June « 2007 « Australian Regulatory Compliance Review from Langes+ Lawyers

June 30, 2007

Financial services compensation arrangements finalised

Corporations Amendment Regulations 2007 (No. 6) have been made to complement section 912B of the Corporations Act 2001 (the Act) and will operate from 1 July 2007.

Under section 912B, Australian financial services licensees
(licensees) providing a financial service to retail clients must have
arrangements for compensating them in the event of monetary losses
suffered due to breaches of relevant obligations under the law. This
may include providing inappropriate advice, or false or misleading
conduct.

The new regulations provide that section 912B is satisfied if
licensees have adequate professional indemnity insurance in place. Existing licensees as at 31 December 2007 have until 1 July 2008 to put their insurance in place. New licensees after 1 January 2008 must comply immediately on commencement of their licence. The regulations also deal with the
return of the security bonds to licensees by the Australian Securities
and Investments Commission (ASIC) and disclosing compensation arrangements in Financial Services Guides.

The foolowing AFS licensees are exempt from the insurance requirement:

(i) a general insurance company regulated by APRA under the Insurance Act 1973;
(ii) a life insurance company regulated by APRA under the Life Insurance Act 1995;
(iii) an authorised deposit-taking institution regulated by APRA under the Banking Act 1959.

Posted 30th June 2007 by David Jacobson in Financial Services

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June 29, 2007

Financial Sector Reform

The two reform Bills (see here and here) are now on ComLaw:

Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007

Financial Sector Legislation Amendment (Simplifying Regulation and Review) Bill 2007

Both Bills are being considered by the Senate Economics Committee which is due to report on 31 July 2007.

Posted 29th June 2007 by David Jacobson in Financial Services

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June 28, 2007

Access Card update

The Office of Access Card has issued a series of fact sheets to accompany the second exposure draft of the Human Services (Enhanced Service Delivery) Bill 2007.

Chair of the Consumer and Privacy Taskforce, Professor Allan Fels
AO, has also released a report on the Access Card Review and Appeals
System and the Taskforce advice on governance.

“The
Taskforce has recommended that a comprehensive system of internal and
external review be established in relation to decisions about the card
that affect individuals. Accountability mechanisms, primarily to the
Parliament, should be strong,” Professor Fels said.

The draft Bill proposes to establish a dedicated Access Card Ombudsman rather than a separate review body for external reviews if a person is dissatisfied with an internal merits review.

Posted 28th June 2007 by David Jacobson in Access Card

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Simpler Regulatory System Act commences

The Corporations Legislation Amendment (Simpler
Regulatory System) Bill 2007 and accompanying Bills were given Royal
Assent on 28 June 2007.

UPDATE 5 July: Here’s the Act

Most of the Simpler Regulatory System package commences on either
Royal Assent or 1 July 2007. Some parts, including particular changes
to the regulation of financial advice, will not be fully effective
without forthcoming supporting regulations.

UPDATE 5 July: here are the regulations

The Regulations to implement the Act are:

UPDATE 28 August: Corporations Amendment Regulations 2007 (No. 10)

You can check when the changes you are interested in commence by looking at my articles here.

The changes take effect immediately include amendments to facilitate distribution of annual
reports over the internet, and to increase the monetary thresholds to
define a large proprietary company as these thresholds have not been
adjusted since 1995. As these changes apply immediately, so they affect
financial reports relating to the 2006-07 reporting period ending on
30 June 2007.

Posted 28th June 2007 by David Jacobson in Simpler Regulatory System 2007

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ASIC v Citigroup decision: no conflict and no insider trading

In Australian Securities and Investments
Commission v Citigroup Global Markets Australia Pty Limited
(ACN 113 114 832)
(No. 4) [2007] FCA 963, the Federal Court has dismissed ASIC’s claims and decided that :

(a) Citigroup
did not contravene its obligations under s 912A(1)(aa) of the Corporations Act
to have in place adequate arrangements for the management of conflicts of
interest (as it did not have a conflict); and

(b) Citigroup did not breach the provisions of
s 1043H of the Corporations Act and s 12DA of the ASIC Act which
prohibit misleading and deceptive conduct; and

(c) Citigroup
did not contravene the
insider trading provisions contained in s 1043A of the Corporations Act (firstly because the trader was not an
"officer" of Citigroup and because he did not make the supposition alleged by
ASIC as a result of a discussion with his superior (that Citigroup was acting for Toll in
relation to the proposed takeover of Patrick) and secondly because the Chinese walls defence
contained in s 1043F of the Corporations Act was engaged.)

