1. Recent Corporate Law and Corporate Governance Developments

1.1 United States SEC to publish proposals to modernise regulation of equity markets
1.2 Australia's $2.8b not-for-profit sector needs reform: study
1.3 Corporate governance principles for New Zealand
1.4 Challenging the role and responsibilities of listed company audit committees
1.5 New IFAC study explores enterprise governance; recommends actions to strengthen corporate performance
1.6 United States SEC adopts enhanced mutual fund expense and portfolio disclosure; proposes improved disclosure of board approval of investment advisory contracts and prohibition on the use of brokerage commissions to finance distribution
1.7 GMI releases global governance ratings - improvements seen but governance risks remain
1.8 Financial Services Reform Act 2001 - Relief for advice provided by accountants in relation to self managed superannuation
1.9 UK Myners review wins government endorsement for wide-ranging changes to shareholder voting process
1.10 New accounting standard on director and executive remuneration
1.11 US directors & officers liability insurance premiums up 33%
1.12 US Takeover defences slow in 2003
1.13 Canadian securities regulators implement new investor confidence measures
1.14 Canadian securities regulators propose corporate governance rules for issuers
1.15 Canadian securities regulators propose mutual fund governance regime
1.16 Market abuse: European Commission adopts first implementing measures
1.17 Survey finds two-thirds of US corporate boards logged more time in past year
1.18 IRRC's study shows corporations overhauling boards and director pay

2. Recent ASIC Developments

2.1 ASIC guidelines for interim relief for low value non-cash payment facilities
2.2 ASIC guidelines for interim relief for loyalty schemes
2.3 Proposed ASIC CLERP 9 policy papers timetable
2.4 ASIC extends statement of advice exemption for some overseas listed products
2.5 ASIC review into disclosures by eligible rollover funds

3. Recent ASX Developments

3.1 ASX share ownership study - 2003 findings
3.2 Other developments at ASX

4. Recent Takeovers Panel Decisions

4.1 Village Roadshow Limited: Panel makes declaration of unacceptable circumstances and final orders
4.2 Forest Place Group Limited: Panel to discontinue proceedings

5. Recent Corporate Law Decisions

5.1 Existence of a partnership - carrying on a business in common: mutuality and agency
5.2 An interlocutory application dismissed for the appointment of a receiver/manager to the Western Australian division of the One Nation Party
5.3 Knowing assistance by directors and the authority of managers
5.4 Disclaimer of onerous property by a liquidator in the context of ISDA master agreements
5.5 The principles of sentencing and white collar crime
5.6 Extension of time to lodge charge
5.7 Statutory demand with substantial compliance with prescribed form held to be valid
5.8 Shareholder approval may bind a company to directors' decisions in breach of their duties to the company
5.9 Operating without an Australian financial services licence - injunctive and declaratory relief sought by ASIC
5.10 Specific terms of a scheme of arrangement do not override general terms of a company's constitution

1.1 United States SEC to publish proposals to modernise regulation of equity markets

On 24 February 2004, the United States Securities and Exchange Commission voted to publish for public comment Regulation NMS, which would contain four interrelated proposals designed to modernize the regulatory structure of the U.S. equity markets. The substantive topics addressed by proposed Regulation NMS are (1) trade-throughs, (2) intermarket access, (3) sub-penny pricing, and (4) market data. In addition, Regulation NMS would update the existing Exchange Act rules governing the national market system, and consolidate them into a single regulation.

(a) Trade-throughs

• Regulation NMS would establish a uniform trade-through rule for all market centers that would affirm the fundamental principle of price priority, while also addressing problems posed by the inherent difference in the nature of prices displayed by automated markets, which are immediately accessible, compared to prices displayed by manual markets, which are not.
• Specifically, the proposal would require self-regulatory organizations (SROs), as well as any market centre that executes orders, to establish procedures to prevent the execution of an order for national market system stocks at a price that is inferior to the best bid or offer displayed by another market centre at the time of execution.
• At the same time, the proposal would include two exceptions to the general trade-through rule.
• First, a market centre would be allowed to execute an order that trades through a better-priced bid or offer on another market centre if the person entering the order makes an informed decision to affirmatively opt out of the trade-through protections. Informed consent would need to be given on an order-by-order basis. This exception is designed to provide greater flexibility to informed traders while preserving the average customer's expectation of having his or her orders executed at the best price.
• Second, an automated market - one that provides for an immediate automated response to incoming orders for the full size of its best displayed bid or offer, without restriction - would be able to trade through a better displayed bid or offer on a non-automated market up to a de minimis amount of one to five cents, depending on the stock's price. This exception reflects the comparative difficulty of accessing market quotes of non-automated markets.
• Overall, the proposal is designed to be a practical response to developments in the marketplace that still preserves the important customer protection and market integrity goals of best execution and the protection of limit orders.
• The proposed trade-through rule would not change a broker-dealer's existing duty to obtain best execution for customer orders.

