What power does the Stock Exchange have over employees of a stockbroker?
The Australian Stock Exchange depends very much on the contractual relationship it has with companies whose shares are listed and brokers who operate in the relevant market. The Corporations Law provides that the rules of the ASX, whether they are the Listing Rules or the Business Rules, are binding on companies whose shares are listed or on members of the ASX. By and large, the relationship between both sets of persons in the ASX is one of contract. Just how far the ASX can be bound by its own rules or how far it can go outside the rules in ensuring compliance was one of the interesting questions that New South Wales Court of Appeal had to determine in Hudson Securities Pty Limited v Australian Stock Exchange (2000) 18 ACLC 683. While the members of this Institute will not generally be directors of the company whose shares are listed on the Stock Exchange, they will have a very real interest in the affairs of the Stock Exchange and how it can organise itself and run its affairs. Again we rely on the facts in the CCH company law cases in discussing this case. The facts were briefly these.
The ASX was conducting an investigation into the conduct of a stockbroking organisation, Hudson Securities Pty Ltd, a "Participating Organisation" under the ASX Business Rules (BR), in relation to its trading in the shares of its parent company. As part of that investigation, ASX sought under BR 13.1 to require certain officers of Hudson to appear before ASX to provide information. The business rule was otherwise silent concerning the attendance at the interviews of any other persons, legal representatives of Hudson and legal representatives of the interviewees, and silent as to provisions of records of the interview. ASX considered that confidentiality was required so as to preserve the integrity of the investigation and therefore sought to prohibit the disclosure of information imparted during the interviews until such time as all the interviews were completed or its draft inspection report was provided to Hudson, whichever was earlier. Accordingly, ASX sought confidentiality undertakings from the interviewees. In addition, ASX was prepared to allow Hudson's legal representatives and any legal representatives of the interviewees to be present at the proposed interviews, but only upon giving of confidentiality undertakings. Without such undertakings, ASX was not willing to allow the legal representatives to be present.
While it was accepted by both parties that, as a Participating Organisation, Hudson was bound by contract with ASX to observe the Business Rules, and that BR 13.1 obliged Hudson to cause its officers to attend for interview, Hudson argued that ASX had no power to require Hudson to procure confidentiality undertakings from its officers. At first instance, Santow J upheld ASX's position. His Honour implied a term into BR 13.1, which amplified the power given to ASX by the express words of BR 13.1 and qualified the obligation to afford procedural fairness in exercising that power. As part of this implied term, the court ordered that Hudson require its officers to each provide an undertaking as to confidentiality. Hudson appealed and argued that it could comply with its obligations under BR 13.1 in such a manner as it chose. Hudson asserted Santow J was not entitled to have regard to the constitutional and statutory context of the Business Rules as part of the surrounding circumstances in which an implied term may be found and, alternatively, that the implied term was not necessary to give business efficacy to the contract constituted by the Business Rules.
ASX's submitted that it had the power to impose confidentiality on the interviewees based upon the nature of, and the need to protect the integrity of, the investigation. ASX argued that the fact that the interviewees were not in a direct contractual relationship was irrelevant because BR 13.5(2) made Hudson "vicariously liable" for their acts or omissions. The New South Wales Court of Appeal overturned the decision of Santow J in part. It was unnecessary to imply any terms into the agreement between the ASX and Hudson. But, the ASX had power to require Hudson to cause an officer to attend and provide information – Hudson did not have any flexibility in that regard. Despite this, however, the ASX did not have power to require Hudson to procure undertakings of confidentiality from the officers appearing before the ASX. They were not parties to the contract between Hudson and the ASX, nor were they subject to the powers of the ASX. However, if the ASX provided certain benefits to Hudson, if Hudson was prepared to accept those benefits under a variation of their contractual arrangements, the ASX could make it a pre-condition that Hudson require its officers to provide the undertakings of confidentiality. That was not the situation here.
Hudson did have an obligation to invite officers to attend; the officers had to answer questions, but not on the basis of confidentiality. Hudson had partially succeeded in the matter. but the Court of Appeal ordered that he should only pay three-quarters of the ASX costs. The ASX continues to find that its Business and Listing Rules cannot extend beyond a broad contractual basis and require others who are not party to those rules to comply with those rules. This kind of ruling continues to frustrate the ASX which would like to see that all organisations which are members of the ASX should be required to have all their officers also comply with the rules that the organisations themselves must comply with in accordance with the statute in the relevant contract.
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