind insider trading is breach of fiduciary duty’, but also noting that insider trading is analogous to an ‘appropriation of corporate property’ and that the insider trading provisions were ‘designed to allow fair play in the marketplace’: at 408–9. An access to information approach, a fiduciary approach and a misappropriation approach would not necessarily lead to the same conclusions as to the appropriate scope of the prohibition on insider trading. To the extent that the fiduciary approach is based on previous dealings of the parties to a transaction, it is not readily applicable to the trading of financial products in public markets. An access to information approach requires an assessment of the insider’s dealings with all persons trading in the market at a particular time, and is therefore likely to support a wider prohibition on insider trading than a fiduciary approach. In Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269; [2005] FCA 88 at [11], Finkelstein J appears to prefer an access to information approach, observing that the policy underlying the insider trading prohibition is to: … ensure that the securities market operates freely and fairly so that one party to a transaction does not, because of the position of asymmetric information, have an advantage over the other party.

[page 708]

In Mansfield v R (2012) 247 CLR 86; 293 ALR 1; 91 ACSR 1; [2012] HCA 49 at [45], the majority in the High Court of Australia referred to the purpose identified in 1981 by the Committee of Inquiry into the Australian Financial System (Campbell Committee) of ensuring ‘that the securities market operates freely and fairly, with all participants having equal access to relevant information’ (emphasis in original).

Insider trading and the economics of the market 17.6 An influential academic critic of insider trading regulation, H L G Manne, argued that insider trading gives rise to a prices signal to the market and moves the price of securities towards the real value of the securities, thus bringing about a better informed and more efficient market13 and, conversely, that a prohibition on insider trading delays the incorporation of information in a company’s share price and thereby increases the bid-ask spread and volatility.14 It has been suggested that the provision of information by this means reduces search costs for all participants in the market,15 and that insider trading is condoned in the markets because its benefits are greater than its costs to companies in which shares are traded. These arguments are most commonly adopted by those who accept the efficient market hypothesis, which holds that securities markets accurately reflect relevant information, including any inside information revealed only by trading on the market, in the price of shares traded.16 These arguments are open to several criticisms. Insider trading is likely to be slower in affecting market prices and less accurate as an indicator of underlying value than direct disclosure of information by the issuer.17 Trading by a single trader is unlikely to have a significant effect on the price of securities, to allow the price at which the securities are traded to reflect inside information to which that trader has access, unless other traders can identify that trader as a person who has access to such information. It has also been argued that insider trading creates a transaction cost for uninformed investors in a liquid market, since informed traders will perform ‘strategic’ trades at incorrect prices, before correcting them at a profit when the prices are accurate, and may deter

traders without access to inside information from trading on such a market.18 [page 709] Manne further suggested that insider trading allowed corporate officers to receive financial rewards for innovation. The suggestion that insider trading provides a desirable incentive for corporate officers is also flawed, since a person who benefits from trading on inside information is not necessarily the person responsible for innovation; insider trading does not necessarily reward that person in proportion to the value of any innovation; and insider trading allows insiders to profit from trading in anticipation of corporate failures as well as corporate successes. Moreover, the possibility of earning profits from insider trading may encourage corporate insiders to withhold information from the market in order to serve the insider’s trading interests. The result would be that the market would be misinformed and, to the extent of that misinformation, inefficient.19 On the other hand, it may be argued that the prevention of fraud and the promotion of disclosure are necessary for the maintenance of an efficient market. The Griffiths Committee expressed the view that ‘insider trading damages an essential component in the proper functioning of the securities markets, that is investor confidence’.20 Similarly, the Campbell Committee observed: The objective of restrictions on insider trading is to ensure that the securities market operates freely and fairly, with all participants having equal access to relevant information. Investor confidence, and thus the ability of the market to mobilise savings, depends importantly on the prevention of the improper use of confidential information.21

Arguably, if insider trading results in a loss of confidence in the integrity of the securities market, investors will either look to other investment avenues or will demand higher risk premiums, increasing the cost of capital to companies.22 The prohibition on insider trading may also be supported as a means of reducing the costs involved in individual investors seeking to police market transactions in which they are involved, to avoid being disadvantaged against other traders with access to inside information.23

Finally, legislation prohibiting insider trading might be supported on the grounds of the intrinsic desirability of a minimum standard of ‘fairness’ in the securities market. On that reasoning, even if any efficiency advantages of prohibiting insider trading — for example, in removing an incentive for insiders to withhold information [page 710] from the market in order to allow them to trade on that information — are marginal, a prohibition on insider trading may be justified.24

Regulation of insider trading in United States law 17.7 Section 10(b) of the Securities Exchange Act 1934 (US) makes it unlawful, in connection with the purchase or sale of any security (whether or not that security is listed on any exchange) for any person, by the use of interstate commerce or the mails or any facility of any national securities exchange, to use or employ any manipulative or deceptive device or contrivance in contravention of the rules and regulations of the Securities and Exchange Commission. Rule 10b-5, made under s 10(b) of the Securities Exchange Act 1934, provides that it is unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate trade or commerce or of the mails or of any facility of any national securities exchange, to employ any device, scheme or artifice to defraud; to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances, not misleading; or to engage in any act, practice or course of business which operates or would operate as fraud or deceit upon any person, in connection with the purchase or sale of any security. Earlier American authorities articulated two groups of principles which might provide the basis for delimiting the scope of the prohibition on insider trading. These principles were directed to the fiduciary status of the insider and to his or her possession of informational advantages. For example, in Re Cady Roberts & Co v SEC 40 SEC 907 (1961), an employee of a broking firm was also a director of a publicly held company,

and learned of a proposed reduction in dividends paid by the company in his capacity as a director. He passed that information to a partner in the broking firm, who sold shares in that company on the account of several clients of the broking firm prior to the public announcement of the dividend reduction. The Securities and Exchange Commission (US) took the view that the prohibition on insider trading was partly founded on fiduciary principles, where a relationship between an insider and a company gave access to information which could be used only for corporate purposes and ‘not for the personal benefit of anyone’. At the same time, the commission relied on the ‘inherent unfairness’ of an insider trading with information ‘knowing that it is unavailable to those with whom he is dealing’. In SEC v Texas Gulf Sulphur Co 401 F 2d 833 (1968), cert denied 394 US 976 (1969), the directors and officers of a mining company were held liable for profits made as a result of trading on undisclosed information relating to a discovery of mineral deposits. The court emphasised the access to information principle, holding that trading by company directors and officers who possessed material non-public information was contrary to the ‘justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to information’. In Shapiro v Merrill Lynch, Pierce, Fenner & Smith Inc 495 F 2d 228 at 235 (2d Cir 1974), the court observed that the intention of r 10b-5 was to secure [page 711] ‘fair dealings in the securities markets’ and to ‘prevent corporate insiders and their tippees from taking unfair advantage of … uninformed outsiders’. However, in Chiarella v US 445 US 222 at 228–30, 233 (1980), the United States Supreme Court rejected the argument that r 10b-5 was breached simply by trading with an unerodable information advantage over others. In that case, an employee of a printing firm traded on information about impending takeovers which he obtained in the course of printing the tender documents. The majority held that the employee had not contravened r 10b-5, in the absence of a breach of a relationship of

trust and confidence owed to those with whom he traded. This reasoning was followed in Dirks v SEC 463 US 646 (1983), which further required that the fiduciary’s breach of duty be for his or her personal benefit in order to establish a breach of r 10b-5. Subsequent American decisions have held an insider’s ‘misappropriation’ of information on which he or she trades will breach the prohibition on insider trading under r 10b-5, even if he or she is not under a fiduciary obligation either to the company the shares of which are traded, or to the other party to the trade. In Chiarella v US above, the United States Supreme Court had left open the possibility that r 10b-5 would be contravened if an insider traded on information which he or she had ‘misappropriated’ from another; although the majority held that the misappropriation theory was not available to found a conviction in that case since it had not been put to the jury at trial. A number of United States appellate courts subsequently adopted the misappropriation approach. In each of these decisions, breach of r 10b-5 was held to have been established on the ground that the employee had breached a duty of confidentiality owed to his or her employer in taking advantage of information obtained in the course of employment by trading in securities.25 In Carpenter v US 484 US 19 (1987), the United States Supreme Court was divided evenly as to the validity of the misappropriation theory and affirmed the judgment of the Second Circuit Court of Appeals on that basis. American courts then extended the misappropriation theory to trading on information in violation of a duty of confidentiality owed to a party other than the company whose shares were traded.26 In US v O’Hagan 521 US 642 (1997), the United States Supreme Court upheld the application of the misappropriation theory in the conviction of a partner of a law firm who had traded on inside information concerning a takeover, in breach of his duty to that firm and that firm’s duty to its client. The court observed that the public policy which supported that theory was to prevent an insider from trading inside information, which he or she had obtained in breach of duty, and thereby obtaining ‘an advantageous market position through deception; he or she deceives the source

[page 712] of the information and simultaneously harms members of the investing public’; and also observed (at 658–9): Although informational disparity is inevitable in the securities markets, investors likely would hesitate to venture their capital in a market where trading based on misappropriated nonpublic information is unchecked by law. An investor’s informational disadvantage vis a vis a misappropriator with material, nonpublic information stems from contrivance, not luck; it is a disadvantage that cannot be overcome with research or skill.

The misappropriation theory seems to have arisen in large part as a product of the statutory regime established by r 10b-5 in the United States. In principle, an insider’s breach of an obligation of confidentiality owed to his or her employer seems to be a less persuasive justification for prohibiting the insider from trading with third parties in an impersonal market than the insider’s unerodable information advantage as against other participants in the market, or the ‘unfairness’ (whatever the definitional difficulty of that concept) of the insider’s trading with such an advantage. The United States has also seen large-scale insider trading cases, particularly in respect of hedge funds, in the last several years. In October 2009, the Securities Exchange Commission and US Department of Justice brought parallel civil and criminal proceedings against a hedge fund, Galleon Management LP, and its principal and later also charged other hedge fund traders and several company insiders in the same matter. These proceedings involved allegations that the fund traded on inside information regarding earnings and takeover activity acquired from, among others, an analyst with a rating agency, company executives and a director in a company in which the hedge fund held shares. A number of defendants pleaded guilty and the principal of the hedge fund was convicted and sentenced to 11 years’ imprisonment and ordered to pay a substantial fine and to forfeit the profits made. Criminal proceedings were also brought against individuals and against a major US hedge fund, SAC Capital Advisers, which was charged with one count of wire fraud and four counts of securities fraud, in respect of insider trading offences alleged to have been committed by numerous employees and facilitated by institutional practices, and pleaded guilty and agreed to pay a fine of $1.8 billion to

resolve criminal and civil proceedings and was also placed under a fiveyear term of probation and agreed to close its advisory business and cease accepting outside investors. However, liability of a recipient of information from an insider (tippee) under US law may be limited by a relatively strict application of requirements for personal benefit and knowledge of the insider’s wrongdoing: see 17.30.

SCOPE OF THE INSIDER TRADING PROHIBITION Key questions in the application of the insider trading prohibition 17.8 Before proceeding to a detailed review of the insider trading prohibition, it is useful to set out several key questions arising in the application of that prohibition in diagrammatic form, as follows: [page 713] Table 17.1: Insider Trading Flowchart Is a person dealing in a Div 3 financial product? (s 1042A)27 ↓Yes Is the information ‘material price-sensitive’: that is, such that a reasonable person would expect it to influence persons who commonly acquire Div 3 financial products in deciding whether or not to acquire or dispose of them? (ss 1042A, 1042D)28 ↓Yes Does that person have information that is not

No →

No →

No →

Insider trading prohibition does not apply Insider trading prohibition does not apply

Insider trading

‘generally available’? (s 1042C)29 ↓Yes Is a Chinese wall exception available? (s 1043F– 1043G)30

Yes →

↓No Is the ‘own intentions’ exception available? (ss 1043I–1043J)31

Yes →

prohibition does not apply Trading prohibition does not apply (but procuring prohibition still applies) Insider trading prohibition does not apply [page 714]

↓No Is the ‘agency’ exception available (licensed markets only)? (s 1043K)32



↓No Trading, procuring and communicating prohibitions apply



Yes →

Dealer not prohibited from dealing as agent for client

When the primary prohibition on insider trading applies: s 1043A(1) 17.9 Section 1043A of the Corporations Act provides that the primary prohibition applies where a person (‘insider’) possesses inside information;33 and the insider knows, or ought reasonably to know, that the matters specified in (a) and (b) of the definition of ‘inside information’ in s 1042A are satisfied in relation to the information; namely, that the information is not generally available and, if the information were

generally available, a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products.

Definition of ‘Division 3 financial products’ 17.10 The term ‘Division 3 financial products’ is defined in s 1042A as meaning: securities; derivatives; interests in a managed investment scheme; debentures, stocks or bonds issued or proposed to be issued by a government; superannuation products, other than those prescribed by regulations made for the purposes of the paragraph; or any other financial products that are able to be traded on a financial market. The term ‘security’ is in turn defined in s 761A as, among other things, a share in a body, a debenture of a body, a legal or equitable right or interest in such a share or debenture, or an option to acquire, by way of issue, a security covered by those paragraphs, but does not include an ‘excluded security’. In Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394; 18 ACSR 404; 13 ACLC 1758, the Supreme Court of New South Wales (Young J) held that shares that had not yet been issued did not fall within the definition of securities in former s 1002A, so that the prohibition on insider trading in former s 1002G did not apply to a subscription for such securities. That decision applied the same reasoning in respect of former [page 715] s 1002G as had Hooker Investments Pty Ltd v Baring Brothers Halkerston & Partners Securities Ltd (1986) 10 ACLR 462 (Young J); aff’d (1986) 5 NSWLR 157; 10 ACLR 524 (Court of Appeal) in respect of s 128 of the Securities Industry Code. However, it might be argued that the holding in

Exicom is inconsistent with the existence of an exception for underwriters in s 1043C, which would not be necessary if the primary prohibition in s 1043A did not apply to subscriptions for unissued securities. The term ‘derivative’ is defined in s 761D and includes, among other things, forward contracts and options in relation to foreign exchange, commodities, interest rates and equities. Derivatives may be both exchange-traded and over-the-counter products. The application of the insider trading prohibition to derivatives over commodities will prohibit a person from buying or selling derivatives over a commodity, when he or she is in possession of inside information concerning that commodity, although he or she could lawfully buy or sell the physical commodity. The definition of ‘Division 3 financial products’ also includes any other financial products that are able to be traded on a financial market. The term ‘financial market’ is defined as a facility through which offers to acquire or dispose of financial products are regularly made or accepted; or offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in the making of offers to acquire or dispose of financial products or the acceptance of such offers: s 767A(1); and see 10.7. The application of the insider trading prohibition to dealings in contracts for differences was confirmed in Joffe v R; Stromer v R (2012) 82 NSWLR 510; [2012] NSWCCA 277, where Mr Joffe was charged with an offence of procuring and Mr Stromer with an offence of acquiring contracts for differences in contravention of s 1043A of the Corporations Act: see 17.11. They contended that contracts for differences were excluded from the definition of ‘financial product’ as credit facilities34 or excluded as contracts for the future provision of services,35 and were therefore not ‘Div 3 financial products’ within s 1042A and not subject to the relevant prohibitions. The Court of Appeal of the Supreme Court of New South Wales held that the exclusions from the definition of ‘financial product’ in s 765A of the Corporations Act applied for the purpose of determining whether a financial product was a ‘Div 3 financial product’ within the scope of that prohibition, but held that no exception was established in the particular case. The result is consistent with the statutory structure and should not involve any narrowing of the insider trading

prohibition that would prevent its application in circumstances in which it should apply. Subsequent case law has applied the insider trading prohibition to contracts for differences and also to foreign exchange derivatives in subsequent case law.36 [page 716]

Elements of the primary prohibition 17.11 In order to fall within the scope of the primary prohibition under s 1043A it is necessary that: a person possesses information that is not generally available; a reasonable person would expect that information to have a material effect on the price or value of particular Div 3 financial products if that information was generally available; and the person knows, or ought reasonably to know, that the information is not generally available and that, if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the particular Div 3 financial products. The prohibition applies where a person knows the relevant information, even if he or she did not remember or did not consciously bring to mind its character, and it also extends, by the reference to ‘ought reasonably to know’ in the third dot point above, to a person who possesses inside information but fails to appreciate the specified matters, where the objectively available information should have led him or her to do so.37 Whether a person ought reasonably to have known that the relevant information was not generally available or whether a reasonable person would have expected it to be material is to be determined by reference to that person’s circumstances, including his or her mental state, experience and level of commercial expertise.38

Prohibition is triggered by possession, not use 17.12 The prohibition in s 1043A is triggered by the mere possession of such information, rather than focusing on the ‘use’ of that information.39

The insider trading prohibition applies where a person possesses inside information, and is not concerned with whether that person uses that information in making a trading decision. In other words, a person is prohibited from dealing in a Div 3 financial product while he or she possesses non-public price-sensitive information in respect of that product, even if he or she would have traded irrespective of that information or is trading for a hedging purpose rather than a profit-making purpose. [page 717]

No connection requirement 17.13 Section 1043A(1) does not require that there exists any connection or relationship between a person who is prohibited from trading and the issuer of the relevant financial products.40 A person becomes an ‘insider’ for the purposes of s 1043A simply by the possession of information having the relevant quality (that is, information which is not generally available and which a reasonable person would expect to have a material effect on the price or value of particular Div 3 securities), if that person knows or ought reasonably to know that that information is not generally available and, if it were generally available, a reasonable person would expect it to have a material effect on the price or value of the particular Div 3 financial product. However, in Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394; 18 ACSR 404; 13 ACLC 1758, the Supreme Court of New South Wales read down the scope of former s 1002G of the Corporations Act in holding that an issuing company cannot itself be an insider for the purposes of that section. Young J read that section as deriving from the law of fiduciary obligations, and observed that a company cannot owe a fiduciary duty to itself. While this conclusion may be consistent with a ‘fiduciary’ approach to the insider trading provisions, it finds no support in the language of s 1043A and is inconsistent with an access to information approach.41

Jurisdictional scope 17.14 Section 1043A (and all of Pt 7.10 Div 3) applies to acts and

omissions within the jurisdiction in relation to Div 3 financial products, regardless of where the issuer of the products is formed, resides or is located and of where the issuer carries on business; and also applies to acts and omissions outside Australia, in relation to Div 3 financial products issued by a person who carries on business in the jurisdiction or a body corporate formed in the jurisdiction: s 1042B. The prohibition on insider trading therefore applies to trading in Div 3 financial products issued by an Australian corporation, even where that trading takes place outside Australia, reversing the result in Danae Investment Trust plc v McIntosh Nominees Pty Ltd (1993) 10 ACSR 1; aff’d (1993) 11 ACLC 1242, where the Supreme Court of South [page 718] Australia held that former s 128 of the Securities Industry Code did not apply to sales and purchases of shares in an Australian incorporated company that took place in the United Kingdom.

Materiality of information 17.15 The insider trading prohibition is triggered by the possession of material information. In this section, we deal with the concept of ‘information’; the materiality standard; the evidence which can be led to establish materiality; and the question whether materiality is class-specific.

Concept of ‘information’ 17.16 Earlier New South Wales decisions took a relatively narrow view of the kind of information that might trigger the insider trading prohibition. For example, in Ryan v Triguboff [1976] 1 NSWLR 588 at 597, the court held that the phrase ‘specific information’ in s 75A of the Securities Industry Act 1970 (NSW) did not include a generalised deduction from other facts which allowed a defendant to effect a sale of shares at a higher price. A wider view was taken by the Supreme Court of Victoria in Commr for Corporate Affairs v Green [1978] VR 505. That wider view was followed at first instance in Hooker Investments Pty Ltd v

Baring Brothers Halkerston & Partners Securities Ltd above (at 463), where Young J held that information would include ‘factual knowledge either of a concrete kind or that obtained by means of a hint or veiled suggestion from which one can impute other knowledge’. The term ‘information’ is now widely defined in s 1042A as including ‘matters of supposition’ and other matters that are insufficiently definite to warrant being made known to the public and matters relating to the intentions or likely intentions of a person. In Ampolex Ltd v Perpetual Trustee Company (Canberra) Ltd (1996) 20 ACSR 649, the Supreme Court of New South Wales (Rolfe J) left open the possibility that the knowledge of an intention to seek to convert certain convertible notes at a higher conversion rate than had previously been applied by the company could constitute ‘information’ within the scope of the corresponding definition in former s 1002A, so as to trigger the prohibition under former s 1002G. The term ‘information’ can include inferences drawn from other information42 or a statement by a third party about a possible transaction.43 The concept of ‘information’ in s 1042A is not limited to information that is either true or believed to be true, so the insider trading prohibition extends to trading on non-public and material information which is of doubtful accuracy or false.44 That approach is correct in policy, since information may be material to investor decision-making, although it ultimately turns out to be incorrect or unfounded. [page 719] The concept of ‘information’ in s 1042A was also considered in Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963. (This case also raised important issues as to conflicts of interest, which are considered in 13.21, and as to the scope of fiduciary duties which are considered in 14.6.) The Australian Securities and Investments Commission (ASIC) alleged that Citigroup, among other things, engaged in proprietary trading on the basis of inside information in connection with a takeover bid by Toll Holdings Ltd (Toll) for Patrick Corporation Ltd (Patrick). In January 2005, Citigroup’s Investment

Banking Division had pitched to Toll for a mandate and Citigroup had begun purchasing Patrick shares on Toll’s instructions, although a mandate letter had not yet been signed. A mandate letter was ultimately signed in August 2005. On 18 and 19 August 2005, there were media reports and market rumours of a possible takeover bid for Patrick. On 19 August 2005, a trader on the public side of Citigroup’s information barrier or Chinese wall (see 17.33) purchased in excess of one million shares in the period to about 3 pm, and ASIC did not allege that the trader had inside information during that period. At about 3.30 pm, that trader was instructed by his immediate superior not to buy any more Patrick shares, without giving any reason for that instruction. Later that afternoon, the trader sold about 200,000 Patrick shares. On 22 August 2005, Toll’s bid for Patrick was announced and Citigroup placed Toll and Patrick on its restricted list, preventing further trading in those shares. ASIC’s first insider trading claim was directed to the trader’s sale of Patrick shares in the afternoon on 19 August 2005, after he had been given the instruction not to buy more Patrick shares. ASIC argued that, as a result of that instruction, the trader had made the supposition that Citigroup was acting for Toll in its proposed takeover of Patrick and was prohibited from dealing in Patrick shares (it might be noted that the sale of the relevant shares was, of course, contrary to the logical response to the alleged inside information). Jacobson J held that, if the trader had formed an uncommunicated supposition as a result of his internal thought processes, that could have amounted to ‘information’ within the meaning of s 1042A, so that the insider trading prohibition could have applied in the relevant circumstances: at [537]. However, his Honour held that the trader was not an ‘officer’ of Citigroup within s 9 and his knowledge was not attributed to Citigroup under s 1042G(1)(a) (see 17.21) and, in any event, the trader had not made the alleged supposition. (A second insider trading claim advanced by ASIC, based on a challenge to the adequacy of Citigroup’s Chinese walls, is considered in 17.33.)

