EXPLANATORY STATEMENT

Select Legislative Instrument 2010 No. 210

Issued by the authority of the Minister for Financial Services Superannuation and Corporate Law

Corporations Act 2001

Corporations Amendment Regulations 2010 (No. 7)

Subsection 1364(1) of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.  In addition, subsection 1513(1) of the Act allows regulations of a transitional nature to be made.  This provision is inserted by Schedule 1 of the Corporations Amendment (Financial Market Supervision) Act 2010 (the Amending Act), which has not commenced yet.  Reliance is had on section 4 of the Acts Interpretation Act 1901 for regulations being made under the Act as amended by the Amending Act. 

The primary purpose of the Regulations is to provide the details concerning the transfer of supervisory responsibility for Australia’s domestically licensed financial markets from the market operators to the Australian Securities and Investments Commission (ASIC). 

On 24 August 2009 the Government announced that it had decided to transfer the responsibility for supervision of Australia’s domestic licensed financial markets from market operators to ASIC.  The Amending Act gave effect to this decision and received Royal Assent on 25 March 2010.

The Amending Act provides ASIC with additional powers commensurate with its new responsibilities.  The Regulations provide the detail of ASIC’s new powers, amongst other things.  The Amending Act is expected to be commenced in the third quarter of 2010. 

Specifically the Regulations amend the Corporations Regulations 2001 to:

•                establish the particulars of the infringement notice and enforceable undertaking regime. 

•                provide for transitional arrangements and grandfathering of certain arrangements to ensure the smooth transition of supervisory responsibility to ASIC.

•                protect information given to ASIC from allegations of breach of confidence, duty or law and maintain legal professional privilege in respect of such information. 

•                exclude from the transfer of supervision and the market integrity rules certain markets.

•                make a number of technical consequential amendments.

Details of the Regulations are included in the Attachment.

Public consultation on the Regulation was conducted in May and June 2010.  A number of submissions were received, including submissions from industry groups and market operators.  The main changes that were made as a result of comments received from consultation include minor amendments to the obligations on market operators with respect to what they must include in their operating rules and procedures, minor amendments to the infringement notice regulations and an extension to the information protected as part of the transfer of information to ASIC.

The Act does not specify any conditions that need to be satisfied before the power to make the Regulations may be exercised.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations will commence on the commencement of Schedule 1 of the Amending Act.

ATTACHMENT

DETAILS OF THE corporations amendment regulations 2010 (No. 7)

Regulation 1 – Name of Regulations

Regulation 1 would provide that the name of the Regulations is the Corporations Amendment Regulations 2010 (No. 7).

Regulation 2 – Commencement

Regulation 2 provides that the Regulations commence on the date of commencement of the Amending Act.

Regulation 3 – Amendment of Corporations Regulations 2001

Regulation 3 provides that the Corporations Regulations 2001 (Principal Regulations) are amended as set out in Schedule 1 to the Regulations.

Schedule 1 – Amendments

Item [1] – Subregulation 1.0.02(1), definition of approved foreign bank

Subregulation 1.0.02(1) provides that either operating rules or market integrity rules would apply.  This reflects that ASIC set market integrity rules may now be relevant to this circumstance. 

Items [2] to [12] –Regulation 7.2.07, subparagraphs 7.2.07(b)(ii) to 7.2.07(b)(vii) and paragraphs 7.2.07(i) and 7.2.08(c)

The amendments to regulations 7.2.07 and 7.2.08 provide that operating rules and procedures of licensed markets must deal with the listed matters only to the extent that market integrity rules do not. This change, and the changes to the specific matters which must be included in operating rules and procedures, arise as a result of the fact that market operators will have reduced supervisory responsibilities after the transfer to ASIC. 

Item [13] – After Part 7.2

This item would insert a new Part into the Principal Regulations, mirroring the new Part 7.2A inserted in the Act by the Amending Act.  This new Part deals with the detailed aspects of ASIC’s new enforcement powers, specifically the ability to issue enforceable undertakings and infringement notices in response to potential breaches of the market integrity rules. 

Regulation 7.2A.01

This regulation inserts an enforceable undertaking regime. ASIC is able (but not be required) to accept enforceable undertakings from persons alleged to have breached market integrity rules, as an alternative to civil proceedings.

Undertakings that could be made include undertakings to perform or refrain from performing a specific action, or to pay a specified amount to a specified party.  These undertakings are able to be altered with ASIC’s agreement.

If a person breaches these undertakings, ASIC is able to apply to a court to make an order that the court considers appropriate, including orders directing the person to comply with the undertaking, to pay the benefit obtained by the breach to the Commonwealth, or to compensate a person who has suffered loss from the breach.

Regulations 7.2A.02 to 7.2A.15

The Regulations insert an infringement notice regime, which is outlined in subregulation 7.2A.02.  This regulation allows ASIC to request a person who is alleged to have contravened subsection 798H(1) of the Amending Act to pay a penalty to the Commonwealth, undertake remedial measures, enter into an undertaking or otherwise accept sanctions, as an alternative to civil proceedings.  The offer of an infringement notice is at ASIC’s discretion.  ASIC is not required to offer an infringement notice instead of pursuing civil proceedings; nor is the liability of a person to civil proceedings affected if a notice is not offered, withdrawn, or not complied with.

To avoid confusion, new regulation 7.2A.03 inserts definitions of the terms ‘compliance period’, ‘infringement notice’ and ‘recipient’ into the regulations.  