(b) Intermarket access

Non-discriminatory access

• Regulation NMS would establish a uniform market access rule that would help assure non-discriminatory access to the best prices displayed by market centres, but without mandating inflexible, "hard" linkages such as the Intermarket Trading System (ITS).
• At its core, the proposal would prohibit a market centre from imposing unfairly discriminatory terms that prevent or inhibit any person from accessing its quotations indirectly through a member, customer, or subscriber.
• This standard is intended to assure that a member, customer, or subscriber of a market centre can sponsor access to quotes and order execution without receiving disparate treatment in the handling of those orders with respect to fees, speed, or other terms.

Quote standardization

• Regulation NMS also would establish an access fee standard. This standard - designed to promote a common quoting convention - is intended to harmonize quotations and facilitate the ready comparison of quotes across the national market system.
• The proposal would establish a de minimis fee standard for all market centres and broker-dealers that display attributable quotes through SROs. Specifically, access fees would be capped at $0.001 per share, and the aggregation of this fee would be limited to no more than $0.002 per share in any transaction.

Locked and crossed markets

• Finally, the proposed rule would require each SRO to establish and enforce rules requiring its members to avoid - and prohibiting them from engaging in a pattern or practice of - locking or crossing the markets.

(c) Sub-penny pricing

• Regulation NMS would ban sub-penny quoting in most stocks. Specifically, it would prohibit market participants from accepting, ranking, or displaying orders, quotes, or indications of interest in a pricing increment finer than a penny in national market system stocks, other than those with a share price below $1.00.
• This proposal is intended to prevent sub-penny pricing from being used by some market participants to "step-ahead" of customer limit orders for an economically insignificant amount. This "sub-pennying" could, over time, discourage investors from placing limit orders, which are an important source of market liquidity.

(d) Market data

• Regulation NMS would amend the existing arrangements for disseminating market data in order to better reward SROs for their contributions to public price discovery, as well as implement most of the recommendations of the Commission's Advisory Committee on Market Information.
• Under existing rules and joint industry plans, the trades and best quotes in thousands of listed and Nasdaq stocks are made available on a real-time and consolidated basis.
• The proposal would replace the current plan formulas for allocating revenues derived from market data fees to the SROs, which are based solely on the number of trades or share volume reported by an SRO. This method of allocation has led to serious economic and regulatory distortions, creating incentives for "print" facilities, "wash" trades, and "shredded" trades. In addition, those markets that generate the highest quality quotes (i.e., the best prices and the largest sizes) are not necessarily rewarded.
• In general, the proposed new formula would divide market data revenues equally between trading and quoting activity, in order to reward markets that publish the best accessible quotes.
• The proposal also includes a number of improvements that were recommended by the Advisory Committee on Market Information. For example, the proposal would broaden participation in plan governance by creating advisory committees composed of non-SRO representatives. Such committees would help assure that interested parties have an opportunity to be heard on plan business, prior to any decision by the plan operating committees.
• In addition, the proposal would authorize market centres to distribute their own additional data, such as limit order books, separate from other markets, as well as establish uniform standards for the terms of such distribution.

1.2 Australia's $2.8b not-for-profit sector needs reform: study

The regulatory framework behind Australia's not-for-profit sector is riddled with inconsistencies and is undermining an economically valuable sector, according to a new University of Melbourne study.

In a first of its kind, this study by University of Melbourne's Centre for Corporate Law and Securities Regulation researcher Susan Woodward, surveyed over 1700 not-for-profit (NFP) companies. The final research report (A Better Framework: reforming not-for-profit regulation) makes recommendations designed to achieve a balance between the needs of the sector and the broad public interest in NFP accountability.

Recent ABS figures confirm that NFPs play a vital role in our society, with the sector adding more to Australia's GDP than the mining industry. In economic terms alone Australians give more than $2.8 billion annually to NFP organisations.
But Ms Woodward said, "The underlying health of the not-for-profit sector is at risk. The regulatory framework that underpins the sector is complex and riddled with inconsistencies. It's time for some preventative medicine".

Ms Woodward said that to meet both the needs of the sector and the needs of its stakeholders, the relevant laws and regulatory bodies needed to be fair, consistent and clear in order to promote NFPs that are transparent, accountable and credible. She comments, "If the regulatory fundamentals are sound, then growth and innovation are more likely to occur."

Ms Woodward said the legal structures in the NFP sector were more varied and complex than in the business sector, and she has proposed several reform recommendations, the principal one being the need for a single, Commonwealth regulatory regime. Other recommendations include:

• ASIC becoming the new regulator for all incorporated NFPs (associations and companies), at least until any sector specific regulator is introduced
• establishing a specialist NFP unit within ASIC
• developing a plain language guide and replaceable rules for NFPs
• establishing an independent NFP advisory body to provide assistance to NFPs with a range of legal, taxation, training and dispute resolution issues.

