Professor Bob Baxt examines how well the Australian Securities and Investments Commission is performing.
On 19 February 2014, the Senate Economic References Committee commenced hearings in relation to its inquiry into the performance of the Australian Securities and Investments Commission (ASIC).
When the inquiry was announced in 2013, the areas highlighted for consideration included:
- ASIC’s enabling legislation and whether there were any barriers preventing ASIC from fulfilling its legislative responsibilities and obligations.
- The accountability framework to which ASIC is subject and whether this needs to be strengthened.
- The workings of ASIC’s collaboration and its working relationships with other regulators and law enforcement bodies.
- ASIC’s complaints management policies and practices.
- The protections ASIC affords to corporate and private whistle-blowers.
- Other related matters.
I should indicate that I provided a short submission to the committee dealing with a number of these and related matters. At the invitation of the committee, I also provided oral evidence.
My discussion here covers only some aspects of the inquiry.
ASIC is the most prominent regulator in the commercial law area of operations other than the Australian Tax Office.
It is larger and what it is asked to do is much more comprehensive than, for example, the Australian Competition and Consumer Commission (ACCC).
It is also larger and has a broader range of responsibilities than the related and important regulator, the Australian Prudential Regulatory Authority (APRA).
Much of its work, however, is closely linked to that of APRA, especially when it comes to the operations of our financial services industries and markets, which are growing at a hectic pace and which cry out for more effective and responsible regulation of one sort or another.
There is little doubt that the current government, while in opposition, was highly critical of some of the initiatives and work that ASIC undertook and was quick to criticise ASIC’s failure when these were highlighted in a range of high profile matters frequently identified by the media.
I have one major complaint about the way in which the media and politicians generally treat regulators, such as ASIC (and to a lesser extent the ACCC). They are far too quick, in my respectful view, to criticise the regulators when things do not proceed quite as well as everyone expected in a major investigation, court case or other issues considered important in the work of the regulator.
When one assesses ASIC’s varied and large areas of responsibility (increased regularly by the governments of the day), one needs to be very careful about blaming ASIC where blame is not warranted.
A classic example is when a major investigation is launched by the media into allegations of misconduct within a corporation, usually one that is listed on the Australian Securities Exchange (ASX).
Too often regulators, and many politicians, jump to conclusions that ASIC has failed in uncovering malpractice of one sort or another and should have been more aggressive in dealing with these matters.
Quite recently we have seen rising concerns about insider trading.
ASIC has “enjoyed” a relatively high rate of success in prosecutions for alleged breaches of insider trading.
My rough calculations of the high profile cases I have come across reveal that ASIC has at least a 70 per cent success rate.
But there are some very high profile cases where ASIC has “failed”.
In particular, I refer to the case of Stuart Fysh where ASIC was successful, at first instance, in obtaining a verdict of a breach of insider trading.
That judgment, however, was overturned in spectacular fashion by a very strong New South Wales Court of Criminal Appeal.
In the early days of regulation in this area, there was a tendency for the regulator of the day, at that time the National Companies and Investments Commission, to perhaps overreach itself in announcing alleged breaches of the law in relation to insider trading or market malpractices.
Corporate raids, raids on stockbrokers and related high profile investigations were often later met with sad stories which indicated the regulator had overstepped the mark on occasions.
Often, the publicity surrounding the potential intervention was far greater than warranted in the context of the issues being addressed.
Today, the criticism that can be levelled at the regulator is that it has not been aggressive enough in dealing with alleged breaches of the law, especially those which are supported by findings by special review panels, committees and reports.
This suggests that certain directors may well have been prosecuted, not only civilly but criminally, for alleged breaches of their duties, for market malpractices and related activities.
At the same time, some judges believe ASIC has been too soft in the settlements it has reached to bring a successful conclusion to an investigation that may well have started with prospective criminal prosecution, but finished at a very low scale on the level of liability.