As discussed here, the proceedings arose out of the purchase by a public side employee of
Citigroup of over 1 million shares in Patrick Corporation Limited
(‘Patrick’) at a time when private side employees working in the
Investment Banking Division were acting for Citigroup’s client, Toll
Holdings Ltd (‘Toll’) on a proposed takeover bid for Patrick. The
shares were purchased by the proprietary trader for Citigroup’s own
account on the last trading day before Toll announced its bid for Patrick. When private side employees
became aware of the proprietary trader’s purchase of the shares, steps
were taken from within the private side that resulted in an instruction to the
trader to stop buying any more shares in Patrick. The trader did not buy more
shares but in the half hour before the close of trading, he sold nearly 200,000
of the parcel of Patrick shares that he had purchased earlier that day.

The Court accepted Citigroup’s argument that the terms of its letter of engagement with Toll excluded the existence of any
fiduciary relationship between the investment bank and its client. ASIC contended that, notwithstanding the existence of a clause in
the letter which excluded the existence of such a relationship, the investment
bank breached certain fiduciary duties to its client by failing to obtain the
client’s informed consent to proprietary trading in the takeover
target’s shares by another division of the bank.The Court decided that the law does not prevent an investment bank from contracting out of, or
modifying, any fiduciary obligations. In the absence of proof of a fiduciary relationship, ASIC’s main claims failed.

The judgment contains useful discussions about conflicts of interest, insider trading and Chinese walls.

UPDATE 29 June: ASIC comments: "The Court has clarified important aspects of insider
trading law, for example the operation of ‘Chinese Walls’ and the
passing of sensitive information. These clarifications will assist ASIC in pursuing insider trading actions."

UPDATE 18 July 2007: ASIC will not appeal

Posted 28th June 2007 by David Jacobson in Compliance, Financial Services

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June 26, 2007

Simpler Regulatory System: financial services regulation changes

The Corporations Legislation Amendment (Simpler Regulatory
System) Bill 2007 made changes to FSR requirements including:

removing the need for a Statements of Advice to be provided in two circumstances: where there is no recommendation in relation to a particular financial product and no remuneration (eg a free initial consultation or where a financial adviser recommends
that a person continue to hold an existing product); and where the amount to which the advice relates is under the prescribed threshold;

refining the circumstances where a Financial Services Guide is not required to be provided, particularly at seminars which are not open to the public;

introducing changes to the retail/wholesale client distinction regarding sophisticated investors;
refining the liability of licensees under the cross-endorsement provisions where authorised representatives act
for a number of financial services licensees with their consent;

introducing a new ‘in use’ notice for Product Disclosure Statements to determine when a Product
Disclosure Statement is no longer current;

improving the mechanism whereby the Australian Securities and Investments Commission (ASIC) takes a role in overseeing compliance with a financial market’s rules where the market operator has a conflict of interest; and

allowing registered managed investment schemes to invest in unregistered managed investment schemes.

Statement of Advice exemption — no product recommendation and no remuneration
The
requirement to provide a Statement of Advice when personal advice is
provided that does not involve the recommendation of a product and no
remuneration is received for, or in relation to, the advice will be
removed. Instead, a Record of Advice will be required to be prepared by
the adviser and provided
to the client upon their request.

The measure does not alter the
need for the advice to be appropriate or for the adviser to be appropriately
trained to provide personal advice.

The amendments will commence on Royal
Assent.

Threshold for requiring a Statement of Advice
A
threshold will be introduced into the Statement of Advice requirements
so that a full Statement of Advice will only be required if the advice
given is in relation to an investment amount that is above a prescribed
threshold. A Record of Advice would need to be given to the client for
advice in relation to amounts less than this threshold.

An initial threshold of $15,000 is proposed.

A Statement of Advice will be required
to be prepared and provided to a client if the amount to which the advice
relates is $15,000 or more. For advice relating to amounts less
than $15,000, the adviser will be required to provide a Record of Advice
to the client.

The Bill will limit the application
of this relief in relation to superannuation advice where the advice relates to consolidation into, or supplementation of, a superannuation fund in which the person is an existing member.

The amendments will commence on Royal
Assent.