Ms Woodward said if important reforms are to take place, the sector itself will need to lobby for change, and government (State and Federal) will need to be committed to streamlining and reforming NFP regulation.

The report was launched at Freehills 101 Collins Street, Melbourne on 19 February 2004. Copies of the report will be available at:

http://cclsr.law.unimelb.edu.au/activities/not-for-profit/index.html

1.3 Corporate governance principles for New Zealand

On 18 February 2004, the Securities Commission of New Zealand delivered its report on Corporate Governance Principles for New Zealand to the Minister of Commerce. The report followed extensive public consultation last year.

"The Commission has developed nine high level principles for good corporate governance in New Zealand," Commission Chairman Jane Diplock said.

"There was strong support for the concept of a principles-based approach to corporate governance, and the final document is in line with the public views that came from the consultation process."

Corporate governance practices and research from relevant overseas jurisdictions were also taken into account in drafting the Principles.

"This will bring New Zealand into line with best practice overseas," Jane Diplock said. "It will increase the integrity of the New Zealand securities markets and make them more attractive to investors."

The Principles focus strongly on reporting and disclosure of corporate governance structures and processes, as well as on reporting of financial and other material matters.

(a) The Principles and listed entities

The Principles do not impose a new regulatory regime on listed entities.

The Commission believes that listed entities with high standards of corporate governance, which disclose these under the NZX Listing Rules, will probably not have to do any additional reporting to be consistent with the Principles.

(b) The Principles apply to a wide range of entities

The Commission's Principles of Corporate Governance have been designed to be adopted by a wide range of entities.

These include all issuers of securities, unit trusts and other collective investment schemes, state-owned enterprises, and statutory bodies in the public sector.

The Commission encourages entities of all types to consider, adopt and report against the Principles as a means to achieving high quality corporate governance.

(c) Principles do not impose new legal requirements

The Securities Commission's Principles of Corporate Governance do not impose a new mandated requirement for issuers of securities.

The Principles identify good corporate governance behaviours. The Commission encourages entities of all types to adopt and report against these Principles.

"Many issuers in New Zealand do achieve good corporate governance," Chairman Jane Diplock said. "However, the Commission has seen and commented on some very poor corporate governance by directors and boards that have raised money from the public. These companies have not met the standards of corporate governance investors have the right to expect."

The Commission will continue to keep corporate governance high on its priorities for enforcement activity. When poor corporate governance is identified it will publicly report on this.

The Commission's report, Corporate Governance Principles for New Zealand, is available on its website.

1.4 Challenging the role and responsibilities of listed company audit committees

The push for compulsory audit committees was a major part of the Ramsay Report into Auditor Independence and it has been included as a central part of the proposed audit reforms in CLERP 9 that makes it compulsory for the Top 500 listed companies to have audit committees.

It is evident that in recent years, there have been significant changes in expectations about what audit committees can contribute to risk management, disclosure and governance generally. In the past audit committees were simply considered sub-committees of Boards that met with auditors and dealt with matters raised by them.

“Now expectations are much wider and require audit committees to be responsible for overseeing many aspects of the management of a corporation,” said Mr Michael O’Sullivan, President of the Australian Council of Superannuation Investors (ACSI).

“The compulsory requirements for the existence of Board Audit Committees will sharpen our attention on the responsibilities of Boards generally and on Board sub-committees in particular. However, the opportunity must not be missed to require disclosures that would enable greater scrutiny to be focussed on what Boards and committees are actually doing on behalf of shareholders.”

“In the context of audit committees, unless copies of audit committee charters are publicly available, and unless annual reports clearly described the activities undertaken by audit committees, the investors will be unable to ask informed questions of Boards and generally hold directors accountable in relation to financial and other governance risks” said Mr O’Sullivan.

“The ASX Corporate Governance guidelines do not spell out minimum terms of reference for an audit committee. This has meant that, in many respects, the operation of Australian audit committees may be falling well short of best practise,” Mr O’Sullivan added.

In response to these gaps in guidelines, Professor Bob Walker, Professor of Accounting at the University of NSW, has reviewed literature to chart changes in ideas on audit committees over the last three decades. The paper was presented by Professor Bob Walker at an ACSI seminar in Sydney and the recommendations for a model charter have been supported by the ACSI.

“Based on prior governance failures and the losses that have ensured, it is clear that one factor contributing to the scale of these disasters was that Boards received financial information that was, at best, inadequate (or, at worst, misleading). Best practice guidelines on the operation of audit committees have not addressed this; rather, they have focussed on external reporting,” explained Professor Walker.

