ANNUAL REPORT OF THE AUSTRALIAN SECURITIES COMMISSION
A. GENERAL CONTENT OF THE REPORT
1.6 In its Report to the Parliament on the 1993-94 Annual Report of the
ASC, the Committee indicated that it would continue to monitor the performance
of the ASC in respect of its commitment to complete all investigations
within 12 months of the resourcing of the investigation. [3]
1.7 In 1994-95, the ASC reports that it completed 33 of 43 major investigations
(or 76 per cent) within the 12 months target. This compares with 52 of
137 such investigations (or 38 per cent) completed in 1993-94.
1.8 The Committee notes both the apparent decline in the absolute number
of major investigations completed and the considerable improvement in
the timeliness with which those investigations were completed. The Committee
also notes the observation of the Chairman of the ASC in February 1995
that over 90 per cent of investigations were now being completed within
12 months. [4] The Committee will continue
to monitor this significant performance indicator in its examination of
future annual reports.
1.9 In June 1995, the Senate Legal and Constitutional References Committee
recommended monitoring of the national complaint handling procedures adopted
by the ASC in relation to the exercise of its investigatory powers. Specifically
that Committee recommended that:
The ASC should include an account of the operation of the complaints
procedure in its Annual Report and, at least annually, should report
on complaints and their handling to the Joint Statutory Committee on Corporations and Financial Services. [5]
1.10 Following this recommendation, the ASC's annual report includes
information about complaints made by members of the public against ASC
staff. The report notes that there were fewer than 15 formal complaints
against ASC staff in 1994-95. These complaints tended to relate to:
- the exercise of the ASC's investigative powers and the serving of
ASC notices;
- the alleged disclosure of personal information by ASC staff; and
- the alleged inappropriate release of confidential documents by ASC
staff.
1.11 Of the matters dealt with through the ASC's national complaints
procedures, two matters were referred to the Australian Federal Police
for further investigation. The remainder were not substantiated.
1.12 The ASC has indicated that future annual reports will contain more
complete reporting to the Parliament on complaints by the public.
1.13 During 1994-95, applications by the ASC to the Companies Auditors
and Liquidators Disciplinary Board saw action taken against a total of
17 auditors and four liquidators. The registration of eight auditors was
cancelled by the Board at the ASC's request. One auditor had his registration
suspended for 12 months and another was suspended for three months. One
liquidator had his registration suspended for three months, and one auditor
undertook to refrain from auditing superannuation funds and investment
pools. Four auditors voluntarily surrendered their registration after
the ASC commenced proceedings, while a further seven voluntarily surrendered
their registration after the ASC indicated it would refer their cases
to the Disciplinary Board. [6]
1.14 Elsewhere in this Report, [7] the
Committee draws attention to some comments made in the annual report of
the Disciplinary Board regarding the number of applications referred to
it by the ASC and the adequacy of the ASC's presentations. These comments
by the Disciplinary Board are apparently long standing. The Committee
welcomes a response from the ASC to the Board's comments.
B. MATTERS ARISING AT PUBLIC HEARINGS
1.15 At its hearing on 29 March 1995, the Committee discussed with the
ASC the implications of the Barings collapse and the risks that might
be faced by domestic securities and futures markets as a result of the
growing use of derivative instruments.
1.16 The ASC Chairman, Mr Alan Cameron, told the Committee that Australian
markets had adequate regulatory safeguards in place to make a similar
collapse unlikely, and that derivatives did not require new legislation.
[8] Mr Cameron stated that:
the ASC is reasonably confident that the chances of trading on
Australian markets resulting in something on the same scale as the Barings
collapse are remote. The way in which the SFE [Sydney Futures Exchange]
supervises its markets means that a rapid build-up of positions would
be likely to be detected and dealt with at an earlier stage than the
Barings positions seem to have been, and that the ASC, as regulator,
would be involved at an early stage.