Financial Services Guide exemption — general advice to the public
A
Financial Services Guide will not need to be provided at a forum where
10 or more retail clients attend, whether or not it is open to any
person to attend the forum.

Sophisticated investors
In Chapter 7 of the Corporations Act 2001
a mechanism will be adopted similar to provisions of Chapter 6D, which
allows a financial services licensee to be satisfied that investors who satisfy a financial services licensee as to their experience may be treated as wholesale clients for the purpose of Chapter 7.

The amendments will commence on Royal
Assent. The amendments apply to financial products
and financial services provided on and after the day the amendments
commence.

Cross‑endorsement of authorised representatives
The
cross‑endorsement arrangements will be amended so that licensees are
only jointly and severally responsible for the conduct of their
authorised representatives where those representatives provide
financial services in relation to the same sub‑class of financial
product.

The amendments commence from a day
to be fixed by Proclamation. If no date is fixed within 6 months
from the date on which the Act receives Royal Assent, then the amendment
will commence on the first day after that period. The amendments apply in relation to
the conduct of a representative on or after the day on which the amendments
commence.

Product activity and data collection
Amendments
will replace the current mechanism for reporting the requirements of
the in‑use notice with a new mechanism which will require the
responsible person for a Product Disclosure Statement (PDS) to provide
information in a standardised online report when:

a financial product for which a PDS must be prepared is first recommended, issued or sold;
a financial product for which a report previously had to be made ceases to be available to be recommended;
there is a change in the fees and charges set out in the enhanced fee disclosure table; or
changes are made in a supplementary or new PDS.

The requirement commences on 1 July
2008, when ASIC has established the on-line report and electronic lodgement
mechanism. From 1 July 2008 to 1 January 2009, both hard copy
and electronic lodgement will be available. From 1 January 2009,
the notices will have to be lodged electronically.

Self‑listing and licensed market operators
Amendments
will provide for ASIC to supervise listed entities which are related to
the market licensee, and participants who are related to or in
competition with the market licensee.

The new section 798C will apply not only to market licensees, but also to a body corporate related to the market licensee, a managed investment scheme whose responsible entity is a related body corporate of the market licensee and a trust whose trustee is a related body corporate of the market licensee, if they list on that market.

The amendments commence on Royal Assent.

Pooled superannuation trusts and product disclosure
The
current exemption from licensing for dealing services provided by
trustees of pooled superannuation trusts under the retail/wholesale
client test will be extended to the product disclosure framework.

The trustees of superannuation funds, approved deposit funds, pooled superannuation trusts or public
sector superannuation schemes with net assets of at least $10 million
are no longer treated as retail clients for the purpose of the product
disclosure and related provisions when acquiring an interest in a pooled
superannuation trust.

The amendments commence on Royal Assent.

Registered managed investment schemes investing in unregistered managed investment schemes
The prohibition on investments by managed investments schemes in unregistered managed investment schemes will be removed.

The amendments commence on Royal Assent.

Non‑cash payment facilities
Disclosure
requirements that apply to all non‑cash payment facilities that are not
related to a basic deposit product will be streamlined by applying the
same limited disclosure requirements to these facilities. The
disclosure requirements that currently apply to non‑cash payment
facilities related to basic deposit products will be maintained.

This change will be implemented by regulation.

Posted 26th June 2007 by David Jacobson in Financial Services, Simpler Regulatory System 2007

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Tax law on rights issues to be amended

Peter Dutton MP, Minister for Revenue and Assistant Treasurer, has announced proposed amendments to the income tax law to restore the
long‑standing taxation treatment of rights issues.

“Shareholders
issued with rights by companies seeking to raise capital will not have
an income tax liability at the time of issue. Instead, the
long‑standing position to treat rights issues on capital account will
be maintained”, Mr Dutton said.

Some consequential
amendments will be made to the capital gains tax rules to ensure that
rights issued by companies are treated consistently.

“These
amendments will provide certainty for taxpayers by restoring the
taxation treatment of rights issues that existed before the decision of
the High Court of Australia in Commissioner of Taxation v McNeil [2007] HCA 5”, Mr Dutton said.

“The bring-forward of a tax liability under McNeil’s case would impose unnecessary compliance costs on companies and their shareholders.”

The amendments will overrule ATO Class Ruling CR 2007/42 issued after the McNeil decision.