Materiality standard 17.17 As noted above, s 1043A applies where information is not generally available; a reasonable person would expect that information to have a material effect on the price or value of Div 3 financial products; and

the insider knows, or ought to know, that the information is not generally available and, if it were generally available, a reasonable person would expect it to have a material effect on the price or value of Div 3 financial products. A reasonable person is taken to expect information to have a material effect on the price or value of particular Div 3 financial products if, and only if, the information would, or would be likely to, influence persons who [page 720] commonly acquire such products in deciding whether or not to acquire or dispose of them: s 1042D. The fundamental issue under the test adopted in s 1043A, read together with s 1042D, is therefore the influence of information on investor decision-making. It would seem that information would be material, under that test, if it would impact on the investment decision-making of persons who commonly acquire the relevant Div 3 financial products, taken together with other information available in the market to such persons. United States courts have held that information relating to an uncertain future event will be ‘material’ if the event either has a relatively high probability of occurrence or would be highly significant if it occurred.45 Information can be material although it is not certain, and the reliability of the source of the information may be relevant to establishing its materiality.46 The question of materiality was contested but materiality was established in R v Rivkin (2004) 59 NSWLR 284; 184 FLR 365; [2004] NSWCCA 7 (procuring of trading by a person who possessed information as to a potential merger of Impulse with Qantas). The question of materiality of information was also considered in Hannes v Director of Public Prosecutions (Cth) (No 2) (2006) 205 FLR 217; 60 ACSR 1; [2006] NSWCCA 373 (an executive of an investment bank purchased call options while he possessed information concerning a probable takeover of a company advised by the bank). Barr and Hall JJ there observed that ‘materiality’ was concerned with the question whether information would or would be likely to influence persons who commonly invest in securities

in deciding whether or not to subscribe for, buy or sell them, that this might generally be said to be concerned with the capacity of information to influence investor behaviour which in turn has an effect on the price or value of securities and materiality is therefore concerned with information which might be said to be price sensitive: at [384]. In Fysh v R [2013] NSWCCA 284, an appeal was allowed on the basis that Dr Fysh had been charged with the possession of inside information that comprised several elements, which were together alleged to be material, but there was reasonable doubt as to whether he possessed all of that information and whether the information that he did possess was material. Other examples of material information in Australian cases include information concerning a possible takeover bid or merger47 and adverse information concerning [page 721] a company, such as information that a company’s viability as a going concern is in doubt.48 United States insider trading cases have typically involved information such as a company’s earnings; impending takeover offers or share placements; mineral discoveries49 or new products; significant changes in dividend rates50 or management policies; or fundamental changes in the financial position of a company.51 Knowledge of the impending publication of a research report by a broking firm or of a significant change in a house position of the firm is also likely to be material. Matters of that kind are likely to influence the trading decisions of persons who commonly acquire Div 3 financial products in deciding whether or not to acquire or dispose of them for the purposes of s 1042D and therefore to have a material effect on the price or value of particular Div 3 financial products so as to fall within the definition of ‘inside information’ in s 1042A. The extension of the insider trading prohibition to dealings in Div 3 financial products (see 17.10) also has the result that the insider trading prohibition may be triggered by a range of information that impacts on the price of such products. For example, non-public information relating to

changes in interest rates may be material to derivatives and other products based on interest rates.

Evidence as to materiality 17.18 In order to establish a contravention of s 1043A, the prosecution will typically lead expert evidence as to the likely effect of particular information on the market price at which the relevant Div 3 financial products are traded, and specifically as to whether that information would, or would be likely to, influence persons who commonly acquire such financial products in deciding whether or not to acquire or dispose of those products. In seeking to establish whether information would, or would be likely to, influence persons who commonly acquire the relevant financial products in deciding whether or not to acquire or dispose of them, the prosecution may rely on an alteration in the market price of those financial products following the announcement of the information to the market, since the efficient market hypothesis suggests that such an alteration may reflect trading decisions made by such persons in response to that information. The United States courts have accepted that such evidence may [page 722] be rebutted by evidence that the alteration in the market price resulted from other factors, such as the release of other information or price movements in the market generally.52 The effect which the later release of the relevant information to the market has on the market price may support a finding of materiality or may tend to indicate that information was not material.53 The United States cases also suggest that the fact that an insider trades in financial products after he or she comes into possession of information will itself support an inference that a reasonable person would have been influenced by that information in determining whether to trade in those financial products.54

Whether materiality is class-specific 17.19 There was authority that the ‘materiality’ of information under former s 128 of the Securities Industry Code was class-specific, so that a person who possessed information likely to affect the price of one class of securities of a body corporate was not prevented from dealing in other classes of securities of that body corporate.55 That conclusion was plausible in relation to former s 128 of the Securities Industry Code, where the test of materiality was directed to the effect of information on the market price of securities. However, it is arguable that information about one class of Div 3 financial products might, in some circumstances, be material in relation to other classes of those products, for the purposes of the definition of ‘inside information’ in s 1042A, in the sense that that information would or would be likely to influence persons in deciding whether or not to acquire or dispose of those other classes of financial products. However, in Exicom Ltd v Futuris Corporation Ltd (1995) 123 FLR 394; 18 ACSR 404; 13 ACLC 1758, the Supreme Court of New South Wales (Young J) held, in relation to the corresponding provision in the Corporations Law, that whether information was likely to affect the price of securities was to be determined by reference to the particular class of financial products traded, and not financial products in that company generally.

Information known to bodies corporate and partnerships 17.20 We now turn to the question of the attribution of information to bodies corporate and partnerships. [page 723]

Bodies corporate 17.21 For the purposes of Pt 7.10 Div 3, a body corporate is taken to possess any information which an officer of the body corporate possesses and which came into his or her possession in the course of performance of

his or her duties as an officer: s 1042G(1)(a). A body corporate is also presumed to know any matter or thing which an officer of the body corporate knows because he or she is such an officer: s 1042G(1)(b). If an officer of a body corporate, in that capacity, is reckless as to a circumstance or result, it is presumed that the body corporate is reckless as to that circumstance or result: s 1042G(1)(c). For the purposes of s 1043M(2)(b), which is a defence to a prosecution for a contravention of s 1043A(1) (see 17.40), if an officer of a body corporate ought reasonably to know any matter or thing because he or she is an officer of the body corporate, it is to be presumed that the body corporate ought reasonably to know that matter or thing: s 1042G(1)(d). Section 1042G has the effect that, if an officer of a body corporate who obtained relevant information knew or ought reasonably to have known, because he or she was an officer of the body corporate, that the information was not generally available and that, if it were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products, it is presumed that the body corporate also knew or ought reasonably to have known those matters. Section 1043F excludes liability for a contravention of the insider trading prohibition in s 1043A where a body corporate maintains a Chinese wall: see 17.33. Section 1042G(1) does not limit the application of s 769B, which attributes the state of mind (defined to include ‘knowledge’) of any employee to a body corporate for the purposes of Ch 7, in relation to Pt 7.10 Div 3: s 1042G(2). In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963, the Federal Court found that information held by a trader employed by a financial intermediary was not attributed to that intermediary because he was not an ‘officer’ of that intermediary as defined in s 9 of the Corporations Act; however, that case did not consider whether s 769B could allow attribution in this situation.

Partnerships 17.22 A member of a partnership is taken to possess any information

that another member of the partnership possesses and that came into that other member’s possession in his or her capacity as partner, or that an employee of the partnership possesses and that came into the employee’s possession in the course of the performance of his or her duties as employee: s 1042H(1)(a). Every member of the partnership is presumed to know any information that a member or employee of the partnership knows because he or she is such a member or employee: s 1042H(1)(b). If a member or employee of a partnership, in that capacity, is reckless as to a circumstance or result, then every member of the partnership is presumed to be reckless as to that circumstance or result: s 1042H(1)(c). For the purposes of s 1043M(2)(b), if a member or employee of a partnership ought reasonably to know any matter or thing [page 724] because he or she is such a member or employee, it is presumed that every member of the partnership ought reasonably to know that matter or thing: s 1042H(1)(d). Section 1043G excludes liability for a contravention of s 1043A(1) where a partnership maintains a Chinese wall: s 1043G(1). A partner is also not treated as contravening s 1043A(1) if he or she enters into a transaction or agreement, other than on behalf of the partnership, merely because he or she is taken to possess information that is in the possession of another member or employee of the partnership: s 1043G(2). This exception applies to transactions undertaken by a partner in his or her own right, and not for the benefit of the partnership. Section 1042H(1) does not limit the application of s 769B, which provides that people are generally responsible for the conduct of their agents or employees, in relation to Pt 7.10 Div 3: s 1042H(2); and see 17.21.

Whether information is generally available 17.23 It is fundamental to the concept of insider trading that

information, upon which an insider trades, is not generally available to other participants in the market. An insider should not be held liable for insider trading if he or she discloses the particular information on the basis of which he or she proposes to trade, allowing others in the market the ability to take account of that information. This principle is described in United States authorities as the ‘disclose or abstain’ principle. The effect of that principle will frequently be to prohibit an insider from trading until the company releases the relevant information to the market, since an insider may be unable to release confidential information to the market without the company’s consent. Disclosure may be unacceptable to the company for legitimate commercial reasons; for example, public disclosure could place a transaction at risk by allowing competitors access to the company’s intentions, or place the company at a negotiating disadvantage as against the other party to a transaction.

Concept of ‘generally available’ 17.24 A person will only fall within the scope of the prohibition on insider trading in s 1043A if he or she possesses information that is not generally available. Information is taken to be ‘generally available’ if: it consists of readily observable matter (s 1042C(1)(a)); or it has been made known in a manner that would, or would be expected to, bring it to the attention of persons who commonly invest in Div 3 financial products of a kind whose price might be affected by the information, and a reasonable period for it to be disseminated among such persons has elapsed since it became known (s 1042C(1)(b)); or it consists of deductions, conclusions or inferences made or drawn from either or both readily observable matter or information made known as mentioned in s 1042C(1)(b)(i): s 1042C(1)(c).

Readily observable matter 17.25 The exception for ‘readily observable matter’ in s 1042C(1)(a) was introduced to avoid the result that a person could be liable for insider trading if he or she traded

[page 725] on the basis of, for example, an observation that the body corporate had excess stocks in a stockyard, which was not the intention of the provision.56 However, this concept can be problematic in some circumstances. For example, in R v Firns (2001) 51 NSWLR 548; 38 ACSR 223; [2001] NSWCCA 191, Firns had been informed of a judgment delivered by the Papua New Guinea Supreme Court in open court that improved the prospects of Carpenter Pacific Resources NL, a listed Australian mining company, in relation to gold mining rights in Papua New Guinea; and had bought shares in that company in Australia before news of that judgment was announced to the then Australian Stock Exchange or published in the Australian press. Firns was convicted of a contravention of former s 1002G, the prohibition on insider trading, in the District Court and appealed from that conviction. The majority in the Court of Criminal Appeal (Mason P and Hidden J) held that the phrase ‘readily observable matter’ was not limited to matters which were readily observable by those present in Australia. In reaching that conclusion, the majority noted that this limb of the definition of ‘generally available’ was designed to ensure that a person who was quick to appreciate the significance of information in the public domain should not be penalised for trading on the basis of that information, reflecting a legislative commitment to an efficient market. Their Honours noted that, although the prohibition on insider trading is aimed at the Australian market, dealings in that market are not restricted to Australian residents or Australian companies. The majority held that information comprised in a judgment of the Papua New Guinea Supreme Court was readily observable, since it was available, understandable and accessible to a significant group of the public, and that former s 1002B(2)(a) was not concerned with how many people observed the information and did not require that any particular time had elapsed between the observation and dissemination of that information. Carruthers J, dissenting, held that the concept of ‘readily observable’ must be read as limited to ‘readily observable in Australia’, to reflect the purpose of the legislation while protecting Australian investors. The issue raised in the decision of the Court of Criminal Appeal in Firns

is one of particular difficulty. On the one hand, in an internationalised securities market, it would be a surprising result if, for example, a person resident in the United Kingdom would contravene the prohibition on insider trading under Australian law by trading in Australian securities listed on the London Stock Exchange on the basis of information which was readily observable in the United Kingdom, even if that information was not yet well known in Australia. On the other hand, the decision in Firns would allow a trading advantage to a person who becomes aware of a matter which is readily observable outside Australia, and trades on information concerning that matter in the Australian market before it becomes known in Australia. That decision has the particular consequence that a company officer who becomes aware of a matter concerning the company which is readily observable overseas, before that matter becomes known in the Australian market, could trade on that information without contravening the prohibition on insider trading in s 1043A.57 [page 726]

Information made known to investors 17.26 Section 1042C(1)(b) contemplates that information may be made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Div 3 financial products of a kind whose price might be affected by the information. This provision reflects the Griffiths Committee’s view that ‘[t]he objective of restrictions on insider trading is to ensure that the securities market operates freely and fairly, with all participants having equal access to relevant information’.58 This provision would allow announcements of matters affecting Div 3 financial products to be made by means that would be expected to come to the attention of investors in such products, for example by an announcement to the Australian Securities Exchange (ASX). This provision is consistent with the approach adopted in the United States courts in relation to r 10b-5. For example, in SEC v Texas Gulf Sulphur Co 401F 2d 833 (1968), the court held that r 10b-5 required an insider to refrain from trading for some time after the disclosure of information, to prevent him or her from gaining a head start in the period

required for the assimilation of that information by the market. In Re Faberge Inc 45 SEC 249 at 255–6 (1973), the Securities and Exchange Commission (US) expressed the view that public disclosure would occur if information was disseminated in a manner which was calculated to reach the marketplace generally, for example, by way of a public release of information in the media. A recommendation made by a particular analyst to his or her clients, or a recommendation made in a newsletter issued by a financial services licensee, would typically have a restricted circulation and would therefore not amount to public disclosure of information.59 It will usually not be possible to establish that information is generally available by reference to rumours in the marketplace or the media, because such rumours typically do not have the specificity of the information known to the defendant.60 For information to be treated as generally available under this paragraph, a reasonable period for that information to be disseminated among persons who commonly invest in Div 3 financial products of a kind whose price might be [page 727] affected by the information must have elapsed since the information became known: s 1042C(1)(b)(ii). It is difficult to develop any general rule as to the time which would be a reasonable time for the purposes of s 1042C(1)(b)(ii). If information relates to a Div 3 financial product that is thinly traded, it is likely that the time required for assimilation of that information by the market will be greater than in the case of information relating to a Div 3 financial product that trades in significant volume. The time required for information to be ‘disseminated’ among investors may also depend upon the complexity of the information, if that term is taken to require not only that information is available to investors but also that it has been understood by the market; for example, the effect of a decline in anticipated earnings of a company or a reduced dividend payment would typically be quickly assimilated by the market, whereas the implications of a complex restructuring or a significant acquisition may not be immediately apparent to the market.

In a prosecution for a contravention of the insider trading prohibition, it may be necessary to identify the time of the impugned transaction with precision, in order to determine whether information was generally available at that time. In R v Evans & Doyle [1999] VSC 488 (SC (Vic), McDonald J, 15 November 1999), the court had to consider whether an agreement to purchase shares had been formed at a time when a company officer and a stockbroker had material non-public information. In that case, the company officer placed orders to purchase shares in Mt Kersey Mining NL with a stockbroker in a telephone conversation shortly before 2 pm on 20 November 1995. At that time, both the company officer and the broker were aware of information concerning a significant mineral discovery on a tenement adjoining those occupied by Mt Kersey Mining NL. The prosecution alleged that the conversation gave rise to an agreement to purchase shares in Mt Kersey Mining NL, which would contravene former s 1002G if that information was not then generally available. The court held that the placing of orders by the company officer with the stockbroker did not constitute an agreement to purchase the relevant shares, and such an agreement was not formed until a later time when the buying broker and selling broker formed a contract to buy the relevant shares in accordance with the rules of the ASX: see 14.11. It was arguable that, by the later time at which the contracts were made on the ASX, further information concerning the discovery had become available to the market so that the relevant information was then publicly available. In the particular circumstances, the court refused the prosecution leave to amend the charges to allege a breach of the insider trading prohibition at that later time, and dismissed the charges against the accused.

Analysis of publicly available information 17.27 In principle, an investor who obtains information through research or analysis is entitled to take advantage of that information, since others in the market could obtain that information given equal effort.61 On that view, trading on inside information is objectionable — by contrast with trading on the basis of information acquired by research or analysis of publicly available information — because it denies [page 728]

the other party the opportunity to lawfully overcome the information advantage of the insider.62 Section 1042C(1)(c) treats information as being generally available if it consists of deductions, conclusions or inferences made or drawn from either or both readily observable matter or information made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Div 3 financial products of a kind whose price or value might be affected by the information. An investor is therefore not prohibited from trading if he or she possesses information that is derived from the analysis of publicly available information. A prohibition on trading in those circumstances could have been a significant disincentive against investment analysts and professional investors undertaking such analysis. However, s 1042C(1)(c) would not protect an investment adviser or institutional investor who traded on the basis of information obtained, for example, from a private contact with company officers. It may be that information that is conveyed to an investment analyst in such a contact would generally not be of sufficient significance, in itself, to pass the threshold for the application of s 1043A. Information communicated to an analyst will only pass that threshold if a reasonable person would expect the information, if generally available, to have a material effect on the price or value of particular Div 3 financial products, in the sense that the information would, or would be likely to, influence persons who commonly acquire Div 3 financial products in deciding whether or not to acquire or dispose of those products: s 1042D. If information communicated to an investment analyst meets that test, s 1043A(1) prevents the analyst trading on that information, whether as principal or agent, and, if those financial products are able to be traded on a financial market operated in the jurisdiction, then s 1043A(2) prohibits communication of the information to others: see 17.28–17.29.

Prohibited acts under s 1043A 17.28 If s 1043A applies, an insider is prohibited from applying for, acquiring or disposing of the relevant Div 3 financial products or entering into an agreement to do so: s 1043A(1)(c). Section 1043A(1) does not

prevent an insider using inside information to decide to refrain from trading or to cancel an order to trade. There are many Australian cases involving the acquisition or sale of securities in contravention of the prohibition under s 1043A(1)(c), often involving dealings in securities while in possession of material pricesensitive information concerning a possible transaction.63 Conduct that amounts to ‘front running’, where a person deals in financial products on the basis of non-public information that a block of those financial products is about to be traded by a third party, or inter-market front running where a person trades in one financial product in the knowledge of another [page 729] person’s intention to trade on another market, may also contravene s 1043A(1)(c).64 Front running may also occur where a financial intermediary purchases or sells financial products in advance of a recommendation to customers to purchase or sell the same products, allowing the intermediary to profit from any change in the market price as a result of that recommendation.65 The exception which is available for knowledge of a person’s own intentions or activities under s 1043H does not apply to a financial intermediary front running its client’s trades or front running a recommendation made to its clients, since the relevant information in that case is knowledge of another person’s trades: see 17.34–17.35. If s 1043A applies, an insider is also prohibited from procuring another person to apply for, acquire or dispose of such products or enter into an agreement to do so: s 1043A(1)(d). The term ‘procure’ is defined in s 1042F, without limiting the meaning of that expression, as including inciting, inducing or encouraging an act or omission by another person. This prohibition is not limited to the situation where such products are able to be traded on a financial market operated in the jurisdiction. An insider could contravene the prohibition on ‘procuring’ another person to trade without disclosing the relevant inside information to that other person, although that other person will not himself or herself fall within the scope of the insider trading prohibition unless he or she acquires that

information so as to be treated as a ‘tippee’: see 17.30. As noted above, s 1043A(1) does not prevent an insider using inside information to decide to refrain from trading or to cancel an order to trade, and the prohibition on ‘procuring’ in s 1043A(1)(d) similarly does not apply to conduct which induces another person to refrain from trading or discourages a person from trading. The Chinese wall defence (see 17.33) does not apply in relation to the ‘procuring’ prohibition, although the absence of that defence is anomalous. The ‘own intentions’ defence (see 17.34–17.35) is also not applicable in relation to the procuring prohibition, since that defence is limited to entering into a transaction and does not extend to procuring another person to do so. On its face, s 1043A(1) applies to trading in Div 3 financial products issued by all companies, whether listed or not. Inadequate disclosure of material information by a vendor of shares in a proprietary company may therefore give rise to civil liability for insider trading under Pt 7.10 Div 3. It may be argued that the application of the insider trading provisions to transactions in the securities of proprietary and unlisted public companies is unnecessary, since the purchaser of shares in a negotiated transaction has the ability to take contractual warranties to protect his or her interests, including warranties that material facts have been disclosed by the vendor. In Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394; 18 ACSR 404; 13 ACLC 1758, the Supreme Court of New South Wales (Young J) read down the corresponding [page 730] prohibition in former s 1002G to apply only to dealings in the marketplace, holding that it had no application to an agreement to subscribe for unissued shares in a company that was to be performed offmarket. A contravention of s 1043A(1) is an offence, and also a contravention of a civil penalty provision: see 17.37, 17.41.

Communication of inside information 17.29 Section 1043A(2) prohibits a person who possesses ‘inside information’ as defined in s 1042A, namely information which is not generally available and is materially price-sensitive, from: directly or indirectly communicating that information to another person, or causing that information to be communicated to that other person; if the insider knows, or ought reasonably to know, that the other person would be likely to: – apply for, acquire, or dispose of relevant Div 3 financial products or enter into an agreement to do so; or –

procure another person to apply for, acquire or dispose of relevant Div 3 financial products or enter an agreement to do so; and

the relevant Div 3 financial products are able to be traded on a financial market operated in the jurisdiction. The scope of that prohibition will depend on the scope of the concept of a financial market ‘operated’ in the jurisdiction. The term ‘financial market’ is widely defined as a facility through which offers to acquire or dispose of financial products are regularly made or accepted; or offers or invitations are regularly made to acquire or dispose of financial products that are intended to result or may reasonably be expected to result, directly or indirectly, in the making of offers to acquire or dispose of financial products or the acceptance of such offers: s 767A(1); and see 10.7. It may be arguable that this prohibition does not apply where financial products are traded on the over-the-counter markets, because conduct constituted by a person making or accepting offers or invitations to acquire or dispose of financial products on his or her own behalf, or on behalf of one party to the transaction only, does not constitute ‘operating a financial market’ for the purposes of Ch 7: s 767A(2); and see 16.6. Division 3 financial products that are ordinarily able to be traded on a licensed market are taken to be able to be traded on that market even though trading in those products on that market is suspended by action taken by the market licensee, or is contrary to a direction given by ASIC to that market licensee

under s 794D(2): s 1042E. By contrast with the prohibition on applying for, acquiring or disposing of relevant Div 3 financial products, entering into an agreement to do so or procuring another person to do so under s 1043A(1) (see 17.28), the prohibition in s 1043A(2) does not extend to communication of information relating to the shares of proprietary or unlisted public companies. For example, assume that a company officer advised a business associate of an anticipated transaction in which that associate was a potential investor, under an express obligation of confidentiality and expecting that the business associate would [page 731] not use that information for the purpose of trading in the relevant financial products. In these circumstances, that officer would not contravene s 1043A(2), since he or she would not know nor ought he or she reasonably to know that the business associate would trade on that information. However, the business associate would contravene s 1043A(1) if he or she traded on that information at a time at which it was not generally available, if a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products if it were generally available; and he or she knew, or ought reasonably to know, that the information was not generally available and that a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products if it were generally available.66 The prohibition of communication of inside information in s 1043A(2) also prohibits a listed company from communicating information which is not generally available and is materially price-sensitive to analysts. Selective disclosure to analysts is objectionable since it results in the analyst or his or her firm or his or her clients being given informational advantages over others, and any gain in increased market efficiency through the disclosure of such information is likely to be outweighed by the cost to market fairness of trading on that information:67 see ASIC Regulatory Guide 62 — Better Disclosure for Investors, August 2000 and Chapter 7.