The paper argues that some basic responsibilities that could be assumed by audit committees continue to be overlooked in formal guidelines.

“Best practice guidelines do not refer to any steps that might be taken to ensure confidence in the quality of information being presented to Boards or external stakeholders… Indeed, most guidelines even fail to refer to governance arrangements in subsidiaries," said Professor Walker.

A second element of the paper is to compare expectations about what audit committees should do with the practices adopted by major Australian listed entities.

Finally, the paper puts forward a suggested audit committee model charter. The charter reflects current expectations about what such a board sub-committee should do in order to make an effective contribution to the governance of major organisations.

It is intended that the model charter supplement existing regulatory and industry standards, with the ultimate aim to provide trustees of superannuation funds, as significant investors in listed companies with a benchmark in which to assess listed companies’ performance in this area.

Further information is available on the ACSI website.

1.5 New IFAC study explores enterprise governance; recommends actions to strengthen corporate performance

The culture and tone at the top, the chief executive, the board of directors and the internal control system are the four key determinants of corporate success and failure, according to a new study released on 17 February 2004 by the International Federation of Accountants (IFAC) and The Chartered Institute of Management Accountants (CIMA).

Enterprise Governance: Getting the Balance Right includes an in-depth analysis of corporate successes and failures in 27 case studies from 10 countries. These countries are Australia, Canada, France, Hong Kong, Italy, Malaysia, the Netherlands, Thailand, the United Kingdom and the United States. Ten industries are covered in the case studies, including telecommunications, retail, financial services, energy and manufacturing.

The IFAC Board requested its Professional Accountants in Business (PAIB)

Committee to conduct the study in conjunction with CIMA to explore and define the emerging concept of enterprise governance, determine its role in preventing or contributing to corporate failures and to recommend actions that can strengthen governance. The study complements previous research done by the IFAC Task Force on Rebuilding Confidence in Financial Reporting, which recommended actions that could be taken by all those in the financial reporting supply chain to restore the credibility of financial reporting and corporate disclosure.

“Although poor corporate governance can ruin a company, the study revealed that good governance on its own cannot make a company successful. Companies need to balance conformance with performance. This is a fundamental component of enterprise governance,” emphasizes Bill Connell who chairs both the IFAC PAIB Committee and CIMA’s Technical Committee.

In the study, conformance is defined as “corporate governance.” It covers such issues as board structures and roles and executive remuneration. The performance dimension focuses on strategy and value creation.

“Unlike the conformance dimension, there are no dedicated oversight mechanisms, such as audit committees, in the arena of strategy. Several of the high-profile companies highlighted in this study fell into difficulties as a consequence of their strategic choices. There is a danger that in the laudable attempt to improve standards of control and ethics, insufficient attention is paid to the need for companies to create wealth and ensure that they are pursuing the right strategies to achieve this. It is both easy and common for boards to fall into the trap of getting immersed in detail at the expense of focusing on overall strategic risks and opportunities that drive shareholder value,” points out Mr. Connell.

An analysis of the case studies showed that, in addition to the corporate governance issues mentioned above, there were several other key strategy issues contributing to corporate success and failures:

·         Choice and clarity of strategy;
·         Strategy execution;
·         Ability to respond to abrupt changes and/or fast-moving market conditions; and
·         Ability to undertake successful mergers and acquisitions (M&As).

Unsuccessful M&As were the most significant cause of strategy-related failure.

A complete chapter on how enterprise governance can be used to control M&A activities is therefore included in the report.

The report also gives detailed information about CIMA’s development of a

Strategic Scorecard for enterprise governance as a means of addressing the strategic oversight gap and avoiding the sort of strategic failures that were apparent in the case studies.

In addition to introducing the concept of the strategic scorecard, the report offers guidance on enterprise risk management, the acquisition process, and managing board performance. An appendix features a synopsis of recent international corporate governance developments.

Enterprise Governance: Getting the Balance Right may be downloaded free of charge from IFAC’s website by going to http://www.ifac.org/store. Print copies may be obtained by contacting mailto:mdamarysgil@ifac.org or mailto:mjasmin.harvey@cimaglobal.com

1.6 United States SEC adopts enhanced mutual fund expense and portfolio disclosure; proposes improved disclosure of board approval of investment advisory contracts and prohibition on the use of brokerage commissions to finance distribution

On 11 February 2004, the United States Securities and Exchange Commission (SEC) took the following actions.

(a) Shareholder reports and quarterly portfolio disclosure by funds

The Commission adopted several amendments to its rules and forms that are intended to improve significantly the periodic disclosure that mutual funds and other registered management investment companies provide to their shareholders about their costs, portfolio investments, and performance.