The amendments will apply from the 2001-02 income year. This will prevent any adverse application of McNeil’s case to companies and their shareholders.

The Government will consult with stakeholders on the development of legislation to implement the changes.

Posted 26th June 2007 by David Jacobson in Business Planning

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June 25, 2007

You know there’s an election coming on when…there are a lot of new laws to digest

Commonwealth Parliament is now in recess until 7 August 2007 but it’s clear that Bills had to be introduced in the last session to have a chance of being passed and implemented before the election due later this year.

Looking at the Bills List (pdf) there are Bills which implement Budget measures (eg the tax changes), government policy changes (eg the Work Choices Safety Net), government responses to Inquiries (the International Trade Integrity Bill) and some which represent the culmination of a long period of consultation and negotiation (eg the Simpler Regulatory System package, the Trade Practices Act small business protection changes). Other Bills (such as Access Card) have had to be amended and will likely wait for the next term to be re-introduced.

For businesses, absorbing the effect of all of these new laws at the same time is time consuming and distracting. Perhaps a 4 year electoral cycle would lead to fewer "last minute rushes".

Posted 25th June 2007 by David Jacobson in Business Planning

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ASIC v Vines penalty reduced on appeal

In Geoffrey William Vines v
Australian Securities & Investments Commission [2007] NSWCA 75, the New South Wales Court of Appeal partially allowed Vines’ appeal against findings that he had breached his duty to act with reasonable care and diligence on
certain occasions during the course of AMP’s 1998–99 takeover bid for
GIO Australia.

ASIC has announced that the New South Wales Court of Appeal has ordered
that Geoffrey William Vines, a former Chief Financial Officer of GIO
Australia Holdings Ltd (GIO), pay a pecuniary penalty of $50,000 for
his conduct during the takeover bid. This penalty replaces the order made in 2006 by Justice Austin of the Supreme Court of New
South Wales that Mr Vines be disqualified from managing a
corporation for three years and pay a $100,000 pecuniary penalty.

The Court of Appeal also held that Mr Vines was a
fit and proper person to manage a corporation and therefore, under the
law that applied at the time, it declined to disqualify him and set
aside Justice Austin’s disqualification order.

Section 1317EA of the Corporations Law, which dealt
with the disqualification of directors at the time of Mr Vines’
conduct, was repealed with effect from 13 March 2000 and replaced by
section 206C of the Corporations Act. The difference between the two
provisions is that under the old law the court could not disqualify a
person they considered fit and proper to manage a corporation. Under
the new law the test is broader and the court can disqualify a person
if they are satisfied that the disqualification is justified.

ASIC was ordered to pay Mr Vines’ costs of the appeal.

Posted 25th June 2007 by David Jacobson in Corporate Governance

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AFS licence requirements updated

ASIC has released updated versions of Policy Statement 166 Licensing: Financial requirements [PS 166] and Pro Forma 209 Australian financial services licence conditions [PF 209].

ASIC has also withdrawn the following three licensing guides:

Meeting the financial requirements for your AFS licence: Compliance with Policy Statement PS 166—An ASIC guide (January 2004)
Responsible officers: Demonstrating compliance with organisational competency obligations—An ASIC guide (July 2003)
Small business and your AFS licence: Compliance with Policy Statements 164 and 181—An ASIC guide (December 2004)

The guides are no longer needed as the key guidance they provide has been or will be incorporated into PS 166, the AFS licensing Kit (reissued in November 2005) and the planned update of Policy Statement 164 Licensing: Organisational capacities PS 164 which ASIC intends to issue by September 2007.

There are two minor changes to ASIC’s policy on financial requirements as follows:

An amendment to the calculation of ‘surplus
liquid funds’ to allow the addition of a percentage of non-current
assets for certain AFS licensees who are eligible providers.
An amendment to the standard adjustments
that need to be made by AFS licenses who underwrite (or sub-underwrite)
financial products that are subject to statutory exposure periods.

The changes respond to industry related queries
about the application of ASIC’s financial requirements policy and some
of the existing licence conditions.

The changes come into effect immediately. An AFS
licensee who wishes to take advantage of the changes to PF 209 must
apply for a variation to its AFS licence using ASIC form FS03,
requesting that the revised versions of all of the conditions and
definitions in PF 209 apply under their licence.

Posted 25th June 2007 by David Jacobson in Financial Services

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