Consider also the position where a company — for example, the target company in a takeover or a company which requires a significant capital injection — provides information which is not generally available and is materially price-sensitive to another company to promote an acquisition of or a subscription for Div 3 financial products. For example, in ICAL Ltd v County NatWest Securities Australia Ltd (1988) 39 NSWLR 214; 13 ACLR 129; 6 ACLC 467, an investment bank retained by a target company communicated price-sensitive information to a possible rival bidder to encourage the making of a takeover bid by that bidder. Bryson J held that the prohibition on tipping under s 128 of the Securities Industry Code had to be reconciled with the fiduciary duty of the directors of the target company to seek the highest price for the company’s shares in a takeover, and declined to grant an injunction to restrain the target company and its directors from causing or procuring any person to acquire or dispose of shares in the company while the relevant price-sensitive information was not generally available. By contrast, s 1043A(2) would prohibit the investment bank from communicating price-sensitive information to a potential bidder if it knew, or ought reasonably to know, that the potential bidder would apply for, acquire or dispose of relevant Div 3 financial products or enter an agreement to do so or procure another person to do so. However, it should be open to the target company or investment bank to [page 732] communicate the relevant information to the potential bidder conditional upon an agreement by the bidder that it will not apply for, acquire or dispose of the relevant securities or enter an agreement to do so or procure another person to do so, or communicate the information to a third party, unless the relevant information has been made generally available by the company. If such an agreement exists, the target company or investment bank would be entitled to assume that the potential bidder would not apply for, acquire or dispose of relevant Div 3 financial products or enter an agreement to do so or procure another person to do so until the

information which it had communicated was publicly available, so as to avoid liability for a contravention of s 1043A(2). A contravention of s 1043A(2) is an offence, and also a contravention of a civil penalty provision: see 17.37, 17.41.

Treatment of tippees 17.30 A tippee who obtains price-sensitive information obtains the same information advantage over others in the market, and the same ability to trade at substantially lower market risk, as is available to the insider who initially possessed that information. The tippee’s trading is equally objectionable to trading by the original insider as a use of price-sensitive information that is not the consequence of the tippee’s research or investigation, allowing an advantage that cannot be eroded by others in the market.68 At general law, the liability of a tippee was derivative of the liability of his or her informant. Where a tippee was aware that information was communicated to him or her by an insider in breach of fiduciary duty, then the tippee could be required to account on the basis of his or her having knowingly assisted in the fiduciary’s breach of trust.69 In United States law, a tippee’s participation in his or her informant’s breach has been held to be the basis of his or her liability under r 10b-5. In Chiarella v US 445 US 222 (1980) at 230–7, the United States Supreme Court observed that tippees ‘have a duty not to profit from the use of inside information that they know is confidential and know or should know came from a corporate insider’, and that the liability of the tippee arose ‘as a participant after the fact in the insider’s breach of fiduciary duty’. In Dirks v SEC 463 US 646 (1983), the United States Supreme Court followed the logic of that analysis in holding that a tippee could not be held liable where there was no breach of duty by the insider, because the insider had a proper purpose for conveying the information to the tippee. In that case, a former employee of a life insurance company communicated allegations of a fraudulent overstatement of the assets of that company to Dirks, an investment analyst. Dirks in turn conveyed that information to a number of other advisers and to several

[page 733] institutional clients, who sold down their holdings in that company. The United States Supreme Court held that Dirks could only be held liable as a tippee if he had knowingly participated in a breach of fiduciary duty by the insider, and that such knowing participation could be established if disclosure by the insider was wrongful and the tippee knew or had reason to know that the insider would benefit from passing on the tip, whether by way of a financial or reputational benefit or because the insider had conveyed the information to a friend or relative. Since the conduct of the employee who had passed the relevant information to Dirks in order to expose a fraud was not wrongful, the conduct of Dirks in passing that information to others did not contravene r 10b-5. The requirements of personal benefit and knowledge of the tipper’s wrongdoing in Dirks v SEC above have recently been given a strict application at appellate level in the United States in US v Newman 773 F 3d 438 (2d Cir 2014). In that case, the tippers, insiders of technology companies, had disclosed confidential information, which was obtained indirectly by employees of hedge funds as third and fourth level tippees. The Second Circuit Court of Appeals applied Dirks in overturning a conviction of the indirect tippees, and held that the prosecution must prove, beyond reasonable doubt, that the tipper breached a fiduciary duty by disclosing material, non-public information in exchange for a personal benefit, and the tippee knew the information was confidential and disclosed by the tipper for that benefit, and the personal benefit in turn required an exchange that was objective, consequential and represented a potential gain of a pecuniary or similarly valuable nature. The Ninth Circuit Court of Appeals took a wider view of the tipping prohibition in US v Salman 792 F 3d 1087 (9th Cir 2015), and an appeal from that decision is pending before the Supreme Court of the United States. By contrast, the prohibition in s 1043A(1) applies to tippees in the same way as it applies to insiders70 and a tippee who acquires material pricesensitive information from an insider can fall within the scope of the primary prohibition on insider trading (see 17.11) on that basis. That prohibition would apply, for example, to a tippee who obtains information

concerning a takeover bid or another person’s trading intentions, that is not generally available; where a reasonable person would expect that information to have a material effect on the price or value of particular Div 3 financial products if it were generally available; and the tippee knows, or ought to know, that the information is not generally available and that, if it were [page 734] generally available, a reasonable person would expect it to have a material effect on the price or value of those financial products.71 The effect of applying s 1043A to tippees in this way may also be illustrated by the facts of Dirks v SEC, above, where a person in the position of Dirks would be treated as falling within the scope of the prohibition under s 1043A(1), since he or she would possess information that was not generally available; a reasonable person would expect that information to have a material effect on the price or value of particular Div 3 financial products if it were generally available; and he or she would know, or ought reasonably to know, that that information was not generally available and that a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products if it were generally available. A person in the position of Dirks would therefore be prohibited from trading in the relevant Div 3 financial products: s 1043A(1). If the relevant Div 3 financial products are able to be traded on a financial market operated in the jurisdiction, he or she would also be prohibited from directly or indirectly communicating the information, or causing the information to be communicated, to his or her clients or other investment advisers since he or she would know, or ought reasonably to know, that those persons would be likely to dispose of the Div 3 financial products or encourage their clients to do so: s 1043A(2). A tippee who has entered into an arrangement with an insider to receive and trade on inside information, and who would fall within the primary prohibition in insider trading on this basis, could alternatively be found guilty of conspiracy to commit the offence of procuring (see 17.28) contrary to s 1043A(1)(d) of the Corporations Act.72 The prohibition in s

1043A(1) would also apply to a person who had no arrangement with an insider for the communication of information but who obtained material price-sensitive information by overhearing a conversation between the insider and another person, or as a result of an accidental disclosure by the insider, if the nature of the information were such that the person knew or ought reasonably to have known that the information was material nonpublic information.

EXCEPTIONS AND DEFENCES Exception for withdrawal from registered scheme 17.31 An exception from the prohibition under s 1043A(1) is available for a member’s withdrawal from a registered scheme, if the amount paid to the member on withdrawal is calculated (so far as is reasonably practicable) by reference to the underlying value of the assets of the financial or business undertaking or scheme, common enterprise, investment contract or time-sharing scheme to which the member’s interest relates, less any reasonable charge for acquiring the member’s interest: s 1043B. [page 735] This exemption is necessary to allow the operation of buy-back covenants in unlisted registered schemes. From time to time, the responsible entity under a registered scheme will possess information that is not generally available (for example, information about negotiations for a sale or purchase of property by the scheme) and that may have a material effect on the value of interests in the scheme. That information is not directly relevant to the price at which interests are redeemed, if that price is fixed by a formula based on the value of the assets of the scheme. There is therefore no objection in policy to a repurchase of a member’s interest in the scheme while the responsible entity possesses material non-public information, provided that all members of the scheme have equal access to

publicly available information in determining whether or not to exercise the right of redemption.

Exception for underwriters 17.32 The prohibition in s 1043A(1) expressly extends to applying for Div 3 financial products.73 An exception to the prohibition in s 1043A(1) is available in respect of applying for or acquiring securities or managed investment products under an underwriting agreement or sub-underwriting agreement and in respect of entry into such an agreement: s 1043C(1)(a)– (b). That exception also extends to disposing of securities or managed investment products acquired under an underwriting agreement or subunderwriting agreement: s 1043C(1)(c). That exception has the result that an underwriter or sub-underwriter that has obtained material non-public information is not prevented from placing securities or managed investment products under an underwriting agreement or sub-underwriting agreement by the fact that it possesses that information. However, that section does not permit the underwriter or sub-underwriter to acquire or dispose of other Div 3 financial products of the same kind which it acquired under the underwriting agreement or sub-underwriting agreement while the relevant information remains non-public and materially pricesensitive. The exception available to underwriters and sub-underwriters is justifiable in policy, if it is accepted that liability for insider trading should only arise if a person who possesses material non-public information thereby obtains an informational advantage in dealing with a person who lacks access to that information. There is generally no such inequality of information between an issuer and an underwriter in negotiating an underwriting agreement for a new issue of securities or managed investment products. That exception is also consistent with the decision in Hooker Investments Pty Ltd v Baring Bros Halkerston & Partners Securities Ltd (1986) 10 ACLR 462 (Young J); aff’d (1986) 5 NSWLR 157; 10 ACLR 524 (Court of Appeal), where the plaintiff sought to restrain a proposed issue of shares on the ground that the underwriter possessed non-public profit forecasts of the company when it entered into the underwriting agreement. In the Court of Appeal, McHugh JA

[page 736] noted that the prohibition in s 128 of the Securities Industry Code was addressed to ‘people who are trading in the market place and is not directed to an underwriting agreement to subscribe for shares proposed to be issued’: 10 ACLR 524 at 529. An exception to the prohibition in s 1043A(2), which deals with the communication of information that is not generally available and is materially price-sensitive, applies if information in relation to securities or managed investment products is communicated to a person solely for the purpose of procuring the person to enter into an underwriting agreement in relation to any such securities or managed investment products: s 1043C(2)(a). An exception from s 1043A(2) also applies if information in relation to securities or managed investment products is communicated by an underwriter to another person solely for the purpose of procuring that other person to either enter into a sub-underwriting agreement in relation to any such securities or managed investment products, or apply for any such securities or managed investment products: s 1043C(2)(b). This exception permits underwriters to issues of securities or managed investments to communicate information (including, for example, information derived from due diligence investigations) to potential subunderwriters or subscribers. A person who has obtained information from an underwriter has a defence to a contravention of s 1043A(1) if it subscribes for securities or managed investments on the basis of that information, since both the underwriter and the issuer of the securities or managed investments are persons who knew or ought reasonably to have known that information before issuing the securities or managed investment to the subscriber: s 1043M(2)(b); and see 17.40. The court also has power to relieve a person wholly or partly from liability relating to a contravention of s 1043A (including civil liability arising from a contravention of the civil penalty provisions under 1317HA) in circumstances where the defence under s 1043M(2)(b) is available: s 1043N; and see 17.41. It is also difficult to see that any person could have suffered loss where the issuer, the underwriter and the potential subscriber were each aware of the relevant information.

However, the exception under s 1043C(2)(b) does not allow trading in Div 3 financial products (as distinct from subscription for the relevant securities or managed investments) by subscribers who have obtained material non-public information from underwriters. Those subscribers are also prohibited from communicating that information to others under s 1043A(2) so long as the information remains not generally available and materially price-sensitive. The exclusion of persons who have received material non-public information from underwriters from the subsequent market in Div 3 financial products, until the information ceases to be price-sensitive or is made public, will tend either to discourage such communication by underwriters — since institutional investors are likely to be reluctant to be provided with information which would prevent trading in such products for an indeterminate period — or to encourage disclosure of that information to the market in order to allow the persons to whom the information was communicated to trade. [page 737]

Chinese walls within bodies corporate and partnerships 17.33 Section 1043A(1) is not contravened by a body corporate which enters into a transaction or agreement when an officer of the body corporate possesses information that is not generally available and is materially price-sensitive, if certain requirements are satisfied: s 1043F. These are that: the decision to enter into the transaction or agreement was taken on behalf of the body corporate by a person or persons other than the officer who possessed the relevant information; the body corporate had in operation at that time arrangements that could reasonably be expected to ensure that the information was not communicated to the person or persons who made the decision, and that no advice with respect to the transaction or agreement was given to that person or any of those persons by a person in possession of the information; and the information was not in fact communicated to the person who

made the decision, and no such advice was given to that person or any of those persons by a person in possession of the information. The exclusion in s 1043F will be available if a Chinese wall (or, in more modern usage, information barrier) is in place within a body corporate. A Chinese wall or information barrier is intended to restrict the passage of price-sensitive information to employees or departments of a body corporate engaged in trading or in advising, and typically involves policies and procedures to limit dissemination of information, and possibly the physical separation of such departments.74 Such a policy should be documented and should involve physical access restrictions and document control procedures, including limits on access to sensitive material held in computer files; separate supervision of divisions on opposite sides of the Chinese wall or information barrier, except at senior management level; and limits on transfers of personnel between departments which are separated by the Chinese wall or information barrier.75 Those policies should be reinforced by continuing education programs and by imposing disciplinary sanctions for breach. It would generally also be appropriate to require employees to report their personal trading and to monitor trading by the body corporate on its own account to allow any breach of the Chinese wall or information barrier to be detected. An issue as to the adequacy of Chinese wall procedures was considered in Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963 (the facts of this case are set out in 17.16). ASIC contended that officers of Citigroup’s Investment Banking Division knew of a substantial likelihood that Toll would launch its takeover bid for Patrick on the next trading day after the relevant trader had bought and sold shares on Citigroup’s own account; and argued that Citigroup could not rely on the Chinese wall exception to avoid a contravention of the insider trading prohibition by trading while it possessed that information, because its Chinese wall arrangements were not effective. The Federal Court held that [page 738]

Citigroup’s Chinese walls, which included many of the features specified above, were sufficient to establish the Chinese wall exclusion, and rejected ASIC’s contention that this would have required that a proprietary trader be brought across the wall where an intermediary was advising a potential takeover bidder. A corresponding defence is available for the entry into a transaction or agreement by members of a partnership under s 1043G(1). The defence for partnerships is necessary since a partner is deemed to possess information that another partner or employee of the partnership possesses by virtue of his or her position as a partner or employee; and since it is presumed that a partner knows that information is not generally available and that a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products, if another partner or an employee knows those matters: s 1042H; and see 17.22. The Chinese wall defences under ss 1043F and 1043G are limited to entry into a transaction or agreement which would contravene s 1043A(1) (c), and do not apply to conduct which amounts to procuring another person to do so within the scope of s 1043A(1)(d). It follows that, if a body corporate or partnership acquires inside information, it would contravene s 1043A(1) by encouraging an application for, acquisition or disposal of Div 3 financial products by a third party, even if that encouragement was given by a person who was not aware of the relevant information by reason of a Chinese wall. There is no basis in policy for denying the application of the Chinese wall defence in this situation. Sections 1043F and 1043G place the onus upon the company or partnership which seeks to obtain the benefit of the Chinese wall exclusion to demonstrate that its internal procedures for restricting the flow of information could ‘reasonably be expected to ensure’ that the information was not communicated across the Chinese wall. If a body corporate or partnership cannot establish that a Chinese wall is in place, and could reasonably be expected to ensure that such information was not communicated across it, it may be held liable under s 1043A if it trades while information which is not generally available and is materially pricesensitive is possessed by an officer of the body corporate or by a member or employee of the partnership, even if the relevant decision was made by a person who did not in fact possess the information.76

Exception for knowledge of person’s own intentions or activities 17.34 A natural person is not prohibited from entering a transaction or agreement in relation to financial products issued by another person, under s 1043A(1), merely because that person is aware that he or she proposes to enter into or has previously entered into or proposed to enter into one or more transactions or agreements in relation to financial products issued by the other person or by a third person, even if a reasonable person would expect the information about those transactions to have a material effect on the price of the financial products if it were generally available: s 1043H. The reference to ‘financial products issued by the other person or by a [page 739] third person’ is intended to ensure that this exception is available in relation to over-the-counter transactions, where each participant in an over-the-counter transaction will be an ‘issuer’ of the relevant financial product. This exemption would apply, for example, if a natural person sold a small parcel of shares while knowing that he or she intended later to sell or to purchase a larger parcel of those shares. The exception for knowledge of a person’s own intentions also applies to hedging activities, where a person establishing a hedge takes a position in the securities, futures or other derivatives in order to hedge a risk arising from its own transactions on other markets. Section 1043H appears to permit ‘self front running’, where, prior to executing a substantial transaction in financial products, a person executes a ‘same side’ transaction in anticipation of profiting from the subsequent transaction. If, for example, a trader intended to buy a substantial number of shares in the securities market in a quarter, it might purchase futures contracts for that quarter, with the intention of profiting from any rise in the market price of those contracts as a result of its purchases. Such a transaction differs from a hedging transaction in that the futures trade is on the same side of the market as the securities trade, increasing the

trader’s exposure to the market, by contrast with a hedging transaction where the futures trade would be undertaken on the opposite side of the market so that any decline in the value of the securities position would be offset by an increase in the value of the futures position. Such a transaction appears to be protected under Australian law by the exception available for knowledge of a natural person’s own intentions or activities under s 1043H and the corresponding exceptions for bodies corporate, their officers and agents under ss 1043I and 1043J: see 17.35. If, however, a transaction in one market created or was likely to create a false or misleading appearance of active trading, or with respect to the market for or the price for trading in financial products on another financial market in the jurisdiction, then it may contravene the prohibition on market manipulation under s 1041B of the Corporations Act: see Chapter 16.

Exception for bodies corporate 17.35 A body corporate is not prohibited from entering a transaction under s 1043A(1) merely because the body corporate or one of its officers or employees is aware that the body corporate proposes to enter or has previously entered into or proposed to enter into, one or more transactions or agreements in relation to financial products issued by the other person or by a third person, if the officer or employee of the body corporate became aware of that matter in the course of the performance of his or her duties as such an officer or employee: s 1043I. The reference to ‘financial products issued by the other person or by a third person’ is intended to ensure that this exception is available in relation to over-the-counter transactions, where each participant in an over-the-counter transaction will be an ‘issuer’ of the relevant financial product. An officer, employee or agent of a body corporate also does not contravene s 1043A(1) by entering into a transaction or agreement on behalf of a body corporate merely because he or she is aware that the body corporate proposes to enter into, or has previously entered into or proposed to enter into, one or more transactions [page 740]

or agreements in relation to financial products issued by the third person or by a fourth person, if he or she became aware of that matter in the course of performance of duties as an officer or employee of the body corporate or in the course of acting as agent of the body corporate: s 1043J. Sections 1043I and 1043J preserve the ability of a body corporate to deal in financial products issued by another body corporate, while previous or proposed dealings in securities of that body corporate are not public knowledge. This exemption would apply, for example, if a body corporate purchased shares in another body corporate in anticipation of making a takeover bid for that body corporate. It would also permit a financial intermediary that has knowledge that a client has entered a substantial transaction in the over-the-counter market, with that intermediary as counterparty, to continue to trade on its own account, including but not limited to trading undertaken to hedge that proposed transaction, notwithstanding that information concerning that transaction may be material price-sensitive information which would otherwise trigger the insider trading prohibition. That exception is also available where the intermediary’s knowledge is of the client’s proposal to enter into such a transaction or of the client’s previous proposal to do so, which may not have proceeded or may have proceeded with another counterparty.

Exception for holders of financial services licences and their representatives 17.36 The dealings between a financial services licensee and its representatives and its corporate clients may provide that licensee with information that would be material in making investment decisions in relation to Div 3 financial products issued by those clients, in the sense of being likely to influence persons who commonly acquire Div 3 financial products issued by those companies in deciding whether or not to acquire or dispose of such products. In the absence of an applicable exception, if a financial services licensee or one of its representatives has obtained such information, s 1043A(1) would prohibit the financial services licensee from executing transactions in the Div 3 financial products of that corporate client on behalf of other clients.

Section 1043K allows an exception to s 1043A(1), which has the effect that a financial services licensee or representative of such a licensee (agent) does not contravene s 1043A(1) by applying for, acquiring or disposing of, or entering into an agreement to apply for, acquire or dispose of, financial products that are able to be traded on a licensed market, if: the agent entered into the transaction or agreement on behalf of another person (‘principal’) under a specific instruction by the principal to enter into that transaction or agreement; at the time of entry into that transaction or agreement, the licensee had in place arrangements that could reasonably be expected to ensure that any information in the possession of the licensee or any of its representatives, as a result of which the person who possessed the information would have been prohibited from entering into the transaction or agreement under s 1043A(1) was not communicated to the agent; [page 741] no advice with respect to the transaction or agreement was given to the principal or the agent by a person in possession of the information; the information was not communicated and no such advice was given; and the principal is not an associate of the licensee or any representative of the licensee. The exception under s 1043K is not generally available in relation to dealings in over-the-counter markets, since it is limited to dealings in financial products that are able to be traded on a financial market. Moreover, financial intermediaries dealing in the over-the-counter markets typically do not enter into transactions ‘on behalf of’ their clients under a specific instruction by the client to do so, but act as counterparty to the client rather than agent for it. A Chinese wall defence or the ‘own intentions’ defence may be available for dealings in the over-the-counter

markets, if the relevant requirements are satisfied: ss 1043F and 1043H–J; and see 17.33–17.35. The exception under s 1043K is available even if the financial services licensee has given advice to its client in relation to the transaction but requires that a Chinese wall is in place to ensure that the representative who possessed the inside information did not communicate that information to the representative who gave advice to the client.77 A financial services licensee that is a trading participant in the ASX is also subject to Pt 3.6 of the ASIC Market Integrity Rules (ASX Market) 2010, which provide that where, as a result of a market participant’s relationship to a client, the market participant is in possession of information that is not generally available in relation to a financial product and that would be likely to materially affect the price of the financial product if the information was generally available, the market participant may not give any advice to any other client of a nature that would damage the interests of either of those clients. That rule is subject to an exception that a market participant is not to be regarded as having possession of information that is not generally available in relation to a financial product where it has a Chinese wall in place and the person advising the client is not in possession of that information. As a matter of practice, there is some advantage to a holder of a financial services licence in ceasing to advise its clients in relation to a Div 3 financial product if it comes into possession of material price-sensitive information concerning that financial product, even if a Chinese wall is in place. The practice of establishing a ‘restricted list’ of securities has commonly been adopted by securities firms in the United States. The United States practice is that, if a broking firm has placed securities on a ‘restricted list’, it neither trades in those securities on its own account; nor makes a [page 742] recommendation to purchase, sell or hold those securities; nor initiates a transaction in those securities for a discretionary client account. Although there is a risk that placing such financial products on a ‘restricted list’ may

operate as a signal to the market that a company or partnership has obtained material non-public information, this risk is reduced if such financial products are placed on the ‘restricted list’ at the time a commercial relationship arises between an issuer and the financial services licensee that is likely to lead that licensee to receive material non-public information, rather than at the time that information is received. The practice of ceasing to advise where securities are on a ‘restricted list’ avoids the possibility that a representative of a financial services licensee could recommend a purchase of financial products to a client on the basis of publicly available information, while another department of the licensee possesses inside information indicating that the recommendation is ill advised. Obviously, the ‘restricted list’ procedure has the commercial disadvantage that it may from time to time prevent a licensee from advising its clients or executing discretionary orders or house orders in particular financial products. Alternatively, a financial intermediary may place financial products on a ‘watch list’, which does not involve suspending its ordinary trading activity, but involves the firm’s compliance department monitoring and investigating any unusual trading activity in financial products placed on that list. A further difficulty would arise if a financial services licensee was under a duty to its client to use all relevant information in its possession in offering investment advice. Under agency principles, information which is in the possession of a broking firm will include knowledge that an employee has acquired in the course of his or her employment and that was required to be communicated by the employee to the firm. Thus, unfavourable information concerning an issuer of financial products that is obtained by an employee of a financial services licensee (for example, in the course of a due diligence investigation for a proposed underwriting) is likely to be attributed to the licensee. If that information is attributed to the licensee, it could be argued that a recommendation to purchase financial products of that issuer, made by an adviser to retail clients, would breach the licensee’s duty to use all information in its possession in making recommendations to its clients, even if a Chinese wall existed so as to prevent advisers obtaining access to the relevant information. English and United States courts have refused to allow a financial intermediary which is under conflicting duties to justify non-disclosure of material information to

clients by asserting the conflicting obligations that it has brought upon itself.78 However, there is a strong argument that a financial services licensee does not breach its fiduciary duty to its client by not revealing material price-sensitive information to its client, since such a duty cannot require the breach of the licensee’s obligations under the Corporations Act. Moreover, if a financial services licensee has advised a client that it has a Chinese wall in place, it is arguable that the scope of the licensee’s fiduciary duty to that client is restricted so as not to require disclosure [page 743] of information which is attributed to the licensee because it is in the possession of one department, if the Chinese wall prevents disclosure of that information to the department offering advice to the client.79