The amendments include the following:

·         Enhanced mutual fund expense disclosure in shareholder reports. The amendments will require open-end management investment companies (mutual funds) to disclose fund expenses borne by shareholders during the reporting period in their shareholder reports. Shareholder reports will be required to include: (i) the cost in dollars associated with an investment of $1,000, based on the fund’s actual expenses for the period; and (ii) the cost in dollars, associated with an investment of $1,000, based on the fund’s actual expense ratio for the period and an assumed return of 5 percent per year. The first figure is intended to permit investors to estimate the actual costs, in dollars, that they bore over the reporting period. The second figure is intended to provide investors with a basis for comparing the level of current period expenses of different funds. The expense disclosure will also be required to include the fund's expense ratio and the account values as of the end of the period for an initial investment of $1,000.

·         Quarterly disclosure of fund portfolio holdings. The amendments will require a registered management investment company (fund) to file its complete portfolio holdings schedule with the Commission on a quarterly basis. These filings will be publicly available through the Commission’s Electronic Data Gathering, Analysis, and Retrieval System (EDGAR). This amendment is intended to enable interested investors, through more frequent access to portfolio information, to monitor whether, and how, a fund is complying with its stated investment objective.

·         Use of summary portfolio schedule. The amendments will permit a fund to include a summary portfolio schedule in its semi-annual reports that are delivered to shareholders in lieu of the complete schedule, provided that the complete portfolio schedule is filed with the Commission and is provided to shareholders upon request, free of charge. The summary portfolio schedule will include each of the fund’s 50 largest holdings in unaffiliated issuers and each investment that exceeds one percent of the fund’s net asset value. This amendment is intended to provide investors with information about portfolio holdings in a format that is more useful and understandable.

·         Exemption of money market funds from portfolio schedule delivery requirements. The amendments will exempt money market funds from including a portfolio schedule in reports to shareholders, provided that this information is filed with the Commission and is provided to shareholders upon request, free of charge. Because the investments of money market funds must be high-quality, are circumscribed by rules under the Investment Company Act of 1940, and have short-term maturities, detailed portfolio information has limited utility for money market fund investors.

·         Tabular or graphic presentation of portfolio holdings in shareholder reports. The amendments will require fund reports to shareholders to include a tabular or graphic presentation of a fund’s portfolio holdings by identifiable categories (e.g., industry sector, geographic region, credit quality, or maturity). This presentation is intended to illustrate, in a concise and user-friendly format, the allocation of a fund’s investments across asset classes.

·         Management’s discussion of fund performance. The amendments will require a mutual fund to include Management’s Discussion of Fund Performance (MDFP) in its annual report to shareholders. Currently, a fund is permitted to include MDFP in either its prospectus or its annual report to shareholders. MDFP is more appropriately located in the annual report, together with other “backward looking” information, such as the fund’s financial statements.

The new requirements will apply to shareholder reports and quarterly portfolio disclosure for reporting periods ending on or after 120 days following publication in the Federal Register.

(b) Disclosure regarding approval of investment advisory contracts by directors of investment companies

The Commission proposed amendments to its rules and forms that would improve the disclosure that mutual funds and other registered management investment companies provide to their shareholders regarding the reasons for the fund board’s approval of an investment advisory contract. The proposals are intended to encourage fund boards to consider investment advisory contracts more carefully and to encourage investors to consider more carefully the costs and value of the services rendered by the fund’s investment adviser.

The proposals would require fund shareholder reports to discuss, in reasonable detail, the material factors and the conclusions with respect to these factors that formed the basis for the board of directors’ approval of any investment advisory contract. The proposed new disclosure would be similar to disclosure currently required in the fund’s Statement of Additional Information, or SAI, and fund proxy statements about the basis for the approval of the fund’s existing advisory contract and any board recommendation that shareholders approve an advisory contract.

The proposals also include several enhancements to the existing disclosure requirements in the SAI and proxy statements that would parallel the proposed disclosure in fund shareholder reports. These enhancements would require the following:

·         Selection of adviser and approval of advisory fee. The proposals would clarify that the fund should discuss both the board’s selection of the investment adviser and its approval of amounts to be paid under the advisory contract. 

·         Specific factors. The fund would be required to include a discussion of (1) the nature, extent, and quality of the services to be provided by the investment adviser; (2) the investment performance of the fund and the investment adviser; (3) the costs of the services to be provided and profits to be realized by the investment adviser and its affiliates from the relationship with the fund; (4) the extent to which economies of scale would be realized as the fund grows; and (5) whether fee levels reflect these economies of scale for the benefit of fund investors. 

·         Comparison of fees and services provided by adviser. The fund’s discussion would be required to indicate whether the board relied upon comparisons of the services to be rendered and the amounts to be paid under the contract with those under other investment advisory contracts, such as contracts of the same and other investment advisers with other registered investment companies or other types of clients (e.g., pension funds and other institutional investors).

Comments on the proposed rule amendments will be due approximately 60 days following their publication in the Federal Register.

