Focus: Rumourtrage and a rising tide of market regulation
31 March 2009
In brief: ASIC announced recently that it had banned a dealer from providing any financial services for 18 months for allegedly spreading false and misleading information about listed securities. This is the latest in a series of developments that are likely to result in tighter regulation of day-to-day business for market participants, fund managers, directors of listed companies and professional investors and a greater willingness by ASIC to take direct action against individuals.
Capital Markets Partner Warwick Painter and Litigation Partner Matthew McLennan (view CV) examine the background to the current push for greater regulation of conduct which has the potential to affect market integrity. The result is that regulation and enforcement action by ASIC and ASX are potentially going to have an impact on a wide range of individuals involved in the equity markets, including market participants, fund managers, directors of listed companies and other key players such as financial journalists, providers of information services, analysts and professional investors.
- The rising tide of market regulation
- Lowering the threshold for enforcement ASIC's banning power, civil penalty offences and ASX disciplinary action
How does it affect you?
In parallel with the well-publicised ban on short selling, ASIC, the Commonwealth Government and ASX have turned their focus to 'unacceptable' market conduct and issues relating to the accuracy and timing of market information and the impact of such conduct on market integrity. Meanwhile, continuing volatility in the equity capital markets provides fertile ground for increased regulation of market conduct and the pursuit of individuals whose conduct is judged to be unacceptable.
- For brokers and securities dealers it could mean that day-to-day conduct is subject to increased scrutiny and compliance rules will be need to be established to ensure that telephone conversations and email traffic do not result in trafficking in rumour or other unacceptable information.
- For fund managers and professional investors it could mean increased compliance measures internally to ensure that individuals are not involved in 'unacceptable' information exchanges and also less flexibility in responding to market trends, where those trends are not supported by ASX disclosures from listed companies.
- For directors of listed companies it has already resulted in much greater scrutiny of price sensitive information, the timing of its release to the market and the effect of such information on the company's share price.
- For analysts and financial journalists it could mean less flexibility to express robust opinions and a greater need to take care in terms of expressions of opinion in analysis or commentary and the passing on of information.
- For individuals it could result in a greater likelihood of prosecution by ASIC for a wider range of conduct which might in other times have passed without comment, with the risk of civil penalties and, in the case of financial services licensees, banning orders being imposed administratively by ASIC without the involvement of an independent umpire.
In March 2008, at about the same time as it focused on short selling, ASIC indicated a concern that some individuals were deliberately spreading false or misleading information about listed securities and that this was being done to provoke sales of securities and to reduce their market price. ASIC reminded market participants that spreading false rumours about listed securities without properly investigating the truth of the rumour can be a criminal offence under section 1041E of the Corporations Act (disseminating false or misleading information). ASIC indicated that, in conjunction with ASX, it would be vigilant in monitoring the market to ensure this type of behaviour is detected and prosecuted. ASIC also announced that it had commenced a formal investigation of certain conduct that could have involved spreading false or misleading rumours or predatory trading that could amount to market manipulation.
The subject of ASIC's investigation came to be known as 'rumourtrage'. No successful prosecution has, as yet, resulted from ASIC's investigation. On 23 March 2009, however, ASIC announced that it had banned a Sydney dealer from providing any financial services for 18 months for allegedly spreading information about listed securities that later turned out to be untrue in circumstances where the dealer's conduct was, in the words of ASIC 'rash, ill-judged and wholly inappropriate'. ASIC took this action under s920A of the Corporations Act, which gives it the power to ban a person who has not complied with a financial services law from providing financial services. The dealer has appealed to the Administrative Appeals Tribunal against the decision.
ASIC and the ASX also appear to be taking a renewed interest in targeting artificial pricing as a form of manipulative trading that threatens the integrity and fairness of the market. The ASX Disciplinary Tribunal has indicated that any deliberate attempt to create artificial, false or misleading appearances with respect to the price of a security is a 'very serious contravention' of ASX Market Rules. It is also a criminal offence under the market manipulation prohibition in section 1041A of the Corporations Act. ASIC and ASX have recently taken action in a number of instances against individuals and brokers for artificial pricing, resulting in banning orders against individuals and fines against brokers under the ASX Market Rules. The maximum fine which can be imposed by ASX against a market participant for this type of offence is now $1 million.
Since the announcement of increased scrutiny of short selling, and the implementation in September 2008 of the ASIC Class Order regulating temporary bans on covered short selling, ASIC and ASX have imposed fines and banning orders for short selling contraventions in a number of instances. Under the ASX Market Rules, the fines which ASX can impose on a broker for failing to settle on time (which is usually also taken by ASX to be an indication of short selling) have also increased significantly. Once the regulations under the Corporations Amendment (Short Selling) Act 2008 (Cth) have been passed, and the current temporary ASIC ban on covered short sales of financial stocks is lifted, the expectation is that both ASIC and ASX will turn their focus with greater intensity to the enforcement of breaches of the short selling regulations at all levels, potentially broadening the reach of its investigations to transactions outside the equity markets and extending to transactions in derivatives, options and other financial instruments that have the same economic effect as a short sale.