CRIMINAL AND CIVIL PENALTIES AND CIVIL LIABILITY FOR INSIDER TRADING Criminal penalties for insider trading 17.37 A contravention of s 1043A(1) or s 1043A(2) is an offence punishable by a fine or imprisonment or both: s 1311(1) and Sch 3. The penalty for individuals for a contravention of the section is the greater of $810,000 or three times the profit gained or loss avoided and/or up to ten years’ imprisonment; and for corporations the greater of $8,100,000, three times the profit gained or loss avoided, or up to 10% of the body corporate’s annual turnover in the relevant period. In each case, the possession of inside information is a physical element, and the fault element for the offence is that the insider knows or ought reasonably to know that the relevant information was not generally available and that, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products: s 1043A(3). The insider trading offences are classified

as ‘serious offences’ for which telecommunication interception warrants can be issued under the Telecommunications (Interception and Access) Act 1979 (Cth). It is open to the prosecution to bring circumstantial evidence suggesting the existence of insider trading. Matters which may be relevant would include evidence of the relationships between the parties to the transaction, the way in which information was received by the accused, the actions taken by the accused on receipt of the information and his or her subsequent actions, the size of the transaction entered into by the accused, and the success or otherwise of the transaction. Such evidence might also include evidence that a particular pattern of trades or transactions was unusual, compared with trades undertaken by the accused generally or by other traders in the market, coupled with evidence that the defendant had the opportunity to obtain inside information; evidence of a coincidence of timing between a trade undertaken by the accused and a public announcement, particularly if the insider otherwise infrequently traded in financial products; or evidence that a solicitor or accountant frequently made purchases of financial products in companies for which he or she acted. If a trade is particularly large having regard to the accused’s financial resources, or if the interval between the time at which the accused could have obtained the information and the time of the trade is relatively short, a court may be more likely to infer that the accused has traded on the basis of the information. [page 744] The courts have observed that the criminalisation of insider trading supports the objectives of Ch 7 of the Corporations Act, including the promotion of confident and informed decision-making by consumers of financial products and the promotion of fair, orderly and transparent markets for financial products.80 The case law has emphasised the importance of general deterrence in sentencing for insider trading offences and has decisively rejected any characterisation of insider trading as a ‘victimless’ crime. At first instance in R v Rivkin (2003) 198 ALR 400; 45 ACSR 366; [2003] NSWSC 447, Whealy J observed (at [44]) that general

deterrence is an ‘especially important matter’ in sentencing for insider trading ‘because of the need to mark out plainly to others who might be minded to breach their professional or related obligations that such conduct would generally merit, in appropriate cases, condign punishment’ and that insider trading is particularly hard to detect and: … has the capacity to undermine to a serious degree the integrity of the market in public securities. It has the additional capacity to diminish public confidence not only so far as investors are concerned but the general public as well.

His Honour also observed (at [44]): It is especially important that the sentencing process provide a firm disincentive to the carrying out of illegal activities especially by those who are engaged in the securities industry. There is a need to sound, in effect, a clarion call to discourage illegal and unethical behaviour among company directors, company officers, brokers, traders, advisors and those who have a close connection through, for example, merchant banking, to the stock market …

On appeal in R v Rivkin (2004) 59 NSWLR 284; 184 FLR 365; [2004] NSWCCA 7 at [412], the Court of Criminal Appeal observed that the victim of the offence of insider trading ‘is the investing community at large, the injury being that related to the loss of confidence in the efficacy and integrity of the market in public securities’. Similar observations were made in R v Doff (2005) 54 ACSR 200; [2005] NSWCCA 119 at [56]; and R v Frawley [2005] NSWSC 585 at [27]. In Director of Public Prosecutions v O’Reilly [2010] VSC 138 at [19], Forrest J observed that there are at least two victims in insider trading cases: ‘the seller or sellers of the stock at the lower price and the public, whose confidence in the integrity of the market must be diminished.’ In R v Hartman (2010) 81 ACSR 121; [2010] NSWSC 1422 at [45]– [46], McClellan CJ at CL observed that each insider transaction was ‘likely to have a cost to someone, who either traded or held their position, without the benefit of the knowledge available to the offender’ and (at [46]) emphasised the significance of general deterrence in respect of white collar crime, including insider trading. On appeal, in Hartman v R (2011) 87 ACSR 52; [2011] NSWCCA 261, the Court of Criminal Appeal of the Supreme Court of New South Wales observed (at [94]): It needs to be remembered that insider trading not only has the capacity to undermine the integrity of the market, it also has the potential to undermine

[page 745] aspects of confidence in the commercial world generally. The principles of confidentiality and trust are fundamental to the operation of many commercial transactions. As the applicant’s employer recognised, advance knowledge by its employees of proposed trades of a significant kind required, as a matter of trust, that they remain in the realm of confidentiality. Insider trading is a form of cheating. Put bluntly, it is a form of fraud, even though its consequences may be more opaque than general fraud.

In R v Glynatsis (2013) 230 A Crim R 99; [2013] NSWCCA 131 at [79], McCallum J observed: The acquisition or disposal of financial products by people having the unfair advantage of inside information is criminalised because it has the capacity to unravel the public trust which is critical to the viability of the market. It is, as previously observed by this Court, a form of cheating. The fact that people of otherwise good character and compelling personal circumstances are tempted to engage in such conduct emphasises the need for the clear deterrent that insider traders should expect to go to gaol.

In Khoo v R [2013] NSWCCA 323 at [99]–[101], RS Hulme J (with whom Leeming JA and Bellew J agreed) also observed that general deterrence must be given substantial weight in sentencing for insider trading, by reason of: … the importance to the securities market generally of its integrity and the importance to those involved in significant transactions in that market of being able to keep confidential information concerning imminent or potential transactions …

In Director of Public Prosecutions v Hill [2015] VSC 86 at [47], Hollingworth J similarly observed that insider trading was a serious criminal offence, because it could undermine market integrity and diminish public confidence, and that ‘insider trading is not a victimless crime’. In R v Joffe; R v Stromer (2015) 106 ACSR 525; [2015] NSWSC 741 at [97], R A Hulme J similarly noted: Speaking generally, insider trading is not a ‘victimless’ crime; it is a serious criminal offence. It has the capacity to undermine to a significant extent the integrity and efficacy of markets as well as confidence in the commercial world generally. Persons who receive price sensitive information in relation to securities are expected to conform to exacting standards of honesty. Insider trading has been described as a form of cheating; a form of fraud.

His Honour also identified matters relevant to assessing the seriousness of the offences as including the quality of the inside information, such that

a higher degree of materiality would generally lead to a finding that the offence was of greater objective seriousness (at [98]–[99]) and any element of breach of trust (at [106]); see also R v Xiao [2016] NSWSC 240 at [82]. A similar view has been taken in the United Kingdom, where s 52 of the Criminal Justice Act 1983 (UK) establishes a criminal offence of insider dealing, comprising a dealing offence, an encouraging offence (corresponding to ‘procuring’ under Australian law) and a disclosure offence (corresponding to ‘communicating’ under Australian law). In R v McQuoid [2009] 4 All ER 388; [2009] EWCA Crim 1301 (Court of Appeal), the general counsel of a communications company had disclosed [page 746] a forthcoming takeover bid for the company to his father-in-law who traded on the information. Lord Judge CJ rejected any suggestion that insider trading was a victimless crime and observed (at [8]–[9]): The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is undermined by market abuse … when it is done deliberately, insider dealing is a species of fraud; it is cheating.

His Honour also noted that the impact of such trading on public confidence in the integrity of the markets was relevant to sentencing. Australian courts have imposed substantial sentences in serious cases of insider trading.81 Relevant matters to sentencing include the amounts invested and the amount of profit obtained from insider trading, the seniority of an offender’s position and steps taken to disguise transactions.82 In R v Xiao above, the Supreme Court of New South Wales imposed a sentence of eight years and three months, with a non-parole period of five years and six months, where the managing director of a mining company pleaded guilty to numerous insider trading offences, by which he and a company associated with him had acquired shares and contracts for differences, in trading accounts in the names of third parties, prior to the making of takeover offers by that mining company, and had made a substantial profit. A conviction for tipping is not less serious than a

conviction for trading for the purposes of determining a penalty for a contravention of this section.83

Defences to a prosecution 17.38 In a prosecution of a person for an offence under s 1043A(1) or s 1043A(2), it is not necessary for the prosecution to establish the absence of the facts which, if they existed, would prevent an act or omission from contravening s 1043A(1) or s 1043A(2), by virtue of s 1043B (exception for withdrawal from registered scheme); s 1043C (exception for underwriters); s 1043D (exception for acquisition pursuant to legal requirement); s 1043E (exception for information communicated pursuant to a legal requirement); s 1043F (Chinese wall arrangements by body corporate); s 1043G (Chinese wall arrangements by partnerships); s 1043H (exception for knowledge of a natural person’s own intentions or activities); ss 1043I–1043J (exceptions for bodies corporate and for their officers or agents); or s 1043K (transactions by holders of financial services licences or their representatives), although the defence will be established if the court is satisfied that those facts exist: s 1043M(1). [page 747]

Information made known to investors 17.39 It is a defence to a prosecution for an offence under s 1043A(1) where a person entered into, or procured another person to enter into, a transaction or agreement at a time when information was in the first person’s possession, and to a prosecution for an offence under s 1043A(2) where a person communicated information or caused information to be communicated to another person, if that information came into the first person’s possession solely as a result of it being made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in Div 3 financial products of a kind whose price might be affected by the information: s 1043M(2)(a), (3)(a). This defence is available if the information has been made known to the market, although

it has not become known to the particular person who is the other party to the trade. This defence is justifiable in policy, since the efficient capital market hypothesis suggests that an announcement of information to the market generally will be reflected in the market price at which financial products are traded, even if it is not known to one of the parties to the particular trade. However, that defence should only be available if information of the same character as that which is known to the insider has been announced to the market. For example, the defence under s 1043M(2)(a) and (3)(a) should not be available if rumours of a particular transaction are known to the market, but the insider is aware that the transaction is a certainty. Equally, the existence of speculation in the market about the profit or loss to be announced by a company would not be a defence under s 1043M(2) (a) or s 1043M(3)(a) to a person who trades with actual knowledge of the company’s results, since the information known to that person is qualitatively different from the information which is publicly available. The defences under s 1043M(2)(a) and (3)(a) are available even if a reasonable time after publication of the information has not elapsed before the person entered into, or procured another person to enter into, the transaction, or communicated the information to another person, provided that the person came into possession of the information solely as a result of its publication. Those defences will therefore protect an institutional investor or market professional that trades on the basis of publicly available information immediately after its release, but before the majority of investors have digested its significance. Those defences are justifiable as protecting the efforts of investment analysts and institutional investors to assimilate information released to the market. These defences do not apply in civil penalty proceedings although the facts relevant to establishing them might support an application for relief from civil penalty liability under s 1043N in such proceedings: see 17.41.

Information known to both parties 17.40 It is also a defence to a prosecution for an offence under s 1043A(1) where a person entered into, or procured another person to enter into, a prohibited transaction or agreement, if the court is satisfied that the

other party to the transaction or agreement knew, or ought reasonably to have known, of the information before entering into the transaction or agreement: s 1043M(2)(b). There is a corresponding [page 748] defence to a contravention of s 1043L(3), in the nature of tipping, if the court is satisfied that the tippee knew, or ought reasonably to have known, of the information before it was communicated: s 1043M(3)(b). These defences also do not apply in civil penalty proceedings although the facts relevant to establishing them might support an application for relief from civil penalty liability under s 1043N in such proceedings: see 17.41.

Civil penalty liability 17.41 A contravention of s 1043A(1) or s 1043A(2) is a contravention of a civil penalty provision: s 1317E(1). If a court is satisfied that a person has contravened either of those provisions, it must make a declaration of contravention, which is conclusive evidence of the matters referred to in it: ss 1317E(1)–(2), 1317F. Once a declaration of contravention of a civil penalty provision has been made under Corporations Act s 1317E, ASIC can seek a civil penalty order under s 1317G, and the court may order a person to pay the Commonwealth a pecuniary penalty of up to $200,000 for an individual and $1 million for a body corporate if the contravention materially prejudices the interest of acquirers or disposers of the relevant financial products; materially prejudices the issuer of the relevant financial products; or, if the issuer is a corporation or scheme, the members of that corporation or scheme; or is serious: s 1317G(1A)–(1B). The court may also order a person who has contravened a financial services civil penalty provision to compensate another person for damage suffered by that person resulting from the contravention: s 1317HA. An application for a declaration of a contravention of a civil penalty provision or a pecuniary penalty order may only be made by ASIC: s 1317J(1). Proceedings for a declaration of contravention or a pecuniary penalty order may be started no later than six years after the

contravention: s 1317K. The court is required to apply the rules of evidence and procedure for civil matters when hearing proceedings for a declaration of contravention or a pecuniary penalty order: s 1317L. As noted in 16.19, the standard of proof in civil penalty proceedings is therefore that of the balance of probabilities and not the criminal standard of proof beyond reasonable doubt, but the court will take into account the seriousness of the allegation in determining whether a matter has been proved on the balance of probabilities in civil penalty proceedings.84 If penalties are sought against the defendants in civil penalty proceedings, they may also rely on the privilege against exposing themselves to a penalty to file limited defences and defer giving discovery until after the close of the [page 749] case against them.85 Proceedings for a declaration of a contravention or pecuniary penalty order are stayed if criminal proceedings are begun against a person for an offence constituted by conduct which is substantially the same as the alleged contravention of the civil penalty provision: s 1317N(1). Such proceedings may be resumed if the person is not convicted of the offence, and are dismissed if the person is convicted of that offence: s 1317N(2). By way of example, ASIC brought civil penalty proceedings in respect of insider trading in Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269; [2005] FCA 88. In that case, Petsas (an employee with ANZ, which was the corporate lender to BRL Hardie) obtained information about a possible merger between BRL Hardie and a United States corporation. Petsas communicated the information to a friend (Miot) and they purchased call options over BRL shares in the friend’s name. After the merger discussions were announced, the friend sold those options for a total profit of $128,495.15. Finkelstein J noted that, had criminal proceedings been brought, the sentence that could have been imposed would be a minimum of 3–6 months’ imprisonment together with an order for restitution. His Honour held that this was a relevant factor in deciding to impose a penalty of $75,000 on Petsas for

contravention of s 1043A(1)(d) (the procuring prohibition) and $65,000 on the friend (Miot) for contravention of s 1043A(1)(c) of the Act (the trading prohibition). His Honour noted that the employee’s offence was the more serious of the two because it involved a breach of his position of trust with ANZ. The defendants were also ordered to disgorge their total profits to compensate those who had sold option contracts to them. The defences under s 1043M (see 17.39–17.40) are not available in civil penalty proceedings. The court may relieve a person wholly or partly from liability under the civil penalty provisions under Pt 9.4B, including liability under the compensation provisions in s 1317HA, if it appears to the court that any of the circumstances in s 1043M(1) applied: s 1043N. However, this relief is discretionary and not available as a matter of right, and there is no legislative guidance or case law as to the circumstances in which this discretion will be exercised by the court. Since ss 1043B, 1043C, 1043D, 1043E, 1043F, 1043G, 1043H, 1043I, 1043J and 1043K each specifies circumstances in which the prohibition in s 1043A is not contravened, the occasion for relief from civil liability under s 1043N should not arise where those exceptions apply.

Compensation for insider trading 17.42 As noted above, a contravention of s 1043A(1) or s 1043A(2) is a contravention of a civil penalty provision: see 17.41. Civil compensation for a breach of s 1043A is available under s 1317HA, which permits a court to order a person [page 750] who has contravened a financial services civil penalty provision to compensate another person (including a corporation) or a registered scheme for damage suffered by that person or scheme which resulted from the contravention: s 1317HA(1). Compensation which may be awarded under this provision includes profits made by any person resulting from the contravention: s 1317HA(2).

The provision for compensation for insider trading under s 1317HA does not address a number of difficult questions that arise in relation to the quantification of such compensation. It is particularly difficult to establish a proper basis for the assessment of damages for insider trading that takes place on an impersonal market. Even in the absence of insider trading, available market information may not accurately reflect the underlying value of financial products traded on such a market.86 The fact that an insider has inside information will have no direct effect upon the price at which a transaction occurs on-market,87 although obviously that information could impact on the willingness of the other party to continue with a transaction if it were publicly known. One commentator has noted that any approach to the assessment of damages for insider trading must either limit the class of traders in a public market to whom the insider is liable, or place a ceiling upon the insider’s liability, or do both. The United States decisions have not resolved this difficulty in any consistent manner. In Shapiro v Merrill Lynch, Pierce, Fenner & Smith Inc 495 F 2d 228 at 240–1 (2d Cir 1974), the Second Circuit noted that it would be unrealistic to impose a strict privity requirement and to require a plaintiff to show that it was on the opposite side of a defendant’s trade in the context of trading on a stock exchange; and held an insider liable for the losses suffered by all investors who bought or sold the relevant securities prior to disclosure of the information, whether or not they traded with the insider. On this approach, the insider’s liability could exceed, possibly by a large margin, any profit made or loss avoided on the transaction. In Fridrich v Bradford 542 F 2d 307 at 318–19 (6th Cir 1976), cert denied 429 US 1053 (1977), the Sixth Circuit recognised that the result in Shapiro v Merrill Lynch, above, was extreme and held that an insider was not liable to an investor whose transaction was well separated in time from the insider’s trading, although it took place prior to public disclosure of the inside information. A similar view was taken by the Eighth Circuit in Laventhall v General Dynamics Corp 704 F 2d 407 (8th Cir 1983) cert denied 464 US 846. In Elkind v Liggett & Myers Inc 635 F 2d 156 (2d Cir 1980), the Second Circuit held that each person who traded contemporaneously with an insider had an action for damages measured as the difference between the price at which that person purchased or sold and the price at which the purchase or sale would have occurred had the relevant information been

disclosed to the market. However, the court held that the total liability of an insider who communicated inside information to another (‘tipper’) was limited to the amount of profit made by his or her tippee. In Wilson v Comtech Telecommunications Corp 648 F 2d 88 (2d Cir 1981) the Second Circuit held that an insider’s liability was limited to those who traded ‘contemporaneously’ with the insider, and denied standing to recover damages to a person who had traded [page 751] a month after the insider’s trading but prior to the public release of the information. Similarly, in Moss v Morgan Stanley Inc 719 F 2d 5 (2d Cir 1983), the court denied standing to persons who had traded in the marketplace generally, rather than trading with the insider or under the influence of trading by the insider, on the ground that the defendants owed no duty to such persons. In Alfus v Pyramid Technology Corp 745 F Supp 1511 (ND Cal 1990), the court held that a plaintiff could not recover damages in relation to trading which took place several days after the insider’s trading. In Neubronner v Milken 6 F 3d 666 (9th Cir 1993), the Ninth Circuit held that contemporaneity of trading was not established where the plaintiff and Milken had each traded over a three-year period, but had only rarely traded on the same day, and dismissed the plaintiff’s claim on that basis.88 In the United States, this issue has been resolved, at least in part, by statute, since s 20A of the Insider Trading and Securities Fraud Enforcement Act 1988 (15 USC s 78(t)–1(a)) allows damages to be recovered by persons who trade contemporaneously with an insider, in the same class of securities and on the opposite side of the market, up to the limit of the profit made or the loss avoided by the insider. However, that section leaves open the question of the limits of ‘contemporaneous’ trading for this purpose. These difficulties are not addressed by the application of the provision for a compensation order under s 1317HA to insider trading in contravention of s 1043A.

Specific situation in which a compensation order may be made under s 1317HA 17.43 Section 1043L allows the recovery of damages under s 1317HA if a person (‘insider’) possesses information that is not generally available and, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of Div 3 financial products (other than derivatives); the insider knows, or is reckless, as to those matters; and the insider, whether as principal or agent, contravenes s 1043A(1) by applying for, acquiring or disposing of Div 3 financial products, or entering an agreement to do so, or procuring another person to do so: s 1043L(1).

Loss recoverable by issuer in relation to subscription for Div 3 financial products 17.44 If the insider applied for or agreed to apply for, or procured another person to apply for or to agree to apply for, the Div 3 financial products, the issuer of those products may, by action under s 1317HA, recover any amount by which the application price was less than the price at which those products would have been likely to have been disposed of at the time of the application, if the information had been generally available: s 1043L(2). The measure of damages under this provision may have anomalous results, since a negotiated subscription price does not necessarily reflect the price at which financial products were trading onmarket, or would have traded on-market if material price-sensitive information had been made available. An action under s 1043L(2) may be brought against the insider, the person whom the insider procured to apply for the relevant financial products, or a [page 752] person involved in the contravention. ASIC may bring an action for compensation under s 1043L(2) in the name of, and for the benefit of, an issuer of Div 3 financial products if it considers that it is in the public interest to do so: s 1043L(6).

Loss recoverable by disposer of Div 3 financial products 17.45 If an insider acquired or agreed to acquire, or procured another person to acquire or agree to acquire, Div 3 financial products from a person (‘disposer’) who did not possess the relevant information, then the disposer may, by action under s 1317HA, recover any amount by which the price at which the financial products were acquired or agreed to be acquired was less than the price at which they would have been likely to have been acquired at that time if the information had been generally available: s 1043L(3). Such an action may only be brought if the disposer did not possess the relevant information, and if he or she was in privity with the insider. Since the amount of compensation is to be determined by reference to the price at which the financial products would have been acquired or agreed to be acquired in a notional acquisition or agreement made at the time of the actual acquisition or agreement, if the information had generally been available, an insider will not be liable to compensate other participants for subsequent increases in the market price, after he or she acquired the relevant financial products. Section 1043L(3) is most likely to apply in a situation where an insider acquired or agreed to acquire Div 3 financial products knowing favourable information concerning an issuer, prior to the public announcement of that information. In that situation, the insider would profit by acquiring the relevant financial products at a lower price than if the information had been released before he or she traded; some participants in the market may have sold those financial products at a lower price than they would have done had that information previously been released, either in trading with the insider or with other participants in the market; other participants may have continued to hold the relevant financial products, so they would obtain the benefit of a later increase in the price of those financial products when the information is released; some buyers may have acquired financial products at the same time as the insider, at a lower price than would have been available if the information had been released before they traded, but without wrongdoing on their part; and other buyers may have acquired the financial products after the announcement of the information, obtaining no gain and suffering no loss since the market price at which they acquired those financial products would have reflected that information.

