Australian Regulatory Compliance Review

Corporations Act update

ComLaw has published a consolidated Corporations Act 2001 incorporating the amendments made by the Corporations Amendment (Improving Accountability on Termination Payments) Act 2009.

Short selling regulations

The Corporations Amendment Regulations 2009 (No. 8) have been made in relation to the disclosure of short selling information under the Corporations Amendment (Short Selling) Act 2008.

Director and executive termination payments amendments commence

The Corporations Amendment (Improving Accountability on Termination Payments) Act 2009 commenced on 24 November 2009.

Background here.

UPDATE: Corporations Amendment Regulations 2009 (No. 9) commenced on 25 November 2009

ASIC guidance to directors on their duty to prevent insolvent trading

One of the most difficult roles of a director is to determine whether the company is insolvent.

ASIC has released a Consultation Paper outlining proposed guidance to directors on their duty to prevent insolvent trading: Consultation Paper 124 Directors’ duty to prevent insolvent trading: Guide for directors (CP 124).

ASIC's draft Regulatory Guide refers to the core principles that a director:

• must keep him or herself informed about the financial affairs of the company and regularly assess the company’s solvency;
• immediately on identifying concerns about the company’s viability, should take positive steps to confirm the company’s financial position and realistically assess the options available to deal with the company’s financial difficulties;
• should obtain appropriate advice from a suitably qualified person; and
• should consider and act appropriately on the advice received in a timely manner.

The draft guide sets out defences and contains guidance including information about ASIC’s approach to insolvent trading and some of the factors ASIC will take into account, and the evidentiary material it will look at, in assessing whether there has been a breach of the insolvent trading provisions.

ASIC is seeking feedback on these proposals by 22 January 2010.

Ripoll report on financial products and services released

The Parliamentary Joint Committee on Corporations and Financial Services (chaired by Bernie Ripoll MP) has released its report into the issues associated with recent financial product and services provider collapses, such as Storm Financial, Opes Prime and other similar collapses, with particular reference to:

• the role of financial advisers;
• the general regulatory environment for these products and services;
• the role played by commission arrangements relating to product sales and advice, including the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers;
• the role played by marketing and advertising campaigns;
• the adequacy of licensing arrangements for those who sold the products and services;
  the appropriateness of information and advice provided to consumers considering investing in those products and services, and how the interests of consumers can best be served;
• consumer education and understanding of these financial products and services;
• the adequacy of professional indemnity insurance arrangements for those who sold the products and services, and the impact on consumers; and
• the need for any legislative or regulatory change.

In conducting its inquiry, the Committee decided to focus specifically on non-superannuation products and services.

The Committee's recommendations focus on stricter regulation of financial advisers.

ASIC v Rich: ASIC One.Tel case against Rich and Silbermann dismissed

In Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 Judge Austin decided that ASIC had failed to prove its case against One.Tel director and joint chief executive Jodee Rich and One.Tel's finance director Mark Silbermann.

ASIC brought civil penalty proceedings for breach of the statutory duty of care of company directors and officers. The proceedings were initially brought by ASIC against four defendants, arising out of the collapse in May 2001 of a large Australian listed company, One.Tel Ltd and its local subsidiaries, and the collapse or on-sale of overseas subsidiaries.

The actions against two of the defendants, joint managing director Bradley Keeling and non-executive Chair John Greaves were previously settled.

ASIC alleged that the defendants did not disclose the true financial position of the company to the board, and that they knew or should have known the true position.

The focus of the argument was on whether ASIC had proved its case as to the true financial position in the January- April 2001 period.

In his conclusion Judge Austin said

"The question for determination is not the larger issue of how it happened that a rising corporate group supported by two well-resourced investors came to fail, in spectacular circumstances. The court has not been asked to determine, at large, who was to blame for the disaster, as amongst the defendants, other executives, non-executive directors, major shareholders and advisers. The proceedings are not a Royal Commission. Notwithstanding the huge amount of effort that has been devoted to these proceedings by the parties and their advisers, and by the court, many questions about the failure of One.Tel are left unanswered....