But it is not hard to envisage situations which may make the risks
larger and the tasks of identifying problems at an early stage more
difficult. For example, positions may be held on a number of exchanges
in a number of jurisdictions, as they were in the Barings case, or derivatives
market dealings by a large conglomerate may be undertaken through a
number of separately incorporated vehicles. It would, therefore, be
a mistake to be entirely sanguine about the possibility of a Barings
happening in Australia. Equally, the ASC believes that the regulatory
regime should not be seen as a panacea. Barings should not result in
a 'there ought to be a law against it' response. As a community, we
need to understand clearly what we expect from the regulation of derivatives
markets, especially OTC [Over the Counter derivatives] markets. In the
ASC's view, what the community looks for primarily ought to be the protection
of inexperienced investors, contributions to the stability of markets,
and a reasonable assurance that brokers and other market intermediaries
have adequate financial resources to honour their obligations to clients
and to other market participants. We should not expect regulation to
guarantee that no-one fails. Rather, what we should aim for is a system
that allows for failure but minimises the damage of fallout in that
event. [9]
1.17 Mr Cameron advised that shortly after the Barings collapse, the
ASC endorsed guidelines issued by the Australian Society of Corporate
Treasurers setting out minimum recommended standards for disclosure of
derivatives exposure. In 1994, the ASC signed a memorandum of understanding
with the Sydney Futures Exchange concerning the regulation of derivatives
markets. [10]
1.18 The Committee also canvassed this issue with CASAC, which had commenced
a review of derivatives in mid-1994. Mr Leigh Hall, a member of CASAC,
specifically endorsed the initiatives of the ASC to further improve the
effectiveness of the regulation of these markets. [11]
1.19 During the Committee's hearing with the ASC, Mr Cameron raised the
issue of the operation of section 127 of the Act, and the possible need
to clarify the disclosure provisions under that section in the case of
the transfer of information between the ASC and other regulators and exchanges.
1.20 Sub-section 127(1) of the Act states:
The Commission shall take all reasonable measures to protect from
unauthorised use or disclosure information given to it in confidence
in or in connection with the performance of its functions or the exercise
of its powers under a national scheme law of this jurisdiction.
1.21 Sub-section 127(4) of the Act states:
Where the Chairperson is satisfied that particular information:
(a) will enable or assist an agency, being the Advisory Committee,
the Panel, the Disciplinary Board, the Review Board or any other agency
within the meaning of the Freedom of Information Act 1982, to perform
or exercise any of the agency's functions or powers;
(b) will enable or assist the government, or an agency, of a
State or Territory to perform a function or exercise a power; or
(c) will enable or assist a government, or an agency, of a foreign
country to perform a function, or exercise a power, conferred by a
law in force in that foreign country;
the disclosure of the information to the agency or government by
a person whom the Chairperson authorises for the purpose shall
be taken to be authorised use and disclosure of the information.
1.22 This section was considered by the High Court in 1993 in Johns v
Australian Securities Commission & Others. [12]
In that case, the Court held that a lawful exercise of the power to disclose
certain information was subject to the rules of natural justice. On the
facts of the case, a corporate officer who had been subjected to a compulsory
examination by the ASC should have been given an opportunity to be heard
on the matter before the ASC released to a Royal Commission the transcripts
of that examination in circumstances which allowed the material to be
published generally.
1.23 In describing the circumstances which led to the crash of Barings
and the situation immediately prior to its collapse, Mr Cameron drew attention
to the apparent lack of adequate communication between the regulatory
authorities and exchanges in Singapore and Japan. Specifically, he noted:
- the importance, at times of market emergencies, of the rapid communication
of information between regulators and exchanges, both domestically and
internationally, and advocated that section 127 of the Act be amended
"to put beyond doubt [the ASC's] ability to release information
to foreign exchanges"; and
- given the need for such transfers of information to happen quickly,
"the implication of Johns case, which is the case that would
require us to consider natural justice implications of such material,
may need to be considered in relation to such an amendment". [13]
1.24 In November 1995, the ASC issued a Policy Statement outlining the
practices it would adopt in relation to the disclosure of information
obtained by the exercise of its compulsory powers. [14]
Among other things, the Statement observes that:
- the ASC can disclose information to Australian and overseas governments
and their agencies (an agency is defined in section 5 as "an agency,
authority, body or person") only if it would enable or assist them
to perform their functions and exercise their powers;
- section 127(4B) of the Act permits disclosure to a stock market or
futures market or a securities clearing house or the clearing house
of a futures exchange where the information will enable or assist an
exchange to monitor compliance with, enforce or perform functions or
exercise powers under the Corporations Law or the business rules or
listing rules of the exchange;
- if the ASC must make a decision before it can use or disclose information,
a person directly and materially adversely affected by the decision
should normally be accorded procedural fairness - the content of this
procedural fairness will differ widely between cases; and
- the purpose of giving a hearing to a person adversely affected by
an ASC decision is to enable that person to make submissions on how
the ASC should exercise its discretion.
1.25 The Barings collapse, when taken with the Johns case, has pointed
to some possible deficiencies in the ASC's ability to provide information
to foreign securities exchanges. As Mr Cameron told the Committee:
I am not aware that anybody would oppose [reform in this area]
as such. It is rather that the language is at the moment, at best ambiguous.