Loss recoverable by acquirer of Div 3 financial products 17.46 If an insider disposed of or agreed to dispose of, or procured another person to dispose of or agree to dispose of, Div 3 financial products to a person (‘acquirer’) who did not possess the relevant information, the acquirer may, by action under s 1317HA, recover any amount by which the price at which the financial products were disposed of or agreed to be disposed of was greater than the price at which they would have been likely to have been disposed of at that time if the information had been generally available: s 1043L(4). Such an action may only be brought if the acquirer did not possess the relevant information and if he or she was in privity [page 753] with the insider. Section 1043L(4) is most likely to apply where an insider disposed of financial products prior to the release of unfavourable information concerning an issuer. In that situation, the insider would profit by selling financial products at a higher price than if the information had been released before he or she traded; some participants in the market may have acquired the financial products at a higher price than they would have done if the information had previously been released, either in trading with the insider or with other participants in the market; other participants may have continued to hold the relevant financial products, and be exposed to the decrease in their price at the time the information is released; innocent sellers may have sold financial products at the same time as the insider, at a higher price than if the information had previously been released, but without wrongdoing on their part; and other sellers may have sold the financial products after the announcement of that information, when the market price would then reflect that information. Sections 1043L(3) and (4) may lead to fortuitous results when applied to transactions on a licensed market, where the matching of buy and sell orders will have been random. To allow recovery to one or a small number of investors who by chance trade with the insider in a market has little justification in principle. On the other hand, allowing damages to be recovered by all persons who traded within the relevant period could lead

to damages which are quite out of proportion to the scale of the insider’s trading or the profits which he or she made or the loss which he or she avoided: see 17.42.

Loss recoverable by issuer in relation to acquisition or disposal of Div 3 financial products 17.47 If an action could have been brought by the disposer or acquirer of Div 3 financial products under ss 1043L(3) and (4) respectively, then the issuer of the financial products is also entitled to recover damages in an action under s 1317HA. In the case of an acquisition or agreement to acquire Div 3 financial products, the issuer may recover the amount by which the price at which those financial products were acquired or agreed to be acquired was less than the price at which they would have been likely to be acquired at that time if the information had been generally available: s 1043L(5)(a). In the case of a disposal or agreement to dispose of Div 3 financial products, the issuer may recover the amount by which the price at which those financial products were disposed of or agreed to be disposed of was greater than the price at which they would have been likely to have been disposed of at that time if the information had been generally available: s 1043L(5)(b). An action under s 1043L(5) may be brought against the insider, a person whom the insider procured to subscribe for the financial products, or a person involved in the contravention. Since an action by the issuer under s 1043L(5) is limited to the circumstances where an action may be brought by a disposer or an acquirer under s 1043L(3) or s 1043L(4) respectively, the issuer has no action available under s 1043L(5) if the disposer or acquirer of the securities possessed the relevant information at the time of the transaction. If no investor in privity with the insider brings proceedings under s 1043L(3) or s 1043L(4), the insider may still be held liable to the issuer under s 1043L(5). The ability of the issuer of the financial products to recover damages [page 754]

against an insider under s 1043L(5), when combined with the ability of a disposer or acquirer of the financial products to recover damages in the same measure under s 1043L(3) or s 1043L(4) respectively, has the result that an insider may be subject to liability for twice the amount of his or her gain or the loss avoided, as well as any potential liability to other parties under s 1317HA. ASIC may bring an action for damages under s 1043L(5) in the name of and for the benefit of the issuer of the financial products, if it considers that it is in the public interest to do so: s 1043L(6).

Relief from liability 17.48 The defences under s 1043M (see 17.39–17.40) are only available in a prosecution for an offence under s 1043A(1) or s 1043A(2), and not in civil proceedings. However, in an action brought under s 1043L because a person entered into or procured another person to enter into a transaction or agreement at a time when certain information was in that first person’s possession, the court may relieve that person wholly or partly from liability if the relevant information came into that person’s possession solely as a result of that information having been made known in a manner that would, or would be expected to, bring it to the attention of persons who commonly invest in Div 3 financial products of a kind whose price might be affected by the information: s 1043L(7). This provision will apply in circumstances where information had been made available in that manner, but a reasonable period for it to be disseminated among such persons had not elapsed, so the information would not be treated as generally available for the purposes of s 1042C: see 17.26. In these circumstances, whether a court should relieve that person from liability may depend, among other things, upon the time that had elapsed after the relevant announcement and before that person traded, and upon whether that person believed that the information was generally available when he or she traded.

Treatment of losses recovered by responsible entity or ASIC 17.49 If a responsible entity for a registered scheme, or ASIC in the name and for the benefit of a responsible entity for a registered scheme, brings an action under s 1043L(2) in respect of a subscription for, or any agreement to subscribe for, any interests in the scheme, or under s 1043L(5) in respect of an acquisition or disposal of or agreement to acquire or dispose of

interests in the scheme, then any amount recovered in the action is to be held by the responsible entity on behalf of persons who, at the time of the subscription or agreement, had rights or interests in the relevant scheme, in proportion to their respective interests: s 1043L(8)–(9).

Other orders that may be made by the court 17.50 Section 1043O allows the court to make a wide range of other orders if it finds that s 1043A has been contravened, including orders restraining the exercise of rights attached to Div 3 financial products; restraining the issue, acquisition or disposal of such products; directing the disposal of such products; vesting such products in ASIC; or cancelling an Australian financial services licence. The court may also make an order directing a person to do or refrain from doing a specified act, for the purposes of securing compliance with any other order made under s 1043O. ___________________________ 1.

The extensive academic commentary includes M P Dooley, ‘Enforcement of Insider Trading Restrictions’ (1980) 66 Virginia LR 1 at 3; A J Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’ (1988) 16 MULR 633 at 634. For a selection of the voluminous academic writing concerning this subject see also A J Black, ‘The Reform of Insider Trading Law in Australia’ (1992) 15 UNSWLJ 214; J Mannolini, ‘Insider Trading — The Need for Conceptual Clarity’ (1996) 14 C&SLJ 151, 154; L Semaan, M A Freeman and M A Adams, ‘Is Insider Trading a Necessary Evil for Efficient Markets? An International Comparative Analysis’ (1999) 17 C&SLJ 220; S Rubenstein, ‘The Regulation and Prosecution of Insider Trading in Australia: Towards Civil Penalty Sanctions for Insider Trading’ (2002) 20 C&SLJ 89; G Lyon and J Du Plessis, The Law of Insider Trading in Australia, Federation Press, Sydney, 2005; J Overland, ‘The Future of Insider Trading in Australia; What Did Rene Rivkin Teach Us?’ (2005) 10 Deakin LR 708; A Jacobs, ‘Time is Money: Insider Trading from a Globalisation Perspective’ (2005) 23 C&SLJ 231; K Kendall and G Walker, ‘Insider Trading in Australia and New Zealand: Information that is “Generally Available”’ (2006) 24 C&SLJ 343; J Overland, ‘Two Steps Forward, One Step Back: Assessing Recent Developments in the Fight Against Insider Trading’ (2006) 24 C&SLJ 207; D Pomilio, ‘On the Reach of Insider Trading Law’ (2007) 25 C&SLJ 467; A J Black, ‘Insider Trading and Market Misconduct’ (2011) 29 C&SLJ 313; J Overland and K Li, ‘Room for Improvement: Insider Trading and Chinese Walls’ (2012) 40 ABLR 223; J Overland, ‘What Is Inside “Information”? Clarifying the Ambit of Insider Trading Laws’ (2013) 31 C&SLJ 189; J Overland, ‘The Possession and Materiality of Information in Insider Trading Cases’ (2014) 32 C&SLJ 353; V Lei and I Ramsay, ‘Insider Trading Enforcement in Australia’ (2014) 8 Law & Financial Markets Review 214.

2.

W J Carney, ‘Signalling and Causation in Insider Trading’ (1987) 36 Catholic University LR 863.

3.

R Tomasic and B Pentony, ‘Crime and Opportunity in the Securities Markets: The Case of Insider

Trading in Australia’ (1989) 7 C&SLJ 186; R Tomasic, ‘Insider Trading Law Reform in Australia’ (1991) 9 C&SLJ 121; and R Tomasic (with the collaboration of B Pentony), Casino Capitalism? Insider Trading in Australia, Australian Institute of Criminology, Canberra, 1991. 4.

Tomasic, Casino Capitalism? Insider Trading in Australia, fn 3, p 51.

5.

Tomasic, Casino Capitalism? Insider Trading in Australia, fn 3, pp 69, 75.

6.

Fair Shares for All: Insider Trading in Australia, October 1989. See also the report of Dr P Anisman, Insider Trading Legislation for Australia: An Outline of the Issues and Alternatives, Australian Government Publishing Service, Canberra, 1986.

7.

Fair Shares for All: Insider Trading in Australia, fn 6, p 13.

8.

Burland v Earle [1902] AC 83.

9.

See, for example, Strong v Repide 213 US 419 (1909); Allen v Hyatt (1914) 30 TLR 444; Coleman v Myers [1972] 2 NZLR 225; Glavanics v Brunninghausen (1996) 19 ACSR 204; 14 ACLC 345; on appeal, as Brunninghausen v Glavanics (1999) 46 NSWLR 538; 32 ACSR 294; 17 ACLC 1247; [1999] NSWCA 199; Charlton v Baber (2003) 47 ACSR 31; 21 ACLC 1671; [2003] NSWSC 745 at [17].

10.

Mannolini, fn 1, pp 153–4.

11.

SEC v Texas Gulf Sulphur Co 401 F 2d 833 (1968), cert denied 394 US 976 (1969); V Brudney, ‘Insiders, Outsiders and Informational Advantages under the Federal Securities Laws’ (1979) 93 Harvard LR 322.

12.

Mannolini, fn 1, at 154.

13.

H L G Manne, Insider Trading and the Stock Market, Free Press, New York, 1966; S Levmore, ‘Securities and Secrets: Insider Trading and the Law of Contracts’ (1982) 68 Virginia LR 117 at 145; W Hogan, ‘Insider Trading’ (1988) 6 C&SLJ 39 at 44.

14.

Semaan, Freeman and Adams, fn 1, at 225–6.

15.

Hogan, fn 13.

16.

F H Easterbrook, ‘Insider Trading, Secret Agents, Evidentiary Privileges, and the Production of Information’ (1981) 11 Supreme Court Review 309 at 326: L Herzel and D E Colling, ‘The Chinese Wall and Conflict of Interest in Banks’ (1978) 34 Business Lawyer 73 at 94; and see 9.40.

17.

D W Carlton and D R Eischel, ‘The Regulation Of Insider Trading’ (1983) 35 Stanford LR 857 at 868; R J Gilson and R H Kraakman, ‘The Mechanisms of Market Efficiency’ (1984) 70 Virginia LR 549 at 629–34.

18.

N Georgakopoulos, ‘Insider Trading as a Transactional Cost: A Microstructure Justification and Optimization of Insider Trading Regulation’ (1993) 36 Connecticut LR 1. That argument has been criticised by Semaan et al: see Semaan, Freeman and Adams, fn 1.

19.

Levmore, fn 13, at 150–l; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 635–6.

20.

Fair Shares for All: Insider Trading in Australia, fn 6, at 17; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 636.

21.

Australian Financial System, Final Report of the Committee of Inquiry, 1981, p 382, cited in Fair Shares for All: Insider Trading in Australia, fn 6, p 17.

22.

L Loss, ‘The Fiduciary Concept as Applied to Corporate ‘Insiders’ in the United States’ (1970) 33 Mod LR 34 at 36; Brudney, fn 11, at 335; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 636–7.

23.

Brudney, fn 11, at 355–6; Levmore, fn 13, at 121.

24.

Brudney, fn 11, at 334; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 637.

25.

US v Newman 664 F 2d 12 (1981), cert denied 464 US 863 (1983); SEC v Materia 745 F 2d 197 (1984); US v Carpenter 791 F 2d 1024 (1986).

26.

SEC v Willis 825 F Supp 617 (SDNY 1993) (applying that theory to trading by a psychiatrist on information obtained from a patient, in breach of the doctor–patient duty of confidentiality). However, American courts have declined to extend the misappropriation approach to information obtained by a person within a family setting, rather than in an employment relationship: US v Chestman 947 F 2d 551 (2d Cir 1991), cert denied 112 S Ct 1759 (1992).

27.

Division 3 financial products includes securities; derivatives; interests in managed investment schemes; debentures, stocks or bonds issued or proposed to be issued by a government; superannuation products; and other financial products able to be traded on a financial market: see 17.10.

28.

For example, ‘material price-sensitive’ information could include information about company earnings, a proposed takeover, mineral discoveries, changes in dividends rates or management policies, changes in financial position, or a client’s request for a price for a substantial trade: see 17.15–17.19.

29.

Information is ‘generally available’ if it is (1) readily observable, for example, economic indicators; or (2) has been made known in a manner that would, or would be expected to, bring it to the attention of persons who commonly invest in Div 3 financial products of the relevant kind (for example, by ASX announcement) and a reasonable period has passed for it to be disseminated; or (3) consists of deductions, conclusions or inferences from readily observable matter or publicly available information; for example, internal analysis: see 17.23–17.26.

30.

A Chinese wall exception is available if the decision to enter into the transaction is taken by a person other than the officer who possessed the relevant information; Chinese wall arrangements are in place; and no information was communicated to or advice given to the person who made the decision by a person who possessed inside information: see 17.33.

31.

The ‘own intentions’ exception is available if a body corporate enters into a transaction or agreement in relation to financial products issued by another person, and the body corporate or one of its officers or employees is aware that it (1) proposes to enter into; (2) has previously entered into; (3) or has previously proposed to enter into, one or more transactions or agreements in relation to financial products issued by the other person or by a third person, and that officer or employee became aware of that matter in the course of performing his or her duties: see 17.34.

32.

The ‘agency’ exception is available if a representative enters a transaction on a licensed market on behalf of another person under a specific instruction to do so; Chinese wall arrangements are in place; information was not communicated and no advice was given by a person who had inside information; and the client is not an associate of the licensee or of any of its representatives: see 17.36.

33.

The term ‘inside information’ is defined in s 1042A as information that is not generally available; and, if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Div 3 financial products.

34.

Credit facilities are excluded by s 765A(1)(h) and reg 7.1.06 of the Corporations Regulations 2001 (Cth).

35.

Contracts for the future provision of services were excluded from the definition of derivative by s

761D(3)(b). 36.

Director of Public Prosecutions v Hill (2012) 223 A Crim R 285; [2012] VSCA 144; R v Glynatsis (2013) 230 A Crim R 99; [2013] NSWCCA 131; R v Xiao [2016] NSWSC 240.

37.

R v Farris (2015) 107 ACSR 26; [2015] WASC 251 at [174].

38.

R v Rivkin (2004) 59 NSWLR 284; 184 FLR 365; [2004] NSWCCA 7 at [94].

39.

By way of comparison, there had been uncertainty in United States case law as to whether s 10(b) of the Securities Exchange Act and r 10b-5 made thereunder were breached by trading while in knowing possession of inside information, or only if the trader used the relevant information for trading. A ‘knowing possession’ approach was adopted in US v Teicher 987 F 2d 112 (2d Cir 1993) and a ‘use’ approach was adopted in SEC v Adler 137 F 3d 1325 (11th Cir 1998) and US v Smith 155 F 3d 1052 (9th Cir 1998). Rule 10b-1, adopted on 10 August 2000, resolved that uncertainty by providing that a person is treated as trading on the basis of material non-public information if that person purchases or sells securities while aware of that information. That rule allows certain affirmative defences where, for example, a person trades on the basis of a pre-existing plan, contract or instruction made in good faith, and material non-public information was not a factor in that trading decision.

40.

Prior to amendments made by the Corporations Legislation Amendment Act 1991 (Cth), the prohibition on insider trading applied only to persons who were connected with a body corporate. A person was treated as connected with a body corporate if he or she was an officer of the body corporate or a related body corporate; a substantial shareholder in the body corporate or a related body corporate for the purposes of Pt 6.7 of the Corporations Law; or was within a business or professional relationship with the body corporate or a related body corporate; or was an officer of a substantial shareholder in the company or a related company. However, the Griffiths Committee suggested that it was ‘the use of information, rather than the connection between a person and a corporation, which should be the basis for determining whether insider trading has occurred’: fn 6 at xv. This approach was adopted in former s 1002G of the Corporations Act and is continued in s 1043A.

41.

That conclusion is also arguably inconsistent with one of the legislative purposes underlying that section, which was to overturn the holding in Hooker Investments Pty Ltd v Baring Brothers Halkerston Securities Ltd (1986) 10 ACLR 457 (Young J); aff’d (1986) 5 NSWLR 163; 10 ACLR 524 (Court of Appeal) that the term ‘person’ in s 125 of the Securities Industry Act did not include a corporation: Explanatory Memorandum to the Corporations Legislation Amendment Bill 1991, [340].

42.

Hannes v Director of Public Prosecutions (Cth) (No 2) (2006) 205 FLR 217; 60 ACSR 1; [2006] NSWCCA 373.

43.

R v Rivkin (2004) 59 NSWLR 284; 184 FLR 365; [2004] NSWCCA 7.

44.

Mansfield v R (2012) 293 ALR 1; 87 ALJR 20; 91 ACSR 1; [2012] HCA 49.

45.

SEC v Texas Gulf Sulphur Co above (mineral discovery); SEC v MacDonald 699 F 2d 47 (1st Cir 1983); Basic Inc v Levinson 108 S Ct 978 (1988) at 987; 485 US 224; Wilson v Great American Industries Inc 855 F 2d 987 (1988) (2d Cir 1988); SEC v Mayhew 121 F 3d 44, 52 (1997) (2d Cir 1997) (merger discussions); SEC v Thrasher 152 F Supp 2d 291 (2001) (SDNY 2001) (rumour from a tipper).

46.

R v Hannes [2000] NSWCCA 503; (2000) 158 FLR 359; 36 ACSR 72 at [194]; R v Rivkin above at [134], [194]; Fysh v R [2013] NSWCCA 284.

47.

Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269; [2005] FCA 88; R v Frawley [2005] NSWSC 583 (a company executive purchased shares while in possession of information concerning a potential merger between another company and his employer or a

competitor); Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57; 54 ACSR 394; [2005] FCA 1037 (civil penalty proceedings for breach of directors duties by trading on information as to potential acquisitions); ASIC, Former Company Secretary Pleads Guilty to Insider Trading, media release no 09-10, 4 February 2009 (company secretary pleaded guilty to insider trading charges in respect of the purchase of shares while in possession of inside information about an alliance between Queensland Gas and an overseas company); Director of Public Prosecutions v O’Reilly [2010] VSC 138 (company director); R v Dalzell [2011] NSWSC 454 (sentencing in respect of a guilty plea for insider trading in shares of a listed company by a senior manager in a corporate advisory firm who was advising that company about a potential acquisition). 48.

ASIC, Perth Man Sentenced on Insider Trading, media release no 03-240, 1 August 2003 (a company director sentenced on six counts of insider trading in respect of the sale of shares shortly before a company was placed in administration); R v Hall [2005] NSWSC 890; R v Stephenson [2010] NSWSC 779 (sentencing in respect of a guilty plea where a former officer and consultant to a company sold shares in the company while in possession of information received from a current executive that the company was under pressure from its bank to repay its loans).

49.

SEC v Texas Gulf Sulphur Co above.

50.

Re Cady Roberts & Co v SEC 40 SEC 907 (1961).

51.

Shapiro v Merrill Lynch, Pierce Fenner & Smith, Inc 495 F 2d 228 (2d Cir 1974).

52.

Elkind v Liggett & Myers Inc 635 F 2d 156 (2d Cir 1980) at 166.

53.

Rivkin Financial Services Ltd v Sofcom Ltd (2004) 51 ACSR 486; [2004] FCA 1538. By contrast, in the continuous disclosure context (see 7.15), the issue of materiality has been treated as a matter to be determined on an ex ante basis having regard to the context in which the relevant disclosures were made including information publicly available to the market, although recognising that evidence of the actual effect of information actually disclosed on a company’s share price is relevant at least as a cross-check as to a different hypothetical disclosure: Jubilee Mines NL v Riley (2009) 40 WAR 299; 253 ALR 673; 69 ACSR 659; [2009] WASCA 62 at [33], [130], [134]; James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85; 81 ACSR 1; [2010] NSWCA 332 at [534]ff.

54.

SEC v Texas Gulf Sulphur Co above; SEC v MacDonald above at 51 (1st Cir 1983).

55.

Hooker Investments Pty Ltd v Baring Brothers Halkerston & Partners Securities Ltd (1986) 5 NSWLR 157 per McHugh JA at 162; 10 ACLR 524.

56.

Explanatory Memorandum to the Corporations Legislation Amendment Bill 1991, [326].

57.

A Discussion Paper on Insider Trading published by the Companies and Securities Advisory Committee on 13 July 2001 recommended that the Corporations Act be amended to overcome that consequence of the decision in R v Firns, above, by requiring that corporate officers wait a reasonable time for a matter to be publicly disseminated before they can lawfully trade. That amendment would not address the position of a person resident overseas who becomes aware of that information in circumstances that it is readily observable outside Australia, and trades on the information before it becomes known to the Australian market. The Treasury’s Insider Trading — Position and Consultation Paper, Canberra, 2007, expressed concerns as to, among other things, the complexity of that amendment and it has not been implemented.

58

R v Firns (2001) 51 NSWLR 548; 38 ACSR 223; [2001] NSWCCA 191 at [48].

59.

C R Good, ‘An Examination of Investment Analyst Liability under Rule 10b-5’ (1984) Ariz St LJ 129 at 154–5.

60.

R v Hannes above; R v Doff (2005) 54 ACSR 200; [2005] NSWCCA 119; Hannes v Director of Public Prosecutions (Cth) (No 2) above; R v Rivkin above (evidence was led from stockbrokers that they were not aware of such rumours); Catena v Australian Securities and Investments Commission (No 2) [2010] FCA 865 (a broker who communicated inside information concerning a potential takeover to several clients was unsuccessful in an argument that ASIC had not shown the information was not generally available through rumours).

61.

Brudney, fn 11, at 341–2; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 646.

62.

Brudney, fn 11, at 355, 360.

63.

For example, R v Rivkin above; Hannes v Director of Public Prosecutions (Cth) (No 2) above; R v Mansfield (2011) 251 FLR 286; 84 ACSR 389; [2011] WASCA 132; on appeal (2012) 293 ALR 1; 87 ALJR 20; 91 ACSR 1; [2012] HCA 49; Joffe v R; Stromer v R (2012) 82 NSWLR 510; [2012] NSWCCA 27; R v Xiao [2016] NSWSC 240 and see 17.17.

64.

R v Hartman (2010) 81 ACSR 121; [2010] NSWSC 1422, on appeal Hartman v R (2011) 87 ACSR 523; [2011] NSWCCA 261; R v De Silva [2011] NSWSC 243.

65.

As to front running generally, see M S Howard, ‘Front Running in the Marketplace: A Regulatory Dilemma’ (1991) 19 Securities Regulation LJ 263; T A Russo and S J Lobel, ‘Front Running and Block Trading’ (1990) 28 Securities & Commodities Regulation 75; J Carley, ‘The Future of Front Running’ (1995) 13 C&SLJ 434.

66.

Compare the similar fact situation in SEC v Lund 570 F Supp 1397 (CD Cal 1983), where the court held the business colleague liable under r 10b-5 in these circumstances, on the basis that he had become a ‘temporary insider’ of the company when he was given information in the expectation that he would keep it confidential.

67.

G C Coffee, ‘Insider Trading versus Selective Disclosure: Distinguishing Fraud from Favouritism’ in K Lehn and R W Kamphuis Jr, Modernising US Securities Regulation: Economic and Legal Perspectives, 1992, pp 139–57.