(c) Prohibition on the use of brokerage commissions to finance distribution

The Commission proposed an amendment to rule 12b-1 under the Investment Company Act of 1940 that would prohibit open-end investment companies (mutual funds) from directing commissions from their portfolio brokerage transactions to broker-dealers to compensate them for distributing fund shares. The Commission also asked for comment on the need for additional changes to rule 12b-1.

In an increasingly competitive marketplace, one way that fund advisers reward broker-dealers for promoting mutual fund shares is through brokerage commissions. Advisers often either select broker-dealers that sell fund shares to execute fund portfolio transactions, or rely on another broker-dealer to execute the transactions, but direct a portion of the brokerage commission to selling brokers. The conflicts of interest that surround the use of brokerage commissions (which are fund assets) to finance distribution may harm funds and their shareholders in a number of ways, including compromising best execution, causing advisers and brokers to circumvent limits on sales charges, increasing portfolio turnover, concealing distribution costs, and influencing broker-dealers’ recommendations to their customers.

The proposed rule amendment would:

·         prohibit funds from compensating a broker-dealer for promoting or selling fund shares by directing brokerage transactions to that broker-dealer; 

·         prohibit “step-out” and similar arrangements under which a fund directs brokerage commissions to selling brokers that do not execute fund portfolio securities transactions as compensation for selling fund shares; and  

·         require funds that use a selling broker-dealer to execute portfolio securities transactions to adopt, and the fund’s board of directors (including its independent directors) to approve, policies and procedures reasonably designed to prevent: (i) the persons who select executing broker-dealers from taking into account brokers’ distribution efforts; and (ii) any agreement under which the fund is expected to direct brokerage commissions for distribution.

The Commission also is requesting comment on the need for additional changes to rule 12b-1 to address other issues that have arisen under the rule. One of these issues is the current practice of using 12b-1 fees as a substitute for a sales load. In addition, the Commission is requesting comment on an alternative approach to rule 12b-1 that would require distribution-related costs to be deducted directly from shareholder accounts rather than from fund assets. Finally, the Commission is seeking comment on whether rule 12b-1 continues to serve the purpose for which it was intended, and whether it should be repealed. The comments the Commission receives will determine whether a proposal for further amendments to rule 12b-1 is appropriate.

Comments on the proposed rule amendment and additional request for comment will be due approximately 60 days after the proposed rule is published in the Federal Register.

1.7 GMI releases global governance ratings – improvements seen but governance risks remain

GovernanceMetrics International (GMI), the corporate governance research and ratings agency, announced on 9 February ratings on 2,100 global companies. Twenty-two companies – eighteen American, two British, one Australian and one Canadian - received scores of 10.0, GMI’s highest rating (see below). As a group, these companies outperformed the S&P 500 Index as measured by average total returns for each of the last one, three and five-year periods by 3.0%, 9.4% and 6.9% respectively. Gavin Anderson, GMI’s President and CEO, said “This is another example of a growing body of research suggesting a correlation between corporate governance and portfolio returns when measured across a number of variables and across a multi-year period.”

On a national level, Canadian companies had the highest overall average rating of 7.6, followed by the United States (7.0), Australia (6.9) and the United Kingdom (6.7). Japanese companies had the lowest overall average rating at 3.0. In Europe, companies from Greece (3.8), Austria (4.0), Portugal (4.0) and Denmark (4.0) had the lowest overall average ratings.

Looking just at the two largest markets rated by GMI, the United States and the United Kingdom, the average rating for the top 100 US companies was 8.0 and the top 100 UK companies was 7.8. In the July 2003 GMI ratings release, these numbers were 7.7 and 7.1, respectively. These improvements are indicative of the governance changes taking place in both markets.

Mr. Anderson said, “While US, Canadian, UK and Australian firms had higher average scores than others, it would be a mistake to conclude that there was little governance risk in companies from these markets. Indeed we are still seeing practices in companies in all four markets that warrant significant shareholder concern. Two examples are a US concern which claims it does not control its overseas operations despite controlling 85% of the voting power of the entity. This same company has had two earnings restatements and its outside auditor recently resigned over management misrepresentations of related-party transactions. In the second example, the Chairman of a Canadian company, who controls the company with a special class of shares, received almost $25 million last year in special fees for ‘business consulting and development services.’ Certainly in the latter case, investors have become much more familiar with this kind of activity in the last few months as managements at some controlled companies enriched themselves at the expense of both shareholders and bondholders.”