ASIC was given the power to issue infringement notices for breaches of the continuous disclosure rules in July 2004 and issued its first infringement notice in August 2005. Since then it has issued a further ten. Though the fines imposed by these notices may not be great (capped at $100,000 for the largest companies), the adverse publicity they generate makes them an effective deterrent. This is despite the fact that the issue of an infringement notice and the payment of the fine are not evidence that the company has in fact broken the law.
ASIC and ASX have embraced the use of this kind of 'moral' pressure over the past few months. In a widely reported speech in November 2008, ASIC Commissioner Belinda Gibson urged listed companies to be conservative in disclosing variations in previously released forecasts. ASX backed up in January with a notice reminding companies ahead of the reporting season of their continuous disclosure obligations in relation to any expected material variations in their financial results. This notice followed a similar reminder last year about the need to consider disclosure of directors' margin loan arrangements. In recent times, ASX has issued an increasing number of price queries to listed companies responding to changes in the price or trading volume of their securities. In many instances, these price queries have come in the middle of market expectations of potentially significant capital raisings by those companies.
CAMAC issues paper
In response to a request by the Minister for Superannuation and Corporate Law (Senator Nick Sherry) to provide advice by 30 June 2009, the Corporations and Markets Advisory Committee (CAMAC) released an issues paper on 10 February 2009 outlining a number of issues for consideration in relation to market integrity.
In particular, CAMAC has been asked to consider the following in relation to rumours about listed companies and the appropriate response to rumours by companies and recipients of such information:
- Whether the market manipulation offences under the Corporations Act should be civil penalty provisions as well as attracting criminal liability and whether any of the elements of these offences should be amended.
- Whether a form of compulsory recording of telephone conversations and other electronic communication (eg, SMS) be introduced.
- Whether there should be any other steps taken to help detect and prosecute rumour-mongering.
- Whether ASIC or the ASX should provide further guidance on how companies should deal with market rumours affecting their own securities.
- Whether recipients of such rumours should develop 'best practice' guidelines on how to deal with rumours and how should such guidelines be monitored and enforced.
Internet discussion sites
On 9 March 2009, ASIC issued a consultation paper (ASIC CP 104) on the regulation of Internet discussion sites (IDSs), being websites that have commentary about financial products. ASIC is proposing to regulate, as financial services licensees, a potentially broader range of operators of IDS that provide a place for people who are not financial services professionals to share information, recommendations and opinions about financial products, including listed shares. ASIC has also proposed that all IDSs should be subject to conduct rules to ensure that operators of the IDS:
- maintain their sites in a fair and efficient manner;
- have good record-keeping practices; and
- give appropriate warnings to users of their site.
There are obvious implications of this for ASIC's power to regulate and monitor information exchanges between investors for the purpose of enforcement action and potentially for the issue of banning orders against the operators of IDS websites that are found to be the source of 'unacceptable' information.
ASIC's surveillance power
In addition to the issues being considered by CAMAC which could require market participants to keep records of telephone calls and other electronic communications, the chairman of ASIC has recently been reported as calling for increased power by ASIC to covertly tap phone lines to catch persons engaged in spreading false rumours about listed securities.
Lowering the threshold for enforcement ASIC's banning power, civil penalty offences and ASX disciplinary action
This short survey of recent regulatory activity demonstrates that ASIC and ASX are increasing the pressure on market participants, dealers, professional investors and directors of listed companies in an endeavour to deter 'unacceptable' conduct which affects market integrity. Just as important as the volume of enforcement action, however, is the form that action takes. Broadly speaking, ASIC has four main types of enforcement power:
- criminal action;
- civil penalty proceedings;
- infringement notices; and
- banning orders.
Banning orders stand out for a number of reasons. They are the only type of power which ASIC has to sanction someone without the involvement of an independent umpire: the Federal or a state Supreme Court. In exercising this power, ASIC is bound by the rules of procedural fairness. The demands of those rules, however, are far less stringent than those that would be applied in a court of law. Added up, these differences make banning orders a much easier sanction for ASIC to use. Also, banning orders allow ASIC to choose which provisions of the financial services law it points to in deciding that a person has 'failed to comply with a financial services law' as required by section 920A of the Corporations Act.
Although the introduction of more comprehensive civil penalties for market manipulation appears to have broad support, such a reform could lead to more frequent enforcement action. ASX's disciplinary power can also result in a dual enforcement regime for ASX market participants with potentially larger penalties being imposed.
Until a clearer direction on the boundaries of increased regulation and enforcement comes from either the Commonwealth Government or ASIC, it is difficult to predict with any certainty what the impact of those changes will be on securities professionals and the market.
What is certain is that ASIC and ASX will be watching you. As a result, participation in the securities markets (and most likely also the derivatives and futures markets) at all levels, whether by brokers, fund managers, professional investors or even by private individuals is likely to require much greater caution to ensure that everyday activities that would previously have been viewed as commonplace look whiter than white even in the glare of hindsight.
- Matthew McLennanPartner,
Ph: +61 2 9230 4732
- John WardePartner,
Ph: +61 2 9230 4892
- Robert PickPartner,
Ph: +61 3 9613 8721
- Andrew PascoePartner,
Ph: +61 8 9488 3741
- Andrew KnoxPartner,
Ph: +61 7 3334 3356