68.

Brudney, fn 11; D C Langevoort, ‘Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement’ (1982) 70 California LR 1 at 10; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 656.

69.

Selangor United Rubber Estates Ltd v Craddock (No 3) [1986] 2 All ER 1073, 1123–4; Karak Rubber Co Ltd v Burden (No 2) [1972] 1 WLR 602, 633; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, esp. per Stephen J at 410; [1975] HCA 8; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22.

70.

By contrast, prior to the amendments made by the Corporations Legislation Amendment Act 1991, a tippee was prohibited from dealing in securities if, at the time he or she received material pricesensitive information from a person who was prohibited from dealing in the securities, there existed an association with the insider who provided the information or an arrangement for the communication of that information with a view to dealing in securities. It was therefore necessary to establish the existence of such an association or arrangement, in order to establish the liability of a tippee. The Griffiths Committee recommended that the insider trading prohibitions include tippees within the primary definition of insider: fn 6, recommendation 7, [4.7.10]. This approach was adopted in former s 1002G of the Corporations Act and is continued in s 1043A.

71.

See, for example, Australian Securities and Investments Commission v Petsas (2005) 23 ACLC 269; [2005] FCA 88; Joffe v R; Stromer v R (2012) 82 NSWLR 510; [2012] NSWCA 277.

72.

R v Curtis (No 2) [2016] NSWSC 795.

73.

By comparison, s 128 of the Securities Industries Code was limited to dealings in issued securities: Hooker Investments Pty Ltd v Baring Bros Halkerston & Partners Securities Ltd above. The Supreme Court of New South Wales held that former s 1002G of the Corporations Law was to be read in the same way in Exicom Pty Ltd v Futuris Corporation Ltd (1995) 123 FLR 394; 18 ACSR 404; 13 ACLC 1758: see 17.5.

74.

Herzel and Colling, fn 16, at 88.

75.

C A Quinn, ‘The Securities Amendment Act 1988 and the Chinese Wall’ (1989) 7 Otago LR 141.

76.

Sun Securities Ltd v National Companies and Securities Commission (1990) 2 ACSR 796 per Ipp J at 807– 8.

77.

As to the legal significance of Chinese walls or information barriers maintained by financial intermediaries, see M Lipton and R Mazur, ‘The Chinese Wall Solution to the Conflict Problems of Securities Firms’ (1975) 50 New York University LR 459; T A Levine, A Z Gardiner and L D Swanson, ‘MultiService Securities Firms: Coping with Conflicts in a Tender Offer Context’ (1998) 23 Wake Forest LR 41; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 658–62; V Goldwasser, ‘Recent Developments in the Regulation of Chinese Walls and Business Ethics: In Search of a Remedy for a Problem that Persists’ (1993) 11 C&SLJ 227; J Overland and K Li, ‘Room for Improvement: Insider Trading and Chinese Walls’ (2012) 40 ABLR 223.

78.

North & South Trust Co v Berkeley [1971] 1 All ER 980 at 992 (dealing with the position of insurance brokers); Black v Shearson Hammill & Co 266 Cal App 2d 363 (1968); Slade v Shearson Hammill & Co, Inc 517 F 2d 398 (1974); Lipton and Mazur, fn 77; Black, ‘Policies in the Regulation of Insider Trading and the Scope of Section 128 of the Securities Industry Code’, fn 1, at 662; Goldwasser, fn 77.

79.

As to the restriction of the scope of fiduciary duty in Australian law see Birtchnell v Equity Trustees, Executors & Agency Ltd (1929) 42 CLR 384 per Dixon J at 408; [1929] HCA 24; and NZ Netherlands Society ‘Oranje’ Inc v Kuys [1973] 2 All ER 1222 per Lord Wilberforce at 1225–6; and see Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; 62 ACSR 427; [2007] FCA 963.

80.

Joffe v R; Stromer v R (2012) 82 NSWLR 510; [2012] NSWCA 277 at [34]; R v Xiao [2016] NSWSC 240 at [81].

81.

For discussion of the penalties for insider trading, see V Lei and I Ramsay, ‘Insider Trading Enforcement in Australia’ (2014) 8 Law & Financial Markets Review 214.

82.

Director of Public Prosecutions v O’Reilly [2010] VSC 138 at [18], [28]; R v Glynatsis [2013] NSWCCA 131 at [54]; Kamay v R (2015) 109 ACSR 611; [2015] VSCA 296 at [28]; R v Xiao above at [91]–[92].

83.

Khoo v R above.

84.

Evidence Act (Cth, NSW, Vic, Tas) s 140; Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34; Australian Securities and Investments Commission v Adler (2002) 168 FLR 253; 41 ACSR 72; [2002] NSWSC 171; aff’d Adler v Australian Securities and Investments Commission (2003) 179 FLR 1; 46 ACSR 504; [2003] NSWCA 131 at [146]–[148]; Australian Securities and Investments Commission v Plymin (No 1) (2003) 175 FLR 124; 46 ACSR 126; [2003] VSC 123; aff’d Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; 185 FLR 245; 48 ACSR 621; [2004] VSCA 54 at [161]; Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1; 71 ACSR 368; [2009] NSWSC 287 at [186]; and see generally T Middleton, ‘The Difficulties of Applying Civil Evidence and Procedure Rules in ASIC’s Civil Penalty Proceedings under the Corporations Act’ (2003) 21 C&SLJ 507.

85.

Rich v Australian Securities and Investments Commission (2004) 220 CLR 129; 50 ACSR 242; [2004] HCA 42; Australian Securities and Investments Commission v Mining Projects Group Ltd (2007) 164 FCR 32; 65 ACSR 264; [2007] FCA 1620; MacDonald v Australian Securities and Investments Commission (2007) 73 NSWLR 612; 65 ACSR 299; [2007] NSWCA 304; P Spender, ‘Negotiating the Third Way: Developing Effective Process in Civil Penalty Litigation’ (2008) 26 C&SLJ 249; M Duffy, ‘Insider Trading: Addressing the Continuing Problems of Proof’ (2009) 23 AJCL 149 at 154.

86.

Langevoort, fn 68, at 17.

87.

Hogan, fn 13, at 48.

88.

For discussion of the ‘contemporaneity’ requirement in the American case law see S B Rosenfeld, ‘Pleading Damages Claims for Insider Trading’ (1994) 27 Rev of Securities & Commodities Regulation 91; H Huang, ‘Compensation for Insider Trading: Who Should be Eligible Claimants?’ (2006) 20 AJCL 84.

Index References are to paragraph numbers

A AAT appeal from decision of, on question of law …. 2.25 reviewable decisions …. 2.23 merits review …. 2.24 Access to information insider trading, access to information theory and …. 17.5 Acquisitions see Takeovers Advertising financial products other than securities see Offer of financial products other than securities securities see Offer of securities Aiding and abetting defective disclosure …. 8.13, 8.32 Alice Springs Heads of Agreement …. 1.58 implementation …. 1.59 Appeal AAT, from, on question of law …. 2.25 Apportionment liability, of …. 9.25 ASX Listing Rules aware, definition …. 7.5 compliance, right to seek …. 12.31

contractual effect …. 11.24 denial of listing of applicant companies, challenges …. 12.5 Brolga …. 12.3 Delta Gold …. 12.11 Kwikasair …. 12.7 Oil Basins Ltd …. 12.10 Peninsula …. 12.8 Premier Pacific Pharmaceutical Industries Ltd …. 12.9 disclosure requirements …. 7.4 confidentiality requirement …. 7.11 exceptions to …. 7.9–7.12 materiality of information …. 7.7, 7.15–7.17 notifiable transactions …. 7.8 operational requirement …. 7.10 reasonable person requirement …. 7.12 time taken …. 7.6 enforceability …. 12.1 Ashton Mission Investments …. 12.24 ASX, by …. 12.4, 12.5 Ampol Petroleum …. 12.16 Bateman …. 12.25 Boomalli …. 12.19 Chapman …. 12.14 cases dealing with …. 12.13–12.30 Delta Gold …. 12.11 Designbuild …. 12.18

Devereaux Holdings …. 12.19 FAI Insurances …. 12.30 Harman …. 12.21 Melbourne City Investments …. 12.26 neutral interpretations …. 12.20 private parties, by …. 12.12 Quancorp …. 12.29 regulator, by …. 12.12 Re Centro …. 12.13 Repco …. 12.17 sympathetic view of courts …. 12.27 TNT Australia …. 12.23 Zephyr …. 12.28 Zytan Nominees …. 12.22 enforcing …. 12.12 investors’ right to seek compliance …. 12.31 joint impact of ss 793C and 1101B …. 12.34 FAI Insurance …. 12.35 Fuelbanc …. 12.37 orders court may make …. 12.38 Shortall …. 12.36 Lavarch Committee review …. 12.3, 12.33 LR 3.1A …. 5.15 legal effect of, overview …. 12.2, 12.39 obligation to grant listing to an applicant company …. 12.5 Brolga …. 12.3

Kwikasair …. 12.7 Peninsula …. 12.8 Re Centro scheme of arrangement …. 12.16 operating rules, enforceability …. 11.24 proposed changes …. 12.5 remedies available …. 12.33, 12.38 ASX Ltd access to market …. 11.41 appeals …. 11.49 challenging the actions of …. 11.51 CFR report into listing monopoly …. 11.2–11.3 corporate structure …. 11.38 directors’ powers under the Constitution …. 11.38 impact of Corporations Act amendments …. 11.39 disciplinary process …. 11.47 examples …. 11.48 enforcement matters …. 11.56 judicial review, decisions subject to …. 12.32 market participant, eligibility …. 11.42 members, rights of …. 11.38 ongoing compliance requirements …. 11.43 power to sanction and discipline participants …. 11.44 proposed changes to ability to list securities …. 12.5 resignation as participant …. 11.50 suspension or termination of participant …. 11.45 effect of …. 11.46

ASX Operating Rules …. 11.24 additional orders under s 1101B …. 11.33 illustration of order …. 11.34 cases failure to comply with operating rules …. 11.32 interpretation of s 793C …. 11.25 enforcement under statutory regime …. 11.24 participants ability to …. 11.31 overview …. 11.40 Auditing and Assurance Standards Board ASIC Act, established under …. 2.103 Australian Accounting Standards Board ASIC Act, established under …. 2.103 Australian Associated Stock Exchanges (AASE) formation …. 1.40 Australian CS facilities licence see also CS facilities ASIC, reporting to …. 2.44 cancellation …. 10.33, 10.35 conditions on …. 2.8, 10.33 imposition of …. 10.34 licensees compliance by …. 10.29 limits on involvement with …. 10.36 obligations of …. 10.28–10.30 systemic risk, reduction of …. 10.29 licensing of …. 10.22

application for licence …. 10.26 scope of licensing requirement …. 10.24 ministerial power to grant …. 2.8 operation of CS facility, for …. 10.10 overseas facilities, grant of licence to …. 10.27 suspension …. 10.33, 10.35 variation …. 10.33 Australian financial services licence (AFS licence) agency exemption …. 13.12 application for …. 13.16 ASIC information to …. 2.59 licensing actions …. 2.101 reporting to …. 2.46, 13.36 banning orders see Banning orders cancellation …. 13.51 administrative review of decision …. 13.55 after a hearing …. 13.53 bodies regulated by APRA …. 13.54 hearing, without …. 13.52 class order relief …. 13.14 conditions, imposition under Corporations Act …. 13.37 conflicts of interest, obligation to manage ASIC Regulatory Guide 181 …. 13.22 background …. 13.20 scope of statutory requirement …. 13.21 credit ratings agencies …. 13.15

dispute resolution …. 6.47 retail clients …. 13.34 ‘efficiently, honestly and fairly’ standard …. 13.18 exemptions from requirement to hold …. 13.9 agency exemption …. 13.12 Corporations Act, under …. 13.10 Corporations Regulations, under …. 13.11 holding out, prohibition of …. 13.39 impact of AFS licensing laws …. 6.73 licensees see Australian financial services licensees ‘providing financial product advice’ …. 13.5 exclusions from definition …. 13.6 ‘providing financial services’ …. 13.3 matters that are not …. 13.4 requirement to hold …. 6.47, 6.73, 13.1, 13.2 suspension …. 13.51 administrative review of decision …. 13.55 bodies regulated by APRA …. 13.54 hearing, after …. 13.53 hearing, without …. 13.52 unlicensed persons, dealing with …. 13.67 agreements with …. 13.67 court’s power to make orders …. 13.70 partial rescission …. 13.69 remedies in respect of dealing with …. 13.72 rescission of agreement with …. 13.68

unenforceability of agreement …. 13.71 variation …. 13.51 Australian financial services licensees accounting and auditing standards …. 14.75 adequacy of resources …. 13.26 allocation of financial products …. 14.81 audit requirements …. 14.77 civil liability …. 14.47 clients agency …. 14.8 ASIC Market Integrity Rules, incorporation of …. 14.16 contract terms …. 14.2 money, dealing with …. 14.65, 14.66, 14.70 account, payment into …. 14.67 payments out of …. 14.68 property other than money, dealing with …. 14.73 purposes for which funds may be accepted …. 14.69 relationship with …. 14.1 compliance procedures …. 13.24 conduct of business requirements …. 14.20 enforcement …. 14.87 contractual obligations …. 14.2 dealing with non-licensees as principal …. 14.84 disclosure by …. 14.20 disclosure document or statement defects in …. 14.42, 14.44

failure to ensure authorised representative gives disclosure document …. 14.45 failure to give …. 14.40 knowingly providing defective material to authorised representative …. 14.43 knowledge of defects in …. 14.41 s 953B application of …. 14.48 defences to action …. 14.51 liability under …. 14.49 losses recoverable …. 14.50 orders court may make …. 14.52 time limits …. 14.51 dispute resolution procedures …. 13.28 disqualification by the court …. 13.63 duty of care …. 14.3 advice, as to …. 14.4 breach of …. 14.6 other circumstances, in …. 14.5 employees of, dealings with …. 14.85 execution of instructions …. 14.80 failure to give disclosure document …. 14.40 fiduciary duties …. 14.9 content of …. 14.11 contractual exclusion …. 14.13 remedies for breach …. 14.14 restriction on scope of …. 14.12

traditional categories, outside …. 14.10 financial records, obligation to keep …. 14.76 Financial Services Guide alteration to …. 14.27 clients, to …. 14.23 content of …. 14.25, 14.26 currency of information in …. 14.24 retail clients, to …. 14.21 supplementary …. 14.28 incomplete information, warning as to …. 14.58 instructions to deal on licensed and foreign markets …. 14.83 limits on involvement with …. 10.36 loan monies, treatment of …. 14.71 misleading conduct, liability for …. 14.7 obligations imposed on …. 13.17 offences …. 14.37, 14.46 orders that court may make …. 13.64 powers of court …. 14.72 priority to clients’ orders …. 14.79 provision of information to ASIC …. 13.36 Pt 7.7 exemptions and modifications by ASIC …. 14.38 no contracting out …. 14.37 offences …. 14.39 reasonable care and skill, duty to use …. 14.3 advice, in respect of …. 14.4

other circumstances, as to …. 14.5 regulation of conduct of …. 13.17 retail clients …. 13.29 compensation arrangements …. 13.35 dispute resolution …. 13.34 general advice, warnings where …. 14.36 obligation to provide Financial Services Guide to …. 14.21 exceptions to requirement …. 14.22 personal advice, suitability requirements …. 14.29, 14.37 who is …. 13.30 risk management system …. 13.28 Statement of Advice (SoA) …. 14.30 content of …. 14.33, 14.34 exceptions to requirement to provide …. 14.31 recommendation of replacement of one product with another …. 14.35 when must be given …. 14.32 supervision requirements …. 13.25 training requirements …. 13.27 unconscionable conduct, prohibition of …. 14.78 Australian market licence ASIC, powers of …. 10.19, 11.6 cancellation …. 10.20 compliance with s 795B …. 11.26 conditions on …. 10.20 criteria for grant of …. 10.13, 11.8, 11.9 suspension …. 10.20

variation …. 10.20 Australian market licensees ASIC, powers of …. 10.19, 11.6 fair, orderly and transparent market …. 10.16 Minister, powers of …. 10.19 obligations of …. 10.15 requirements for …. 10.17 Australian Prudential Regulation Authority (APRA) twin peaks regulatory structure, and …. 1.2 Australian Securities and Investments Commission (ASIC) AAT, review of decisions by …. 2.18, 2.22 administrative actions …. 2.97 administrative law controls on …. 2.21 AFS licensees, information about …. 2.59 appointment of members …. 2.15 assistance civil penalty provisions, in connection with …. 2.78 licensees, from …. 2.61 prosecution, in connection with …. 2.77 reasonable, power to require …. 2.76 banning orders …. 2.102 body corporate …. 2.12 books, powers regarding see Books breach reporting …. 2.42–2.47 class orders …. 2.19 CDPP, relationship with …. 2.84

compensation on behalf of persons affected, application for …. 2.95 consumer laws, information under …. 2.60 consumer protector regulator …. 2.12 criminal matters, role in …. 2.83 criminal prosecutions …. 2.81 dealing, information about …. 2.58 declaration of contravention …. 2.91 delegation by …. 2.16 disclosure documents, lodgment of …. 5.41 ASIC’s role …. 5.42–5.43 consents required for …. 5.45 exposure period …. 5.44 disclosure of information by …. 2.40, 2.58 discretions conferred on …. 2.13 exercise of …. 2.20 enforceable undertakings …. 2.100 enforcement role …. 2.79 approach to …. 2.80 options …. 2.79 establishment of …. 1.45, 2.12 examinations by compulsory examinations …. 2.72 conduct of …. 2.71 exclusion of a lawyer …. 2.74 legal representation …. 2.74 oral …. 2.70

record of, releasing …. 2.75 statutory privilege …. 2.73 transcript, use of …. 2.75 financial market operators, responsibility for supervision off …. 1.21, 1.22 functions …. 2.5, 2.12, 2.13, 11.7 hearings administrative …. 2.66 evidence on oath or affirmation …. 2.64 informal and quick …. 2.66 inquisitorial …. 2.66 natural justice …. 2.65 opportunity to be heard …. 2.66 persons who may appear at …. 2.63 power to hold …. 2.62 rules of evidence …. 2.65 independent action by …. 2.10 information-gathering powers …. 2.39–2.40 general powers …. 2.48 infringement notices, issue of …. 2.99, 11.7 injunctions, standing to seek …. 2.93 inspection of books by …. 2.49 investigations by …. 2.67 commencement …. 2.68 conducting …. 2.68 procedural fairness …. 2.69 legal professional privilege …. 2.54

licensing actions …. 2.101 limited written directions to by Minister …. 2.10 mandatory reporting …. 2.41 Market Disciplinary Panel …. 11.7, 11.57 Market Integrity Rules …. 1.54, 11.7 market licensees, powers in relation to …. 10.19 membership …. 2.15 Ministerial directions to …. 2.10 misconduct reporting …. 2.42–2.47 modification and exemption powers …. 2.31–2.33 breadth of power …. 2.35 Ch 7, Corporations Act …. 2.36 exercise of …. 2.37 offers of securities …. 4.7 rationale for …. 2.34 takeovers, regarding …. 2.35 no-action letters …. 2.20 notices form and purpose …. 2.52 non-compliance, reasonable excuse for …. 2.53 power to give …. 2.51 oral examinations by …. 2.70 orders, power to seek …. 2.96 penalties …. 11.6 PDSs, lodgment of …. 6.58 powers …. 2.1, 2.12, 2.13

principles for operation …. 2.14 regional offices …. 2.15 regulatory guides issued by …. 2.17 no binding effect …. 2.18 representative proceedings by …. 2.94 responsibilities …. 2.5, 2.12 role …. 2.1 standing to bring proceedings …. 2.86 stop orders …. 2.98 Strategic Outlook 2014–2015 …. 15.5 structure …. 2.15 twin peaks regulatory structure, and …. 1.2 Australian Securities and Investments Commission Act 2001 (Cth) administrative arrangements …. 2.1 bodies established under …. 2.103 consumer protection provisions …. 1.35, 15.10–15.13, 15.22–15.24 dishonest, misleading or deceptive conduct, prohibition by …. 1.33, 15.23 financial services regulation, law and …. 1.14 regulatory framework, as cornerstone of …. 1.1 role, under Corporations Agreement …. 1.62 unconscionable conduct, prohibition by …. 1.34, 15.19 unfair contract terms, provisions in respect of …. 1.36, 15.14–15.19 ASIC Capability Review Panel (Capability Panel) report …. 12.2 Australian Securities Exchange (ASX) changing role of …. 11.2–11.3

debentures, listing of …. 3.12 monopoly on listing facilities …. 11.1 proposed ending of …. 11.2 Authorised deposit-taking institutions (ADIs) exclusion from managed investment scheme …. 3.32

B Bank deposits financial product …. 3.54 Banning orders alternatives to …. 13.61 ASIC, by …. 2.102, 13.56 AAT review of decision …. 13.62 hearing before …. 13.58 purpose …. 13.56 cancellation …. 13.60 duration …. 13.59 grounds for …. 13.57 variation …. 13.60 Barter schemes exclusion from managed investment scheme …. 3.32 Body debentures of …. 3.8 definition …. 3.7 Body corporate acts imputed to …. 9.16 definition …. 3.7

engaging in conduct …. 9.15 exclusion from managed investment scheme …. 3.11 imputed primary liability acts imputed to body corporate …. 9.16 acts imputed to employers and principals …. 9.17 Books ASIC inspection by …. 2.49 production of books to …. 2.50 requirement to provide explanation of …. 2.57 use to which books may be put …. 2.56 warrant to seize …. 2.55 Broker dealing with other property …. 14.73 disclosure of instructions …. 14.82 lien, right to …. 14.19 right of indemnity …. 14.17 loss of …. 14.18 Bubble Act 1720 …. 1.40 Business ethics and compliance CLERP principle …. 1.46

C Campbell Committee …. 1.6 Capital markets nature and role …. 10.1 regulatory issues …. 10.1

Causation efficient capital market hypothesis …. 9.40 challenges to …. 9.41 evidence in security class actions …. 9.51 ‘fraud on the market’ theory in the US …. 9.40–9.41, 9.53 indirect causation principles …. 9.48 market-based causation theories …. 9.39, 9.47 proof of …. 9.39 CDPP ASIC, relationship with …. 2.84 criminal charges, decision to lay …. 2.83 role of …. 2.84 Chi-X Australia admission requirements …. 11.52 ASIC Market Integrity Rules (Chi-X Market) …. 11.4, 11.23 disciplinary action …. 11.54 enforcement matters …. 11.56 market licence, grant of …. 10.3 ongoing compliance requirements …. 11.53 operating rules …. 11.40 participants ability to enforce …. 11.31 resigning as a participant …. 11.55 size and structure of …. 11.4 Chose in action debentures as …. 3.8 financial instruments as …. 1.5

shares as …. 1.5 Civil penalty provisions ASIC’s power to require assistance …. 2.78 criminal proceedings, relationship to …. 2.85 enforcement role of ASIC …. 2.79–2.80 insider trading, civil penalty liability …. 17.41 Civil proceedings applicable rules of evidence and procedure …. 2.87 ASIC duty of fairness …. 2.90 obligation to act fairly …. 2.90 representative proceedings …. 2.94 standing to bring …. 2.86, 2.92 burden of proof …. 2.88 continuous disclosure provisions, contravention …. 7.22–7.24 liability of person involved …. 7.25 third party compensation …. 7.24 declaration of contravention …. 2.91 privilege against self-incrimination …. 2.89 Class actions see Securities class actions Clients Australian financial services licensees, of see Australian financial services licensees relationships under ASX MIRs …. 11.17 reporting to …. 11.19 Commissioner for Corporate Affairs appointment of …. 1.41