As part of its rating process, GMI identifies issues of concern to investors and “red flags” companies that are undergoing regulatory investigation, have high potential options dilution, unequal voting rights or other practices that represent additional risk to equity or debt holders. Parmalat was one such company GMI flagged in July of last year, months before the Italian company imploded and became Europe’s Enron. In its current universe GMI has issued red flags at 675 companies. The market sectors with the highest percentages of red flags are Technology (56%), Media (50%), Telecommunications (45%) and Healthcare (39%). In addition, GMI identified 211 companies that have taken an unusual and non-recurring charge of 5% or more of revenues in the last year, 190 companies that have been cited or found guilty for a breach of law involving non-accounting issues, and 189 companies that have been subject to a regulatory investigation for a material issue other than an accounting matter.

Another area of concern is compensation. While 1,835 companies covered by GMI had a compensation committee, in 414 cases an executive sat on the compensation committee. In 59 instances, it was the CEO. Of particular interest also is director independence, and the question of whether board leadership comes from a combined Chairman/CEO or an independent Chairman or lead outside director. In this latest ratings release, GMI found that in just the last six months there has been a significant shift. While the total number of independent directors increased marginally from 56.1% to 57.5%, the number of combined Chairman and CEO positions fell from 47.3% to 41.6%, the number of independent chairman grew from 13.2% to 21.2% and the change in the number of lead directors jumped from 23.3% to 33.4%. Fifty percent increases in six months is a very significant change and were found not only in the United States, but also in Europe and Australia.

GMI’s rating system incorporates hundreds of data points across six broad categories of analysis: board accountability, financial disclosure and internal controls, executive compensation, shareholder rights, ownership base, takeover provisions, plus corporate behaviour and social responsibility.

(a) Companies with a global score of 10.0 (the highest rating) are:

(b) Average overall ratings by country

(c) Average overall rating by sector

Utilities (105) 6.8
Energy (91) 6.8
Basic resources (73) 6.6
Retail (104) 6.6
Non-cyclical goods and services (91) 6.5
Technology (198) 6.5
Insurance (96) 6.5
Chemicals (63) 6.5
Healthcare (150) 6.4
Banks (152) 6.2
Industrial goods and services (328) 6.2
Financial services (203) 6.1
Media (96) 6.1
Food and beverage (73) 6.1
Cyclical goods and services (154) 6.0
Telecommunications (47) 5.9
Automobiles (43) 5.3
Construction (54) 5.3

1.8 Financial Services Reform Act 2001 – Relief for advice provided by accountants in relation to self managed superannuation

On 9 February 2004, the Australian Federal Treasurer announced that new regulations were to be made to provide relief from the Financial Services Reform Act 2001 (FSRA) for accountants who provide advice to their clients on the decision to acquire or dispose of an interest in a self managed superannuation fund (SMSF).

The Government accepts that such advice should not require licensing under the FSRA regime. The new regulation will be consistent with a recommendation made by the Parliamentary Joint Committee on Corporations and Financial Services which considered this matter.

The regulation would be limited to ‘recognised accountants’ that hold appropriate qualifications to provide the advice. A recognised accountant would be exempted from the previous restriction in Corporations Regulation 7.1.29 that they not make ‘a recommendation that a person acquire or dispose of a superannuation product’ in relation to a SMSF. The exemption will not cover the provision of advice about the particular investments that a SMSF may hold and such advice will remain subject to FSRA licensing.

The new regulation is intended to promote certainty for accountants. It acknowledges the important role that accountants currently play in providing a range of professional advice and expertise to their business and other clients.

It ensures that advice on the establishment of a SMSF, which often forms a part of overall business arrangements, is treated comparably with other FSRA exempt advice provided to a client, such as on business structuring and taxation. The exemption for advice on the establishment of a SMSF is in keeping with the policy of exempting such advice from the FSRA.

The regulation will have effect from the end of February 2004, before the conclusion of the FSRA transitional period on 11 March 2004.

1.9 UK Myners review wins government endorsement for wide-ranging changes to shareholder voting process

Paul Myners’ report to the Shareholder Voting Working Group (SVWG), published on 3 February 2004, outlines a comprehensive action programme to remove obstacles to casting votes by institutional investors at UK company meetings. The report, "A review of the impediments to voting UK shares", details a series of actions required from: beneficial owners of shares, companies or issuers, company registrars, investment managers, custodians and proxy voting agencies. The report also makes recommendations to the Department for Trade and Industry, the Financial Services Authority (FSA) and the Financial Reporting Council.

Speaking about the report Paul Myners commented:

"There has been continuing concern that the system for registering proxy votes at company meetings is not as efficient as it should be. Complications arise from the number of different participants involved and the confusing lines of responsibility. There is no single simple solution, no silver bullet to the problem of ‘lost votes’. However, significant improvements can be achieved through concerted action by all interested parties. There is nothing inherently flawed in the pipework that carried votes from the investor to the issuer. What has previously been lacking is a commitment on the part of participants to make it work effectively”

The report has been welcomed by Industry Minister Jacqui Smith and has also been endorsed by the Institutional Shareholders’ Committee³, the British Bankers' Association, the Institute of Chartered Secretaries and Administrators and the Association of Private Client Investment Managers and Stockbrokers.