One of the unanswered questions is whether One.Tel would have survived if, in May 2001, PBL/CPH and News had maintained their support for the company and implemented their plan to underwrite a deeply discounted rights issue to raise $132 million. The tendered evidence has led me to reject ASIC's figures as to the financial circumstances of One.Tel at the end of February, March and April 2001and to prefer the figures set out in Chs 11, 13 and 15 respectively. If those figures are right, a fundraising of $132 million accompanied by continuing support by the major shareholders would probably have been enough to address the company's cash requirement until November 2001, by which time, according to the business plans, the company's businesses would have been generating more healthy Group cash flow. The withdrawal of that support, and the abandonment of the rights issue, may well have ensured that the company could not survive."

The judgment is 3,105 pages long. The table of contents alone is 62 pages.

A costs hearing has been set for November 27. Judge Austin has already indicated that ASIC should pay the defendants' costs on a party and party basis.

ASIC is considering whether to appeal.

UPDATE 17 December 2009: ASIC appeals One.Tel decision

Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 assented to

The Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 received royal assent on 6 November 2009.

It is expected that Schedule 1 (margin lending), Schedule 2 (trustee companies) and parts of Schedule 3 (debentures) will commence by 1 January 2010. The rest of the Act commenced on 6 November 2009.

Draft regulations and example PDS

Director and executive termination payments bill passed

The Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 was passed by the Senate on 16 November after it dropped an amendment requiring a review in three years time. The House of Representatives sent the Bill back to the Senate after it disagreed with the proposed Senate change.

Key features of the Bill include:

• termination benefits for company directors and executives exceeding one year's average base salary are subject to shareholder approval.
• The scope of the requirements relating to termination benefits is expanded to include senior executives or key management personnel of a disclosing entity.
• The definition of what constitutes a "benefit" is broadened.
• New regulation-making powers will specify what types of payments are, or are not, a termination benefit, and to define 'base salary'.
• The obligation to immediately repay unauthorised termination benefits .
• The retention of the existing requirement for the giving of the benefit to be approved by a resolution passed at a general meeting.

The legislation and accompanying regulations will take effect the day after Royal Assent is granted.

UPDATE 25 November: The Bill was assented to on 23 November and commenced 24 November 2009.

It inserts new sections 200AA and 200AB in the Corporations Act and amends sections 200A-G and J relating to the payment of termination benefits to company directors and executives.

The Corporations Act currently allows for termination benefits up to seven times a director’s total annual remuneration package before shareholder approval is required. Additionally, only company directors’ termination benefits are subject to shareholder approval.

The new rules will not apply retrospectively to existing contracts. The new arrangements will apply to contracts that are entered into and renewed or extended.

The new rules will also apply to existing contracts for which a variation of a condition is made. Minor changes to an existing contract would not be considered a variation of a condition. However, changes that effect an essential term, including any term relating to remuneration would be considered a variation of a condition.

Regulation of credit ratings and credit ratings agencies

ASIC has announced that it has decided to withdraw current class order relief that allows issuers of investment products to cite credit ratings without the consent of credit rating agencies.

From 1 January 2010, issuers must ensure that the credit rating agency has given its consent for the inclusion of a credit rating (and its form and context) in any fund raising or takeover documents that will be issued after this date.

Also from 1 January 2010, credit rating agencies will be required to hold an Australian Financial Services (AFS) licence. (see here).

ASIC targets unsolicited credit cards: NAB agrees to deactivate cards

ASIC has reminded financial institutions of the prohibition in Section 12DL of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) against the sending of unsolicited credit and debit cards by annnouncing the terms of National Australia Bank's response to ASIC's concerns with National Australia Bank (NAB)'s distribution of American Express credit cards as ‘companion’ cards to NAB Qantas Gold account customers. ASIC was concerned that the distribution was unsolicited and potentially in breach of section 12DL .

ASIC was concerned because the distribution of American Express cards was not made in response to a request in writing from customers, and involved the sending of a companion card to its Qantas Gold Card which was an additional card, and not a card sent in renewal, replacement or substitution of an existing card.

In response to ASIC’s concerns, NAB is writing to all of its Qantas Gold account customers. NAB will either give customers who have already used the companion cards the choice not to retain the card (via an opt-out process) or give customers who have not used the companion cards the opportunity to confirm that they wish to retain the card in writing (via an opt-in process), otherwise the companion card will be automatically deactivated.

In both instances, customers’ NAB Qantas Gold accounts will remain open and their Qantas Gold MasterCards or Visa cards will continue to work.