Common law manipulative transactions at …. 16.4 Commonwealth Alice Springs Heads of Agreement …. 1.58 co-operative scheme with states …. 1.57 Corporations Act 1989, passing …. 1.58 referral of power to …. 1.55, 1.61–1.62, 2.2–2.3 legislation …. 2.4 rise in power of …. 1.58 Commonwealth Criminal Code application of …. 2.82 Commonwealth Ombudsman ASIC, oversight of …. 2.29 Commonwealth Treasurer appointments, making …. 2.7 clearing and settlement facility licensing …. 2.8 financial markets, regulating …. 2.8 powers …. 2.1 role …. 2.1, 2.6 Statement of Expectations …. 2.11 Companies engaging in conduct …. 9.15 first Companies Acts …. 1.40 insider trading, bodies corporate and Chinese walls within …. 17.33 exceptions for …. 17.35 information known to …. 17.20, 17.21

position until 1980 …. 1.56 Uniform Companies Legislation …. 1.56 Companies and Securities Advisory Committee (CASAC) report of …. 1.48 Companies Auditors and Liquidators Disciplinary Board ASIC Act, established under …. 2.103 Compensation arrangements under Div 3 …. 10.42 court orders for …. 8.76 financial markets, arrangements for …. 10.37 insider trading, for …. 17.42 acquirer of Div 3 financial products, loss recoverable by …. 17.46 court, orders that may be made by …. 17.50 disposer of Div 3 financial products, loss recoverable by …. 17.45 issuer of Div 3 financial products, loss recoverable by …. 17.44, 17.47 losses recovered by responsible entity or ASIC, treatment of …. 17.49 s 1317HA, order under …. 17.43 Competition exchange markets, in …. 1.54 market operators, between …. 10.3 provision of market facilities, for …. 1.54 Conditions and warranties consumer transactions, in …. 15.25 ASIC Act provisions …. 15.25–15.27 implied warranties …. 15.27–15.29 Conduct

engaging in …. 9.14 companies and individuals …. 9.15 Consent defence of withdrawal of …. 9.24 Constitution arrangements for regulation …. 2.2, 2.3 Consumer protection adequacy of existing …. 15.4 ASIC Act provisions …. 4.45, 15.10–15.13 financial service definition …. 15.13 misleading or deceptive conduct …. 15.23 public warning notice …. 15.31–15.33 substantiation notice …. 15.34–15.35 unconscionable conduct …. 15.19 undesirable or unlawful sales conduct …. 15.24 unfair contract terms …. 15.14–15.17 ASIC Strategic Outlook 2014–2015 …. 15.5 Australia, current protection …. 15.8 Competition and Consumer Act 2010 (Cth) …. 4.45, 15.10 conditions and warranties see Conditions and warranties ‘conduct engaged in trade or commerce’ …. 4.45, 15.11 ‘consumer behavioral biases’ …. 15.5 disclosure requirements and …. 15.5 financial products and services, application to …. 15.1–15.2 FSI recommendations …. 15.6 ASIC extension of powers …. 15.9, 15.30

regulatory framework, provisions in respect of …. 1.35 state fair trading legislation …. 4.45 UN Guidelines for Consumer Protection …. 15.7 unfair contract terms standard form consumer contracts …. 15.14–15.18 Continuous disclosure ASX Listing Rules see ASX Listing Rules aware, definition …. 7.5 case law …. 7.3 contravention accessorial liability …. 7.20 civil penalty …. 7.22–7.25 criminal penalty …. 7.19–7.21 infringement notice regime …. 7.26 liability for …. 7.19 remedies for …. 7.27 history …. 7.2 information generally available …. 7.14 injunctions …. 7.21 listed disclosing entities, by …. 7.8, 7.13 materiality …. 7.15–7.17 notifiable transactions …. 7.8 other disclosing entities, by …. 7.18 policy …. 7.2–7.3 scope of chapter …. 7.1 statutory requirements …. 7.13

Contracts utmost good faith …. 5.33 Contravention intentional participation or assistance …. 9.21 involvement in …. 9.19 knowledge …. 9.20 Corporate Affairs Commission futures market supervision …. 1.43 Corporate culture ASX Listing Rules and …. 12.2 Corporate Law Economic Reform Program (CLERP) …. 1.39 CLERP 6 …. 1.48 financial services reform …. 1.48 first tranche of reforms …. 1.47 instigation of …. 1.44, 1.46 principles …. 1.46 proposal papers …. 1.46 reforms proposed by …. 1.46, 1.58 reforms resulting from …. 1.47 Corporations Act 2001 (Cth) adjectival law …. 1.62 administrative arrangements …. 2.1 commencement …. 1.14 constitutional basis …. 1.61 contravention injunctions …. 8.71–8.72

powers of court …. 8.70 state of mind of defendant …. 8.69 enactment …. 1.62 engaging in conduct …. 9.14 insider trading, prohibition by …. 1.38 referral of powers by states …. 1.55, 1.61–1.62, 2.3 legislation …. 2.4 regulatory framework cornerstone, as …. 1.1 financial services regulation, law and …. 1.14 s 1101B impact on unlisted securities …. 12.38 orders for breach of …. 12.38 territorial application …. 4.5 Corporations Agreement 2002 …. 1.59, 2.3 nature of …. 2.5 Corporations and Markets Advisory Committee (CAMAC) …. 2.1 ASIC Act, established under …. 2.103 establishment …. 2.104 Legal Committee …. 2.104 members …. 2.104 purpose …. 2.104 reports by …. 2.104 Corporations Law …. 1.55 constitutionality of arrangements …. 1.60 creation of …. 1.59

failure of …. 1.60 Scheme 1991 …. 1.58 Cost effectiveness, CLERP principle …. 1.46 Council of Financial Regulators (CFR) ASX monopoly, report …. 11.2 Courts compensation, orders for …. 8.76 damages, power to award …. 8.74 non-punitive orders …. 8.75 powers …. 9.2 relief, power to grant …. 9.26 Credit definition …. 3.59 facilities financial product …. 3.59–3.60 litigation funding agreement …. 3.59 Credit ratings agencies AFS licence, requirement to hold …. 13.15 Criminal offences aiding and abetting …. 4.50 Commonwealth Criminal Code …. 4.48 physical and fault elements …. 4.48 purpose …. 4.48 non-compliance with offer of securities provisions …. 4.46 primary and secondary offenders …. 4.49–4.50

Criminal proceedings civil penalty proceedings, relationship to …. 2.85 contravention of continuous disclosure provisions …. 7.19 accessorial liability …. 7.20 insider trading, criminal penalties for …. 17.37 defences to prosecution …. 17.38 Crown immunity …. 4.6 CS facilities see also Australian CS facilities licence ASIC, powers of …. 10.32 Minister regulating …. 2.8, 10.32 operating rules and procedures …. 10.31 operation in jurisdiction …. 10.25 regulation of clearing and settlement facility operators …. 1.23 statement of expectations …. 2.11 what are …. 10.23

D Damage statutory claims for …. 9.3 Damages court’s power to award …. 8.74 ordinary measure of …. 9.52 quantification …. 9.52–9.53 Dark trading venues ASIC approach to …. 10.4 development of …. 10.4

Dealing improperly inducing see Improperly inducing dealing Debentures arrangements excluded from …. 3.11 body, of …. 3.8 chose in action …. 3.8 definition …. 3.8, 3.10 issue must comply with Ch 2L …. 4.34 listing of …. 3.12 mortgage debentures …. 3.12 off-market takeover bid, part of …. 3.12 other investment products, distinguished …. 3.9 paperless …. 3.13 prospectuses …. 5.22, 5.23 retail markets, issued to …. 3.12 trading over the counter …. 3.12 Defective disclosure aiding and abetting …. 8.7 commission, by …. 8.2 consent to inclusion of statement …. 9.10 defective documents …. 8.31 aiding and abetting …. 8.32 criminal liability …. 8.31 defences to civil and criminal liability …. 8.34 elements of contravention …. 8.33 lack of awareness defence …. 8.30

lack of knowledge defence …. 8.27 prohibition on giving …. 8.31 reasonable reliance defence …. 8.28 withdrawal of consent defence …. 8.29 defences to liability …. 8.8 engaging in conduct …. 9.14 body corporates …. 9.15–9.16 employers and principals …. 9.17 individuals …. 9.15 endorsing …. 9.18 investor claims for …. 9.1 liability arising …. 8.1 omission, by …. 8.2 passing on …. 9.18 persons liable …. 9.6 s 1022B, under …. 9.13 s 729, under …. 9.7 relationship between liability regimes …. 8.14 statutory bases for liability …. 8.3–8.5 statutory remedies …. 9.1 Defences civil liability, to …. 9.24 insider trading, to prosecution for …. 17.38 both parties, information known to …. 17.40 investors, information made known to …. 17.39 liability, relief from …. 17.48

Depository interests definition …. 3.16 nature of …. 3.16 Derivative definition …. 3.1, 3.36 excluded arrangements …. 3.37 exchange-traded …. 3.36 financial product, as …. 3.36, 3.53 future delivery of something excluded …. 3.37 futures contracts …. 3.36 litigation funding agreement …. 3.36 nature of …. 3.36 offer of see Offer of financial products other than securities options …. 6.7 prudentially regulated products …. 3.54 Derivative trade repositories ASIC, reporting to …. 2.45 regulation …. 10.43–10.47 Australian …. 1.25, 10.44–10.47 Corporations Act …. 1.21, 1.25 overseas developments …. 10.43 Derivative transactions regulation …. 10.43–10.47 Australian …. 1.25, 10.44–10.47 Corporations Act …. 1.21, 1.25 overseas developments …. 10.43

Disclosure applications, dealing with …. 5.56 ASX listing requirements …. 7.4 confidentiality requirement …. 7.11 exceptions to …. 7.9–7.12 materiality of information …. 7.7, 7.15–7.17 notifiable transactions …. 7.8 operational requirement …. 7.10 reasonable person requirement …. 7.12 time taken …. 7.6 continuous see Continuous disclosure correcting and updating …. 5.52 defective see Defective disclosure defects in …. 5.52 documents expiry of …. 5.51 replacement …. 5.53–5.54 consequences of lodging …. 5.55 supplementary …. 5.53–5.54 consequences of lodging …. 5.55 issuers, regulatory requirements imposed on …. 1.15 continuous disclosure …. 1.19 ongoing disclosure obligations …. 1.17 lodgment of documents with ASIC …. 5.41 ASIC’s role …. 5.42–5.43 mandatory, specialist liability regimes …. 8.6

general liability rules, distinguished …. 9.5 positive disclosure obligations under general law …. 5.30 prospectus, in see Prospectus two separate disclosure regimes …. 6.6 Dishonest, misleading or deceptive conduct …. 16.25, 16.27 market manipulation, application to …. 16.21, 16.25 penalties for contravention …. 16.26 regulatory framework, prohibition by …. 1.33 Dispute resolution AFS licensees and non-licensees …. 6.47 Due diligence carrying out …. 5.39 defence …. 9.24 delegation to committee …. 5.38 documentation …. 5.38 purpose …. 5.34–5.39 scope and extent …. 5.39 structuring …. 5.38 Duty of care AFS licensees to clients …. 14.3 advice, as to …. 14.4 breach of …. 14.6 other circumstances, in …. 14.5

E Eggleston Committee …. 1.56 interim reports …. 1.40

principles …. 1.42 Examinations ASIC, by see Australian Securities and Investments Commission (ASIC) Expert relief from liability for defects in report …. 9.26

F Facility definition …. 10.8 False or misleading statements see also Misrepresentations consequences of a contravention …. 8.63 dealing, inducing …. 4.44 dissemination of …. 8.59 consequences of a contravention …. 8.63 elements of offence …. 8.61 requisite fault element …. 8.62 half truths …. 5.31 market manipulation, application to …. 16.21–16.22 penalties for contravention …. 16.26 price, affecting …. 4.44 remedies …. 9.1 requisite fault element to establish contravention …. 8.62 s 1041E, elements of …. 8.60, 8.61 silence as misrepresentation …. 5.31 supervening falsity …. 5.31 False trading and market rigging application of s 1041B …. 16.10

case law, Australian …. 16.12 false or misleading appearance, creation of …. 16.13 penalties …. 16.14 prohibited conduct, examples of …. 16.11 Federal Court financial services regulation, resolution of disputes in respect of …. 1.14 jurisdiction …. 2.27 review of ASIC decisions by …. 2.26–2.27, 16.17 Fictitious transactions prohibition of …. 16.17 contraventions, civil penalties for …. 16.19 extraterritorial application of provision …. 16.20 Fiduciary duties Australian financial services licensees, of …. 14.9 content of …. 14.11 contractual exclusion …. 14.13 remedies for breach …. 14.14 restriction on scope of …. 14.12 traditional categories, outside …. 14.10 Fiduciary relationship parties, between …. 5.32 Financial advice reforms anti-avoidance and civil penalty provisions …. 14.63 background …. 14.53 ongoing fee arrangements disclosure …. 14.61

renewal …. 14.62 right to terminate …. 14.60 statutory best interests obligation …. 14.54 appropriateness of advice …. 14.58 priority of client’s interests …. 14.59 products applicable …. 14.57 s 961B(1) duty …. 14.55 s 961B(2) specified steps …. 14.46 warning as to incomplete information …. 14.58 Financial advisers fiduciary duty …. 1.52 remuneration …. 14.64 Financial benchmarks manipulation of …. 16.23 Financial instruments classes of, differentiating …. 6.6 Financial intermediaries adequacy of capitalisation …. 13.1 conduct of business rules …. 1.30 ethical standards, compliance with …. 13.1 exchange operating rules …. 1.31 financial services disclosure …. 1.29 general law obligations of …. 1.28 licensing …. 1.27, 13.1 regulating …. 1.26 regulatory framework and …. 1.13

unqualified persons, exclusion of …. 13.1 Financial investment making …. 1.49, 3.44 examples …. 3.45 Financial market compensation arrangements …. 10.37 approved arrangements under Div 3 …. 10.38 conduct amounting to operating …. 10.9 definition …. 10.7, 11.6 facility, meaning …. 10.8 integrated facility …. 10.8 integrity …. 1.6 licence to operate …. 1.22, 10.6 scope of requirement …. 10.6 when licence is required …. 10.6 regulation by minister …. 2.8 what is …. 10.7 Financial market operators ASX see Australian Securities Exchange (ASX) Chi-X see Chi-X Australia conduct amounting to operating …. 10.9 currently licensed domestic …. 11.5 licence to operate …. 1.22, 10.6 scope of requirement …. 10.6 when licence is required …. 10.6 Financial product

advice, providing …. 6.75, 13.5 exclusions from definition …. 13.6 bank deposits …. 3.54 complex or structured products …. 3.9 conduct in relation to …. 4.44 credit facilities …. 3.59 dealing in …. 4.45, 6.74, 13.7 definition …. 1.15, 1.49, 3.1–3.2, 3.4, 6.2 ASIC Act, in …. 3.60 broad …. 3.41 Corporations Act, in …. 3.42 differing …. 3.39 exclusions …. 3.32 flexible and adaptive …. 3.41 functional …. 3.43 underlying policy …. 3.40 derivatives …. 3.36–3.37, 3.53 disclosure …. 1.50 financial instruments expressly excluded …. 3.58 financial instruments expressly included …. 3.50 financial product purpose …. 3.43 foreign exchange contracts …. 3.56 government securities …. 3.55 hawking …. 6.72 incidental …. 3.48 information offences …. 8.12

insurance …. 3.54 managed investment scheme interests …. 3.52 prohibited conduct …. 4.44 prudentially regulated products …. 3.54 securities as …. 3.51 superannuation …. 3.54 unregistered schemes, interests in …. 3.35 Financial Reporting Council ASIC Act, established under …. 2.103 Financial risk managing …. 3.55, 6.2 Financial services ASIC Act definition …. 4.45, 15.13 CLERP 6 proposals …. 1.48 consultation paper …. 1.49 Corporations Act provisions …. 1.50 financial services business, carrying on …. 13.8 exemptions under Corporations Regulations …. 13.14 jurisdiction, in …. 13.13 Financial Services Reform Act 2001 (Cth) …. 1.48 approach to regulation taken by …. 1.2 commencement …. 1.50 intention …. 1.2 ‘refinements’ project …. 1.50 Financial Services Reform Bill 2001 …. 1.50 persons providing …. 4.45

prohibition of undesirable conduct …. 4.45, 15.13, 15.24 ‘providing financial services’ …. 13.3, 15.13 matters that are not …. 13.4 registers relating to …. 13.65 terminology, restrictions on use of …. 13.66 wholesale markets …. 1.49 Financial services licensees Australian financial services licence see Australian financial services licence financial intermediaries see Financial intermediaries insider trading, exceptions for holders and their representatives …. 17.36 licensing …. 1.50 Financial System Inquiry (FSI) …. 1.6–1.7 comprehensive review by …. 3.40 consumer protection recommendations …. 15.6 definition of financial product …. 3.40, 3.41 Final Report …. 1.44–1.45 main task …. 1.45 recommendations …. 1.45, 3.40 Foreign exchange contracts financial products …. 3.56 Franchises exclusion from managed investment scheme …. 3.32 Fundraising ASIC exemptions and modifications …. 4.7 governments, by …. 4.6

mandatory disclosure under specialist regime …. 8.6 regulatory framework …. 4.1 Future of Financial Advice (FoFA) reforms …. 1.53 Futures contracts derivatives …. 3.36 Futures industry regulation …. 1.43

G Global financial crisis (GFC) causative factors in the US …. 1.51 legislative and regulatory responses …. 1.52 Government fundraising by …. 4.6 securities, whether financial product …. 3.55

H Hawking financial products …. 6.72 prohibition …. 14.86 securities …. 4.43 Hearings ASIC, by see Australian Securities and Investments Commission (ASIC) High Court control of ASIC by …. 2.28 High yield equity notes (HYENAs) debentures, whether …. 3.9

Hybrid securities nature of …. 6.8 types …. 6.8

I Illegal transactions dissemination of information about …. 16.18 contraventions, civil penalties for …. 16.19 extraterritorial application of provision …. 16.20 Improperly inducing dealing elements of s 1041F …. 8.65 inducing a person to deal …. 8.66 market manipulation, application to …. 16.21 penalties for contravention …. 16.26 misleading, false or deceptive statements, promises or forecasts …. 8.67 offence …. 8.64 recklessness …. 8.68 Information insider trading access to information theory and …. 17.5 bodies corporate, known to …. 17.20–17.21 concept of …. 17.16 generally available, whether …. 17.23–17.24 inside, communication of …. 17.29 investors, made known to …. 17.26 materiality of …. 17.15, 17.17 class-specific, whether materiality is …. 17.19

evidence as to …. 17.18 partnerships, known to …. 17.20, 17.22 publicly available, analysis of …. 17.27 readily observable matter, exception for …. 17.25 transparency, CLERP principle …. 1.46 Infringement notices ASIC, issue by …. 2.99 continuous disclosure regime, contravention …. 7.26 Injunctions ASIC’s standing to seek …. 2.93 continuous disclosure …. 7.21 Corporations Act, contravention of …. 8.72–8.73 order under s 1324, power to make …. 16.29 Insider trading …. 17.1 access to information theory and …. 17.5 bodies corporate Chinese walls within …. 17.33 exceptions for …. 17.35 information known to …. 17.20–17.21 civil penalty liability …. 17.41 compensation for …. 17.42 acquirer of Div 3 financial products, loss recoverable by …. 17.46 court, orders that may be made by …. 17.50 disposer of Div 3 financial products, loss recoverable by …. 17.45 issuer of Div 3 financial products, loss recoverable by …. 17.44, 17.47 losses recovered by responsible entity or ASIC, treatment of …. 17.49

s 1317HA, order under …. 17.43 criminal penalties for …. 17.37 defences to prosecution …. 17.38 defences to prosecution for …. 17.38 both parties, information known to …. 17.40 investors, information made known to …. 17.39 liability, relief from …. 17.48 Division 3 financial products, and definition of …. 17.10 economics of market and …. 17.6 fiduciary theory and …. 17.3 financial services licences, exceptions for holders and their representatives …. 17.36 flowchart …. 17.8 information bodies corporate, known to …. 17.20, 17.21 concept of …. 17.16 generally available, whether …. 17.23–17.24 inside, communication of …. 17.29 investors, made known to …. 17.26 materiality of …. 17.15, 17.17 class-specific, whether materiality is …. 17.19 evidence as to …. 17.18 partnerships, known to …. 17.20, 17.22 publicly available, analysis of …. 17.27 readily observable matter, exception for …. 17.25 knowledge of person’s own intentions or activities, exception for …. 17.34

misappropriation theory and …. 17.4 partnerships Chinese walls within …. 17.33 information known to …. 17.20, 17.22 prohibition of …. 1.38, 17.1 connection requirement, no …. 17.13 elements of primary prohibition …. 17.11 jurisdictional scope …. 17.14 key questions in application of …. 17.8 possession, triggering of prohibition by, not use …. 17.12 s 1043A, prohibited acts under …. 17.28 when primary prohibition applies …. 17.9 regulatory framework …. 1.38 fiduciary theory and …. 17.3 misappropriation theory and …. 17.4 policy justification for regulation of …. 17.2 tippees, treatment of …. 17.30 tipping …. 1.38 trading …. 1.38 underwriters, exception for …. 17.32 United States law, regulation in …. 17.7 withdrawal from registered scheme, exception for …. 17.31 Insurance financial product …. 3.54 retail clients, provision to …. 13.31 Insurance brokers

treatment of funds held by …. 14.74 Intermediaries see Financial intermediaries International Organization of Securities Commissions (IOSCO) Principles …. 1.8 Internet offers of securities on …. 4.5 Interstate Corporate Affairs Commission (ICAC) establishment …. 1.56 Intra-group schemes exclusion from managed investment scheme …. 3.32 Investigations ASIC, by see Australian Securities and Investments Commission (ASIC) Investors claims for defective disclosure see Defective disclosure CLERP principles …. 1.46 protection …. 1.46 IOSCO Principles see International Organization of Securities Commissions (IOSCO) Principles Issuers regulating …. 1.15 continuous disclosure …. 1.19 licensing …. 1.120 ongoing disclosure obligations …. 1.17 other financial products, offering …. 1.17 securities, offering …. 1.16 wholesale offers …. 1.18

K Knowledge contravention, of …. 9.20 defence of lack of …. 8.27, 9.24

L Law administration of, and financial services regulation …. 1.14 financial services regulation, and making of …. 1.14 resolution of disputes under …. 1.14 Legal professional privilege disclosure, resisting …. 2.54 Legislation national application …. 2.2 uniform companies legislation …. 1.56 LEPO case …. 6.6 Liability apportionment of …. 9.25 Licensed markets operating rules …. 10.18 amendments to …. 11.9 content …. 11.8 definition …. 11.8 enforceability …. 11.24 procedures …. 10.18 Licensing clearing and settlement facility operators …. 1.23

disqualified person, involvement in licensee by …. 1.24 exemptions from requirements …. 10.12 financial market operators see Financial market intermediaries …. 1.27 involvement with licensees, limits on …. 1.24 jurisdictional scope …. 10.11 objectives …. 10.2 overseas market operators, grant of licence to …. 10.14 unacceptable control situation …. 1.24 Life insurance statutory funds, exclusion from managed investment scheme …. 3.32 Limitation period concealed fraud …. 9.23 proceedings, for commencement of …. 8.76, 9.22 Loss statutory claims for …. 9.3