Indeed, in the case of ASIC v Ingleby, the Court of Appeal regarded the settlement agreed to by the regulator and parties involved as inadequate.
Some judges – the minority I should say – have queried the scope and utility of some of the processes which led to settlement decisions being brought to the courts, not for rubber stamping, as some have suggested, but for approval.
In that context, I note that in the case of ASIC v Ingleby there is significant disagreement in the views taken by Victorian Court of Appeal’s Justice Weinberg in his powerful decision and commentary, and the views of the Federal Court.
Justice Weinberg suggests that the way in which the ACCC settlement regime has been approved for some time by the Full Federal Court is not appropriate. (Company Director, June 2013).
In response to criticism that ASIC was not tough enough in pursuing certain insider trading allegations, Commissioner John Price recently suggested in an opinion piece in The Australian Financial Review (1 February 2014) that one must be sure that the evidence supports the case that one is bringing.
To prove any breach of the criminal statute surrounding market malpractice, manipulation or insider trading, or breaches of directors’ duties, requires ASIC to establish a significant amount of positive evidence in a court of law.
While I fully support the proposal that the regulators must from time to time run test cases in areas of the law where there is, quite clearly on the facts before them, enough evidence to support a case being brought, great care must be taken that frivolous cases are not pursued. This is because once the “dirty stuff” gets thrown around, the bad smell will remain whatever happens in the litigation.
In my view, the performance of ASIC in relation to the six areas the Senate Economic References Committee is considering has, by and large, been positive, except with respect to my comments below.
Sure, ASIC could have run more cases and won more cases. It is true, too, that ASIC has perhaps been a bit conservative in some of the matters that it has pursued.
But it has an enormous workload to undertake.
I am generally impressed with ASIC’s attempts to produce guides on a number of complex areas of the law.
The recent paper issued by Commissioner Greg Tanzer on the regulation of complex investment products reflects a very responsible and proactive approach by ASIC to an area which continues to cause our courts and regulators here and elsewhere significant difficulty in finding the right balance in progressing the regulatory regime that has to be not only established, but followed.
In my view, ASIC and other regulators, such as APRA, face one very significant difficulty which our Parliament must attend to as a matter of some urgency.
The popular notion of corporate social responsibility (CSR) is bandied about with great abandon, if I may say so respectfully, by too many organisations, the media, politicians and others.
CSR raises some complex and difficult problems.
In most situations, the rules laid down by the ASX Corporate Governance Council are not backed by the law.
Companies whose shares are listed on the ASX and which have to comply with its listing requirements are, in a real sense, bound by the rules of the corporate governance regime.
But there are many companies that are not necessarily linked to the listing regime and which do not face that kind of responsibility.
The Commonwealth Criminal Code requires all corporations to ensure they have compliance programs in place so that they can demonstrate that they not only adopt, but continually refresh, a regime of risk management and responsibility.
This requirement was clearly recognised by Justice French, now the Chief Justice of the High Court of Australia, in the very important, but largely ignored, decision of Re Chemeq Limited (2006) FCA 936.
To require directors and officers of companies to comply with the CSR regime, when it conflicts with the rules contained within our statute and common law, poses serious problems for directors and officers who are “betwixt and devil and the deep blue sea” in knowing how to respond to their obligations.
So, when a specially constituted Court of Appeal in Western Australia got the law wrong, in my view, in the Bell case (Company Director, November 2012), the High Court of Australia was denied the chance of reviewing the decision as this case was settled.
It is not surprising that directors and officers are crying out for some guidance.
It will be interesting to see the Senate Committee’s response to ASIC’s request that penalties for breaches of the law be increased in the light of its apparent failure to bring more “big ticket cases”.
It will also be interesting to see whether the committee recommends a restructuring of ASIC to allow it to concentrate on more specific high profile areas.
In addition, we wait to see how it responds to the claims made in more than 400 submissions in response to its review.
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