New regulation 7.2A.04 defines the circumstances under which an infringement notice can be given.  ASIC is able to issue an infringement notice if they had reasonable grounds to believe that a person has contravened subsection 798H(1) of the Amending Act.  They are able to issue a notice in relation to more than one contravention.

New regulations 7.2A.05 and 7.2A.06 describe what is required in the issuing of an infringement notice.  Before a notice could be issued, ASIC is required to give to the recipient written reasons as to why ASIC believes a breach has occurred, and give the recipient an opportunity to give evidence and make submissions to ASIC, as well as appear at a private hearing with ASIC.  It is envisaged that this would include an opportunity for intended recipients to bring outside evidence, including witnesses, before ASIC.  Evidence presented to ASIC by an intended recipient or representative of a recipient would not be admissible in evidence in any proceedings against the recipient, except in circumstances where the evidence is false or misleading.

The Regulations require that the infringement notice include substantial details.  These include identification details such as dates and the name and address details of recipients, as well as details regarding the conduct that is alleged to make up each contravention, the market integrity rule alleged to have been contravened, and the fact that the notice is being issued under new regulation 7.2A.04.  The notice is also required to specify the maximum penalty that a Court could order with respect to each contravention in addition to the penalty ASIC is seeking under the infringement notice, what other conditions must be satisfied to comply with the notice, and how any penalty can be paid.  The non-binding nature of the infringement notice will also be mentioned, requiring the notice to make clear that the recipient may choose not to comply, but also making it clear that this may result in ASIC pursuing civil proceedings instead. 

Regulation 7.2A.07 sets out the maximum penalties payable under an infringement notice.  ASIC is able to specify a maximum penalty payable of up to three-fifths of the penalty amount set out in the market integrity rules for a breach.  The regulation also allows breaches of multiple rules to apply penalties cumulatively.

Regulations 7.2A.08 to 7.2A.10 give details on compliance with the infringement notices.  A recipient will be taken to have complied with the notice when they have paid any specified penalty, undertaken specified remedial measures, entered into relevant undertakings, or accepted any other sanctions specified in the notice.  Recipients will be given 28 days to comply with the notice, which they could apply to have extended by ASIC.  ASIC will have 14 days to respond to applications for extension, after which a rejection is deemed to occur.

If compliance occurs, the effect is that any liability to the Commonwealth for a contravention of subsection 798H(1) of the Amending Act would be discharged, no civil or criminal proceedings could be brought by the Commonwealth for the conduct specified in the notice, and the recipient is  not be taken to have admitted guilt or to have contravened the section.  These protections will not apply in situations of false or misleading information being provided to ASIC.

Regulations 7.2A.11 to 7.2A.14 concern the withdrawal of notices. A recipient is permitted to apply to ASIC to withdraw a notice, and ASIC would be permitted to withdraw a notice unilaterally.  If a notice is withdrawn, ASIC is required to refund any penalties paid; similarly, any other sanctions taken would be rendered unenforceable and unwound to the extent possible.

New regulation 7.2A.15 concerns the publication of notices. The regulations specify the ways in which ASIC may publish details of notices.  ASIC is required to include in any publication a statement that compliance with an infringement notice is not an admission of guilt and the recipient is not taken to have contravened the market integrity rules.  Publication can occur in the Gazette alongside a copy of the notice, or in a written or oral statement that includes a detailed summary of the notice.

Items [14] – [27]

The regulations amend the regulations 7.8.01 to 7.9.63C to refer to both market integrity rules and operating rules.  At present these regulations only refer only to operating rules. These amendments are necessary to adjust for the fact that when the Amending Act commences financial markets will be subject to both operating rules and market integrity rules where currently only operating rules exist.

Item [28] – After Part 10.5

This item inserts a new part into the Principal Regulations to deal with transitional and application issues relating to the Amending Act. 

New regulation 10.14.02 excludes four markets from the application of the Amending Act.  The excluded markets are: BGC Partners (Australia) Pty Limited, Bloomberg Tradebook Australia Pty Ltd, Mercari Pty Ltd and Yieldbroker Pty Limited.  It is intended that these markets would be subject to the same obligations that were in place before the Amending Act. 

New regulation 10.14.03 provides protection in regards to the transfer of documents to ASIC where this information is request to help ASIC perform its functions under Part 7.2A.  The regulation allows the operator or employee to retain claims of qualified privilege over the information and would protect the operator and employee from claims of breaches of law, contract or duty which could arise as a result of giving the information to ASIC.  This Regulation is intended to facilitate the transfer of information from market operators about supervisory and other matters, including insider trading and market manipulation investigations, to ASIC. 

New regulations 10.14.04 and 10.14.05 provides for transitional arrangements and grandfathering of certain arrangements to ensure the smooth transition of supervisory responsibility to ASIC.  Specifically, the regulations would provide that:

•                any written waivers, consents, recognitions, accreditations, approvals, determinations, exemptions and notifications given by market operators to participants under the operating rules of a market, where such rules have now been incorporated into the market integrity rules, are taken to be given by ASIC and would continue in their prior form and effect unless ASIC determines otherwise;

•                any notifications or certifications given by participants to market operators, under the operating rules of a market, where such rules have now been incorporated into the market integrity rules, are taken to be given to ASIC and would continue in their prior form and effect unless ASIC determines otherwise; and

•                any registers kept by a market operator under the previous framework are taken to be kept by ASIC.