M Managed investment schemes ASIC, registration with …. 3.33 exemption from requirements …. 3.34 number of …. 3.34 common enterprise …. 3.26, 3.29 contribute, meaning of …. 3.25 definition …. 3.1–3.2, 3.17 elements of …. 3.23–3.31 exclusions from …. 3.32

scope of …. 3.22 statutory …. 3.18, 3.19 examples of commercial arrangements …. 3.17 financial product, as …. 3.52 interests in …. 3.17 legislative history …. 3.20 mandatory disclosure under specialist regime …. 8.6 offer of interests in see Offers of financial products other than securities passive investors …. 3.31 pooling …. 3.26–3.30 registered …. 3.17 scheme, requirement for …. 3.24 simple, PDS for …. 6.56 small scale personal offers of interests in …. 6.32 statutory definition …. 3.18–3.19 unlisted managed funds …. 3.34 unregistered …. 3.17 Manipulation common law, manipulative transactions at …. 16.4 market see Markets Margin lending PDS for …. 6.57 regulation of …. 1.53 Margin lending facility ASIC regulation …. 3.38 definition …. 3.38

Market Integrity Rules (ASIC) client relationships …. 11.17 contravention of …. 11.7 obligations …. 11.20 participants and representatives, regulation of …. 11.16 power to make …. 1.54, 11.15 principal trading …. 11.18 reporting to clients …. 11.19 statutory requirements …. 11.8 trading …. 11.21 Markets administrative law rules, application of …. 11.37 alternative trading systems …. 10.4 ASIC, role of …. 11.2–11.3 ASIC Market Integrity Rules …. 1.54, 11.15 client relationships …. 11.17 contravention of …. 11.7 obligations …. 11.20 participants and representatives, regulation of …. 11.16 principal trading …. 11.18 reporting to clients …. 11.19 statutory requirements …. 11.8 trading …. 11.21 ASIC Market Integrity Rules (Chi-X Market) …. 11.23 ASIC Market Integrity Rules (Competition in Exchange Markets) …. 1.54, 11.10–11.14 best execution …. 11.11

CLERP principles …. 1.46 client relationships …. 11.17 common law rules of restraint of trade …. 11.36 competition for provision of market facilities …. 1.54 competition law, impact of …. 11.35 direct market access …. 10.5 external regulation …. 11.6 extreme price movements …. 11.11 financial see Financial market licensed see Licensed markets manipulation …. 4.44 characteristics, essential, of …. 16.1 dishonest conduct, application to …. 16.21, 16.25 penalties for contravention …. 16.26 extraterritorial application of provisions …. 16.20 false or misleading statements, application to …. 16.21–16.22 penalties for contravention …. 16.26 financial benchmarks …. 16.23 inducing persons to deal, application to …. 16.21, 16.24 penalties for contravention …. 16.26 market benchmarks, of …. 16.23 misleading or deceptive conduct …. 16.27 motives for …. 16.2 nature of …. 16.1 order setting aside transaction, power to make …. 16.28 policies underlying prohibition of …. 16.3

section 1041A, prohibition under …. 16.5 artificial price, creation of …. 16.7 jurisdiction, operation of financial market in …. 16.6 penalties …. 16.8 stabilising transactions, application to …. 16.9 market freedom …. 1.46 Market Integrity Rules ASIC …. 1.54, 11.15 statutory requirements …. 11.8 misconduct, market, prohibition by regulatory framework …. 1.37, 4.44 operating rules amendments to …. 11.9 content …. 11.8 definition …. 11.8 pre- and post-trade transparency …. 11.13 principal trading …. 11.18 regulation of market participants …. 10.1, 11.1 challenges to …. 10.3–10.5 statutory regime …. 11.6 rigging see False trading and market rigging role and nature of …. 10.1 rules of natural justice …. 11.36 self-listing …. 10.21 wholesale, distinction from retail …. 1.14 Markets Disciplinary Panel …. 1.54 Martin Review …. 1.6

Matched orders …. 16.16 contraventions, civil penalties for …. 16.19 extraterritorial application of provision …. 16.20 Merton, Robert …. 1.48 Ministerial Council for Corporations role of …. 1.62, 2.5 Misleading or deceptive conduct AFS licensee liability for …. 14.7 civil liability for …. 8.10 consequences of contravention …. 8.57 Corporations Act provisions …. 8.36 disclaimers …. 8.56 examples of …. 16.27 exclusion provision …. 8.56 existing legal duty of disclosure …. 8.54 forward looking statements …. 8.49 half truths …. 8.52 notional representative class …. 8.47 prohibition …. 4.44, 8.9, 8.35 reasonable expectation of disclosure …. 8.55 remedies …. 9.1, 16.27 silence as …. 8.51 state of mind of alleged contravenor …. 8.48 statements of opinion …. 8.50 statutory prohibitions …. 8.10–8.11, 8.36 statutory proscription …. 8.37–8.41

in trade or commerce …. 8.42 supervening falsity …. 8.53 test to be applied …. 8.45–8.47 what is …. 8.43–8.44 Misrepresentation defective disclosure …. 8.2 silence as …. 5.31 Murray Inquiry …. 1.7

N National Guarantee Fund application to court where claim disallowed …. 10.41 claims against …. 10.39 provisions common to arrangements under Div 3 …. 10.42 when compensation is available from …. 10.40 National regulatory system transition to …. 1.55 New matter defence of unawareness …. 9.24 Non-cash payments facilities …. 3.47 making …. 3.47 Notice ASIC form and purpose …. 2.52 non-compliance, reasonable excuse for …. 2.53 power to give …. 2.51

O Offences contravention of Corporations Act injunctions …. 8.71–8.72 powers of court …. 8.70 state of mind of defendant …. 8.69 information offences …. 8.58 limitation period …. 8.76, 9.22 Offer of financial products other than securities advertising offers requiring PDS …. 6.70 permitted advertisements …. 6.71 personal offers …. 6.69 restrictions on …. 6.68 application forms …. 6.59 application money, dealing with …. 6.60 arrangements with different components …. 6.11 conducting …. 6.58 controls on sales process …. 6.68 cooling off …. 6.64 Corporations Act, Pt 7.9, regulation by …. 6.1 exemptions …. 6.4 product disclosure regime …. 6.2 scope …. 6.5 structure of …. 6.2 issued in the course of a business …. 6.10

minimum subscription condition …. 6.62 Product Disclosure Statement regime …. 6.6 product selection …. 6.2 quotation conditions …. 6.61 requirements …. 6.3 stop orders …. 6.67 transaction confirmation …. 6.63 two separate disclosure regimes …. 6.6 Offer of securities advertisements …. 4.35 exceptions to prohibition …. 4.39 offers that need disclosure to investors …. 4.37 permitted …. 4.38 prohibitions …. 4.36 small scale personal offers …. 4.36 anti-avoidance provision …. 4.14 application forms …. 5.46 applications dealing with …. 5.56 outstanding, dealing with …. 5.56 ASIC exemptions and modifications …. 4.7 Australia, offers made outside …. 4.5 bonus share plan, under …. 4.24 Ch 6D court orders for contravention of …. 4.51 territorial application …. 4.5

continuously quoted securities …. 5.3 contravention as criminal offence …. 4.47 criminal liability for defective disclosure …. 8.22 defences to liability …. 8.25 physical and fault elements …. 8.23 primary and secondary offenders …. 8.24 defects in offer documents …. 8.15 disclosure defective disclosure document …. 8.16–8.21 defences to liability …. 8.25 dissemination burden …. 5.3 documents …. 4.1, 5.1–5.2 exempt offerors …. 4.28 general exceptions …. 4.42 information burden …. 5.3 issue offers …. 4.11 lack of awareness defence …. 8.30 lack of knowledge defence …. 8.27 lodged disclosure documents …. 4.40, 5.1 offers excluded from requirement for …. 4.17 offers requiring …. 4.10–4.11 pathfinder disclosure documents …. 4.41 reasonable inquiries defence …. 8.26 reasonable reliance defence …. 8.28 types of disclosure documents …. 5.2, 5.3 withdrawal of consent defence …. 8.29

dividend reinvestment plan, under …. 4.24 existing debenture holders, to …. 4.25 experienced investors, to, through financial services licensee …. 4.21 fundraising provisions …. 4.4 high net worth investors, to …. 4.20 indirect issue, sale amounting to …. 4.13 internet, on …. 4.5 invitations and offers …. 4.9 issue offers, disclosure requirements …. 4.11 issuer must be in existence …. 4.32 nature of …. 4.3 proprietary company …. 4.33 requirements for …. 4.31 steps to be taken by …. 5.1 loss or damage directors and proposed directors, liability of …. 9.9 others who contravene s 728(1) …. 9.11–9.12 person making offer, liability of …. 9.8 persons liable …. 9.7 persons named with their consent in the disclosure document …. 9.10 mandatory disclosure …. 4.1, 4.3 markets that discipline issuers and intermediaries …. 4.3 meaning of …. 4.9 no consideration, for …. 4.26 non-compliance, consequences of …. 4.46

off-market sale by a controller …. 4.12 indirect …. 4.16 offer information statements …. 4.1, 5.2, 5.8 contents …. 5.27 offeree nature of …. 4.3 provision of disclosure document to …. 5.1 offers involving at least $500,000 …. 4.19 parameters of regulation …. 4.3 pattern of regulation …. 4.2 people associated with the body, to …. 4.23 primary and secondary offers …. 4.3, 4.8 private placements …. 4.15 process of …. 5.40 professional investors, to …. 4.22 publicity …. 4.35 purpose test …. 4.14 quoted securities rights issues …. 4.29 sale offers …. 4.30 regulated securities offer, conducting …. 5.1 regulation …. 4.1 alternative …. 4.3 offers otherwise regulated …. 4.27 parameters of …. 4.3 pattern of …. 4.2

specialist …. 4.3 requirements for conducting …. 5.40 rights issues of quoted securities …. 4.29 scale of …. 4.3 selling restrictions …. 4.43 small scale personal offerings …. 4.18 stop orders …. 5.57 types …. 4.8 Office of the Information Commissioner ASIC, oversight of …. 2.30 Opes Prime collapse of …. 1.52 Options derivatives …. 6.7 disclosure regime …. 6.7 issued securities, over …. 3.15 PDS …. 6.7 securities, as …. 6.7 unissued securities, over …. 3.14 Orders compensation, orders for …. 8.76 contravention of Corporations Act …. 8.70 Ch 6D …. 4.51 non-punitive …. 8.75 Over the Counter (OTC) markets regulation …. 10.43–10.47

P Parliamentary Joint Committee on Corporations and Financial Services (PJC) …. 2.1 ASIC Act, established under …. 2.103 duties …. 2.105 establishment …. 2.105 members …. 2.105 Partnership exclusion from managed investment scheme …. 3.32 insider trading Chinese walls within …. 17.33 information known to …. 17.20, 17.22 Person involvement in contravention …. 9.19 person aggrieved, who is …. 11.27–11.30 Principals trading by …. 11.18 Product Disclosure Statement (PDS) additional information …. 6.66 ASIC policy guidance …. 6.43–6.44 authorisation …. 6.38 contents additional requirements …. 6.50 determining …. 6.42 evolution of requirements …. 6.39–6.41 prescribed requirements …. 6.42

cooling off …. 6.48 defective documents …. 8.31, 9.4 aiding and abetting …. 8.32 civil liability …. 9.13 criminal liability …. 8.31–8.32 defences to civil and criminal liability …. 8.34 elements of contravention …. 8.33 knowingly providing defective document …. 8.32 lack of awareness defence …. 8.30 lack of knowledge defence …. 8.27 prohibition on giving …. 8.31 reasonable reliance defence …. 8.28 withdrawal of consent defence …. 8.29 disclosure correcting and updating …. 6.65 general disclosure obligation …. 6.51 general limitation …. 6.54 limits on obligation …. 6.52 matters actually known to responsible person …. 6.53 requirements …. 6.45 significant risks, about …. 6.46 specific …. 6.45 environmental, social or ethical considerations …. 6.49 exemptions from requirement …. 6.27–6.32 experienced investor dealing with an AFS licensee …. 6.23

form …. 6.35 high net worth investor …. 6.22 incorporation by reference …. 6.36 issue situation …. 6.11, 6.14 issuer or seller, preparation by …. 6.33 jurisdictional connection …. 6.26 large business …. 6.21 limits on disclosure …. 6.52–6.55 actual knowledge …. 6.53 only reasonable expected information …. 6.54 lodgment with ASIC …. 6.58 loss or damage from defective disclosure …. 9.13 manner of providing …. 6.34 margin loans …. 6.57 offer of financial products other than securities …. 6.6 options …. 6.7 preparation and content, requirements relating to …. 1.17 professional investor …. 6.24 quoted financial products …. 6.55 recommendation situation …. 6.11, 6.14 regulated persons …. 6.13 related body corporate of a wholesale investor …. 6.25 remedies …. 9.1 requirement to provide …. 6.12 retail and wholesale clients …. 6.17–6.19 sale situation …. 6.11, 6.16

short-form …. 5.2, 6.37 simple managed investment schemes …. 6.56 supplementary or replacement …. 6.65 timing …. 6.34 transaction over $500,000 …. 6.20 Production books, of, to ASIC …. 2.50 notice to produce …. 2.50 Profile statements content requirements …. 5.26 disclosure document …. 4.1, 5.2, 5.7, 5.26 Prospectus ASX Listing Rule 3.1A …. 5.14 clear, concise and effective information …. 5.28–5.29 content determining …. 5.35 requirements …. 5.9 continuously quoted securities …. 5.13–5.14 corporate bond, two-part simple …. 5.6 debenture prospectuses …. 5.22–5.23 defect in …. 5.12 avoiding …. 5.36 disclosing entity …. 5.13 disclosure document …. 4.1, 5.2 due diligence …. 5.34 functions …. 5.34–5.39

structuring …. 5.38 expiry date …. 5.20 fees, disclosure of …. 5.18 full …. 5.4 general disclosure requirement …. 5.10–5.12 interests, disclosure of …. 5.18 information to be included in …. 5.12 lodgment …. 5.21 offer pursuant to …. 5.3 profile statements …. 4.1, 5.2, 5.7, 5.26 purpose …. 5.2 quotation of securities …. 5.19 reasonable investor test …. 5.14 short form …. 4.1, 5.2, 5.5, 5.24 specific disclosure requirements …. 5.16 terms and conditions of offer …. 5.17 transaction specific …. 5.4 two-part simple corporate bond …. 5.6, 5.25

R Rae Committee …. 1.10, 1.41, 1.56 Ratings agencies regulation …. 1.51 Reasonable reliance defence …. 8.28, 9.24 Regulation case for …. 1.12

conceptual underpinnings …. 1.3 conduct …. 1.4, 1.32 co-operative regime between Commonwealth and states …. 1.57 derivative transactions …. 10.43–10.47 disclosure …. 1.4 Financial Services Reform Act 2001 (Cth), approach to regulation taken by …. 1.2 Financial System Inquiry …. 1.6 goals of securities regulation …. 1.9 IOSCO Principles …. 1.9–1.10 market failure and …. 1.10 markets, of …. 1.10 national system, transition to …. 1.55 need for …. 1.5, 1.12 integrity and information …. 1.11 specialist regulation …. 1.6 offers of securities …. 4.1 Poseidon boom …. 1.10, 1.40, 1.56 position until 1980 …. 1.56 public interest theories of …. 1.10 purpose of regulation …. 1.1 role of regulation …. 1.1 second wave of reform …. 1.44 self regulatory requirements …. 1.1 states, by …. 1.56 third wave of reform …. 1.51 underlying principles …. 1.7–1.8

why regulate …. 1.4, 1.12 Regulatory framework constitutional arrangements …. 1.39 consumer protection provisions …. 1.35, 15.8, 15.10–15.13 cornerstones of …. 1.1 CS facilities …. 1.13 current …. 1.13 evolution of …. 1.39 disclosure of product information …. 1.13 dishonest, misleading or deceptive conduct, prohibition of …. 1.33 evolution …. 1.39 Federation 1901, at time of …. 1.40 insider trading, prohibition of …. 1.38 institutional arrangements …. 1.14 intermediaries …. 1.13 conduct of business rules …. 1.30 exchange operating rules …. 1.31 financial services disclosure …. 1.29 general law obligations of …. 1.28 licensing …. 1.27 regulating …. 1.26 issuers, regulating …. 1.15 continuous disclosure …. 1.19 licensing …. 1.20 ongoing disclosure obligations …. 1.17 other financial products, offering …. 1.17

securities, offering …. 1.16 wholesale offers …. 1.18 legislation post-dating 1998 …. 1.39 market infrastructure …. 1.21 market misconduct, prohibition by …. 1.37 market operators …. 1.21–1.22 clearing and settlement facility operators …. 1.23 financial market operators, licensing of …. 1.22 substantive regulation …. 1.39 early developments …. 1.40 first wave …. 1.40 twin peaks regulatory structure …. 1.2 unconscionable conduct, prohibition of …. 1.34 unfair contract terms …. 1.36, 15.14–15.18 Regulatory neutrality CLERP principle …. 1.46 Representatives ASIC can give information to licensee …. 13.45 appointment of …. 13.40 additional requirements …. 13.46 notification of …. 13.44 authorised …. 13.38 liability of financial services licensees for conduct of …. 13.47 civil liability …. 13.50 effect of Div 6 …. 13.49 notification of appointment …. 13.44

two or more financial services licensees, acting for …. 13.42 limits on appointment …. 13.43 multiple principals, acting for …. 13.48 regulation of …. 11.16, 13.38 sub-authorisation …. 13.41 Retail consumer protection …. 1.6, 15.3 Retail clients …. 13.29 financial advice and statutory best interests obligation …. 14.54 appropriateness of advice …. 14.58 priority of client’s interests …. 14.59 products applicable …. 14.57 s 961B(1) duty …. 14.55 s 961B(2) specified steps …. 14.46 warning as to incomplete information …. 14.58 compensation arrangements …. 13.35 dispute resolution …. 13.34 financial products/services provided to …. 13.31–13.33 general advice, warnings where …. 14.36 general insurance products …. 13.31 obligation to provide Financial Services Guide to …. 14.21 exceptions to requirement …. 14.22 personal advice, suitability requirements …. 14.29, 14.37 superannuation /RSA products …. 13.32 who is …. 13.30 Retirement Savings Account products retail clients, provision to …. 13.32

Retirement village schemes exclusion from managed investment scheme …. 3.32 Rigging market see False trading and market rigging Rights issue definition …. 3.51 financial product, whether …. 3.51 quoted securities, of …. 4.29, 6.30 Rippoll Report recommendations …. 1.52 release of …. 1.52

S Sale quoted financial products, offers of …. 6.31 Sales conduct undesirable or unlawful …. 4.45, 15.13 ASIC Act provisions …. 15.24 Securities advertisements see Offer of securities continuously quoted definition …. 5.13 disclosure obligations …. 5.13 PDS, disclosure in …. 6.55 prospectus …. 5.13, 5.14 debentures of a body …. 3.8 depository interests …. 3.16

definition …. 3.1–3.2 elements of …. 3.3 financial product, as …. 3.51 government securities …. 3.55 hawking …. 4.43 hybrid …. 6.8 information offences …. 8.12 issue of …. 5.48 issued, options over …. 3.15 legal or equitable rights or interests in …. 3.13 offer see Offer of securities on-market transactions …. 14.15 four contracts analysis …. 14.15 overview …. 1.1 prospectus laws, for …. 3.5 quotation conditions …. 5.50 shares in a body …. 3.6, 3.7 short-selling statutory restrictions …. 6.4 stapled …. 6.9 transfer …. 5.48 unissued, options over …. 3.14 what is meant by …. 3.3 Securities class actions claims same person or persons, against …. 9.30

same, similar or related circumstances …. 9.31 court’s power to order that proceeding not continue as …. 9.34 development in Australia …. 9.28 examples of …. 9.28 identification of class members …. 9.33 lead plaintiff …. 9.35 opt-out procedures …. 9.36 other orders court may make …. 9.38 overview …. 9.27 requirements for …. 9.29 settlement of …. 9.37 substantial common issue of law or fact …. 9.32 Securities industry regulation see also Regulation early legislation …. 1.41 history of …. 1.41 more extensive legislation …. 1.41 Senate Select Committee on Securities and Exchange …. 1.40 Shares choses in action, as …. 1.5 classes of …. 3.6 description …. 1.5 definition …. 3.6 legal nature of …. 3.6 shares in a body …. 3.6–3.7 Short selling …. 16.30 ‘covered’ …. 16.30

legislative restriction on …. 16.31 ‘naked’ …. 16.30 permitted, scope of …. 16.30 Silence misleading or deceptive conduct …. 8.51 Statement of Advice (SoA) …. 14.30 content of …. 14.33–14.34 exceptions to requirement to provide …. 14.31 recommendation of replacement of one product with another …. 14.35 when must be given …. 14.32 Stock exchanges formation …. 1.40 registration …. 1.41 Stop orders ASIC, by …. 2.98 defective advertisements …. 5.59 defective disclosure documents …. 5.58, 6.67 grounds for issuing …. 5.58 interim …. 5.61 obligation to hold a hearing …. 5.60 offers of securities …. 5.57 Storm Financial collapse of …. 1.52 Subscription moneys minimum subscription conditions …. 5.49 trust, to be held on …. 5.47

Superannuation exclusion from managed investment scheme …. 3.32 financial product …. 3.54 retail clients, provision to …. 13.32 Supreme Court financial services regulation, resolution of disputes in respect of …. 1.14 Sydney Futures Exchange establishment …. 1.43 legislation …. 1.43

T Takeovers acquisitions compulsory …. 1.47 controls on …. 1.47 ASIC’s modification power …. 2.35 ASX MIRs …. 11.22 bids …. 1.35 compulsory acquisitions and buy-outs …. 1.47 ‘Eggleston’ principles …. 1.39 framework of current law …. 1.42 compulsory …. 1.47 mandatory disclosure under specialist regime …. 8.6 market bid …. 11.22 misleading or deceptive statements …. 8.19 omission of information required by law …. 8.20 regulation …. 1.39, 1.42

remedies for breach of specialist regimes …. 9.1 schemes of arrangement see Schemes of arrangement Takeovers Panel dispute resolution by …. 1.47 role of …. 1.47 Trade Practices Act s 82 …. 9.4 Trading algorithmic activities …. 10.5 alternative systems …. 10.4 ASX MIRs …. 11.21 ‘dark’ trading venues …. 10.4 false see False trading and market rigging high frequency trading …. 10.5 insider see Insider trading Two-part simple corporate bond prospectus disclosure requirements …. 5.6, 5.25

U Uhrig Review …. 2.11 Unconscionable conduct ASIC Act provisions …. 15.19 meaning …. 15.20–15.21 prohibition of …. 4.45 Underwriters insider trading, exception for …. 17.32 Unfair contract terms

regulatory framework, prohibition by …. 1.36, 4.45 standard form consumer contracts …. 15.14–15.18 definition …. 15.15 principles applicable …. 15.18 unfair terms …. 15.17 United States insider trading, regulation in United States law …. 17.7 securities regulation …. 1.40

W Wallis Inquiry see Financial System Inquiry (FSI) Warrants disclosure regime …. 6.7 securities, as …. 6.7 Warranties see Conditions and warranties Wash sales …. 16.15 contraventions, civil penalties for …. 16.19 extraterritorial application of provision …. 16.20 Western Australian co-operative companies exclusion from managed investment scheme …. 3.32

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Related LexisNexis Titles Australian Corporations Legislation, 2016 edition Austin & Ramsay, Ford, Austin & Ramsay’s Principles of Corporations Law, 16th Edition, 2014 Farrar & Hanrahan, Corporate Governance, 2017