Skip to content.

Home

Allens

Focus: Rearmed sheriff in town

8 December 2010

In brief: Recent legislation gives the Australian Securities and Investments Commission broad new search powers, enables the Australian Federal Police to intercept communications when investigating suspected insider trading and market manipulation, and provides for substantially increased penalties for market manipulation offences. Partner Matthew McLennan (view CV) , Lawyer Tom Randall and Law Graduate Sikeli Ratu report.

How does it affect you?

  • The ease with which the Australian Securities and Investments Commission (ASIC) and related agencies can gather information has been increased.
  • The maximum penalties for market misconduct offences for corporations and individuals have been greatly increased.
  • ASIC's new responsibilities for the integrity of domestic licensed markets has led to a flood of new guidance that sends the message of 'business as usual (mostly)' while also signalling the potential for change.

Background

New legislation provides ASIC with wide-ranging new search powers and enables the Australian Federal Police (the AFP) to intercept communications for the purpose of investigating suspected insider trading and market manipulation. At the same time, the amendments provide for significantly increased penalties for market manipulation offences. 

ASIC has also recently updated Regulatory Guide 98 (RG98) following its assumption of the Australian Securities Exchange's (the ASX) market supervision responsibilities on 1 August 2010. With the recently released Regulatory Guides 216 and 214, RG98 signals that ASIC will exercise its new powers with respect to the maintenance of market integrity, to minimise disruption to market participants; however, it has also drawn attention to the breadth of powers that the new arrangements allow it to deploy.

Return to top

Corporations Amendment (No 1) Act 2010

On 18 November 2010, the Federal Parliament passed the Corporations Amendment (No 1) Act 2010 (Cth) (the Act).

The Act amends the Corporations Act 2001 (Cth), the Australian Securities and Investment Commission Act 2001 (Cth) (the ASIC Act) and the Telecommunications (Interception and Access) Act 1979 (Cth) (the TIA Act) to:

  • improve ASIC's ability to use search warrants to obtain documents;
  • give Federal Government agencies additional powers to obtain a warrant to intercept telecommunication transmissions; and
  • heighten the penalties available to the courts in cases of market manipulation. 

ASIC investigatory powers

ASIC may now apply to a magistrate for a search warrant without first having to issue a notice to produce documents. The amendments also provide that the AFP, which would execute such a search warrant, may enter premises without first informing the occupier, if the AFP believes that would be necessary to prevent the destruction of material. 

Interception powers

The Federal Government has claimed that market offences 'by their very nature involve complex networks of people [and] technological sophistication' that make the offences difficult to investigate with traditional methods. Accordingly, the Act has amended the TIA Act to add insider trading and market manipulation offences to the list of serious offences in the TIA Act. The effect of amendment is to enable an interception agency, such as the AFP, to apply for a telecommunications interception warrant in the course of an investigation into market manipulation or insider trading offences by ASIC. Depending on any restrictions or conditions placed on the warrant, this could provide investigators with the means to eavesdrop on all communications, be they personal or business-related, originating from or directed to the target person or corporation, or from or to a person likely to communicate to the target person or corporation. 

Return to top

Penalties for market manipulation offences

The Act has dramatically increased the maximum penalties available for market manipulation and insider trading offences.

Individuals

For individuals, the maximum period of imprisonment for such offences has doubled from five to 10 years.

The maximum pecuniary penalty has more than doubled, to the greater of either:

  • $495,000; or
  • if the court can determine the value of the benefit obtained from the conduct constituting insider trading or market manipulation, three times that value.
Corporations

For corporations, the maximum pecuniary penalty for such offences has increased substantially, to be the greater of:

  • $4,950,000; or
  • if the court can determine the value of the benefit gained from the conduct constituting insider trading or market manipulation, three times that value; or
  • if the 'value of the benefit' cannot be determined, 10 per cent of the corporation's annual turnover for the 12-month period before the offence was committed.

Return to top

Market integrity regime

The passage of the Act represents the second major set of amendments to the Corporations Act made this year, the first being the insertion of Part 7.2A, which gives ASIC responsibility for the maintenance of the integrity of domestic licensed markets (such as the ASX). RG98, together with RG214 and RG216, seeks to provide guidance on ASIC's approach to utilising its new authority. 

The key messages from these changes are as follows.

  • ASIC intends for the new arrangements to cause as little disruption to market participants' expectations as possible, and seeks to tailor both the investigatory and disciplinary process to be similar to those that operated under the previous regime of operator-regulated markets. For example, ASIC has established a Market Disciplinary Panel to function similarly to the ASX Disciplinary Tribunal, to be staffed by practitioners from the marketplace who are not officers or employees of ASIC.
  • However, there are important legal differences between the old and new systems. The power to issue infringement notices and to accept enforceable undertakings with respect to breaches of the Market Integrity Rules resides with ASIC at law and is delegated to the panel. ASIC has stated that it will not exercise these powers directly.
  • While it is ASIC's stated position that it will maintain the status quo, it also acknowledged that a range of measures is now available to it in dealing with a suspected breach of the market integrity rules. ASIC may therefore make, for instance, banning orders, or orders suspending or cancelling the Australian Financial Service licence of a market participant for failure to comply with the market integrity rules.
  • When market integrity was entrusted to licensed operators, the investigative powers did not extend to third parties, ie persons who were not market participants or the employees or officers of market participants. Under the new arrangements, ASIC may use the compulsory powers it exercises generally under the ASIC Act in the course of an investigation. ASIC has said that it intends to utilise these powers in the course of conducting investigations into potential breaches of the market integrity rules. 

Return to top

Conclusion

A suite of recent legislative amendments have sought to strengthen the regulatory environment by streamlining the oversight of financial markets under ASIC, significantly increasing the maximum penalty available for breaches of some rules regarding market conduct, and by providing easier access to intrusive investigative methods.

For further information, please contact:

Return to top

Share with

What are these?

 

 

Recent Litigation & Dispute Resolution publications