It talks about exchanging information with a foreign government or an
agency of a foreign country. I think there is a strong question whether
an exchange in a foreign country, an exchange of our own kind, for example,
would be regarded as an agency of that country. We would rather not
have that doubt because, as you say, this situation might arise as a
matter of urgency.
Similarly ... as to the natural justice implications of the Johns
case, we would simply rather not be exposed to them if we were in a
market crisis. You can interpret your way around those a bit more readily
than you can around the wording of section 127(4)(c), this issue about
the agency, but because the natural justice content in that situation
may not involve telling the people anyway. But sometimes these issues
have to be confronted. Perhaps the community interest in the security
of the market might override, in any event, any individual interest
in affording that person who is the subject of the notification full
natural justice, before you go talking to other exchanges. [15]
1.26 The ASC has pointed to an apparent ambiguity in the language of
section 127 of the Act. This ambiguity may affect the ASC's ability to
exchange information with foreign exchanges. The Committee considers that,
if such an ambiguity is present in the legislation, it ought to be clarified.
1.27 In similar terms, the ASC has argued for a more flexible application
of the natural justice requirements imposed on it by the Johns
case in situations of market crisis. Clearly, the rules of natural justice
represent a cornerstone of our legal system, and cannot be lightly legislated
away. However, the application of those rules should not be such as to
prolong or exacerbate a market crisis.
1.28 The Johns case itself concerned the provision to a Royal
Commission of transcripts of a compulsory examination by the ASC. While
it is unlikely that information of such a type would be in issue in a
situation such as occurred with the collapse of Barings, it is difficult
to foresee all those types of information which might be in issue, or
how accurate or relevant that information might be.
1.29 The Committee notes the view of the ASC that a person directly and
materially adversely affected by a decision should normally be accorded
procedural fairness, but that "the content of procedural fairness
will differ widely between different cases, depending on the effect on
the person and the use or disclosure proposed to be made". [16]
In a sense, this view simply echoes comments in some of the judgments
in the Johns case itself. For example:
The need to preserve the confidentiality of the ASC's investigation
does not exclude procedural fairness, but reduces its content, perhaps
in some circumstances to nothing. To inform the appellant of the proposed
intention to release the transcripts and to hear submissions concerning
the effect of that decision upon the appellant's interests, for example,
would not adversely affect the investigation process. [17]
1.30 Where the ASC is called upon to provide information to other regulators
in situations of market crisis, the Committee considers that the legislation
should ensure that the public interest in the fair conduct of business
and the individual's right to be treated fairly are both taken account
of. At the very least, adversely affected individuals should be told that
the ASC proposes to provide information about them.
[3] See Parliamentary Joint Committee
on Corporations and Securities, Report on the Annual Reports of the
Australian Securities Commission and Other Bodies 1993-94 (October
1995) paras 2.23-2.25. Monitoring of the ASC's compliance with this performance
indicator was also supported by the Senate Legal and Constitutional References
Committee which, in its report on The Investigatory Powers of the Australian
Securities Commission, specifically recommended that this Committee
monitor the ASC's performance in regard to the timely completion of all
its investigations (see p xiv).
[4] Corporations and Securities Committee, Committee
Hansard, 6 February 1995, p. 122.
[5] Senate Legal and Constitutional References
Committee, The Investigatory Powers of the Australian Securities Commission
(June 1995) p. xiii.
[6] Australian Securities Commission, Annual
Report 1994/95, p 41.
[7] See para 1.39.
[8] See Corporations and Securities Committee,
Committee Hansard, 29 March 1995, pp 146-51.
[9] See Corporations and Securities Committee,
Committee Hansard, 29 March 1995, pp 148-49.
[10] The Memorandum provides for immediate
referral to the ASC of matters which come to the attention of the SFE
that may constitute serious breaches of its business rules or of the Corporations
Law. See Corporations and Securities Committee, Committee Hansard,
29 March 1995, pp 142-43
[11] Corporations and Securities Committee,
Committee Hansard, 30 March 1995, pp 19-21.
[12] (1993) 178 CLR 408; 67 ALJR 850.
[13] Corporations and Securities Committee,
Committee Hansard, 29 March 1995, p 150.
[14] Australian Securities Commission, Policy
Statement 103.
[15] Corporations and Securities Committee,
Committee Hansard, 29 March 1995, pp 154-5.
[16] Australian Securities Commission, Policy
Statement 103, para 30.
[17] Johns v Australian Securities Commission
(1993) 67 ALJR 850 at 883 per McHugh J.
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