Among the conclusions and recommendations contained in the report are:

·         voting policy - beneficial owners should determine a voting policy and engage fully in its implementation
·         electronic voting - beneficial owners of shares should require their agents (custodians, investment managers etc) to have an electronic voting capability as part of their standard service conditions;
·         registering title to shares - beneficial owners should consider requiring their shares to be registered in a nominee company with designation in their own name or some other unique designation, rather than in an undesignated omnibus nominee account;
·         date for the appointment of proxies - the current 48 hour limit should be amended to two business days to take account of bank holidays and weekends;
·         stocklending - borrowing stock for the purpose of voting is not appropriate as it gives a proportion of the vote to an agent who has no on-going economic interest in the company. Beneficial owners should be fully aware of the implications for voting if their shares are lent and, when a resolution is contentious, should recall the related stock;
·         accountability - investment managers should actively exercise the votes in shares they hold or manage for beneficial owners and have a stated, public and regularly reviewed policy on voting UK shares;
·         voting resolutions at company meetings - best practice should be to call a poll (rather than a show of hands) on all resolutions at company meetings;
·         disclosing the results of polls and proxy votes - quoted companies should disclose on their websites and in summary in annual reports the results of polls of general meetings. The FSA should make it a listing requirement for the results of polls to be disclosed as a regulatory announcement to the market;
·         recognising votes withheld - votes consciously withheld can be a useful tool in communicating shareholders' reservations about a resolution, provided there is a clear explanation to the company as to why the vote has been withheld. Companies should provide a 'vote withheld' box on all proxy forms;
·         improving the powers of proxies - Company Law should be changed to give more rights to proxies so that they can speak and vote on a show of hands as well as a poll;
·         scrutiny of polls - Company Law should be amended to require independent scrutiny of polls if requested by shareholders.

1.10 New accounting standard on director and executive remuneration

David Boymal, Chairman of the Australian Accounting Standards Board (AASB), announced on 28 January 2004 the gazettal of a new Accounting Standard, AASB 1046 Director and Executive Disclosures by Disclosing Entities, that will be effective for years ending on or after 30 June 2004. The main aim of the new Standard is to improve the quality and comparability of disclosures by listed companies about the remuneration of those responsible for its governance. Mr Boymal said the increase in disclosures required from Australian companies is in line with increases for listed companies in major capital markets overseas.

Mr Boymal commented “Controversies about what should be disclosed about whom and how to treat executive share options have contributed to delays in producing AASB 1046. Progress has also been hindered by trying to fit into schedules for issuing new Australian Standards equivalent to those of the

International Accounting Standards Board (IASB). However, the AASB has decided that issuing AASB 1046 should not be delayed any longer, particularly since it covers an area that the IASB has stated it will leave to national jurisdictions.”

The majority of the disclosures in AASB 1046 were initially proposed in Exposure Draft ED 106 Part 1 Director and Executive Disclosures by Disclosing Entities (May 2002). Those proposals have been amended to reflect the responses received, subsequent decisions of the IASB (on share-based payment) and redeliberation by the AASB. The method required for measuring equity compensation has been changed from the vesting date method proposed in ED 106 to the grant date method expected in the IASB’s forthcoming IFRS 2 Share-based Payment. Unlike IFRS 2, AASB 1046 does not require equity grants to be recognised as expenses but it does require disclosure for each specified director and specified executive; specified directors being the directors of the entity required to prepare the financial report and specified executives being at least five executives in the economic entity (or entity) with the greatest authority.

Disclosing entities applying AASB 1046 will be exempt from complying with requirements on director disclosures in AASB 1017 Related Party Disclosures. The requirements in AASB 1034 Financial Report Presentation and Disclosures for the banded disclosures of executive remuneration will be withdrawn. However, disclosing entities will still need to provide the other disclosures required by AASB 1017. Corporate non-disclosing entities will remain subject to all requirements of AASB 1017, including the disclosure requirements for directors. AAS 22 Related Party Disclosures, applicable to non-corporate, non-public sector reporting entities, is not changed by the issue of AASB 1046. It is expected that the AASB will address remuneration disclosures for all non-disclosing reporting entities when considering the adoption of IAS 24 Related Party Disclosures.

AASB 1046 is available on the AASB website.

1.11 US directors & officers liability insurance premiums up 33%

On 26 January 2004, Towers Perrin's 2003 Directors & Officers Liability Survey was released indicating that directors and officers (D&O) liability insurance premiums increased approximately 33% on average from 2002 to 2003. While employee lawsuits were significant for all types of respondents, entities with more than 500 shareholders saw most of their claims come from shareholders. Despite record premium increases during the year, the 2003 D&O Premium Index indicates that the market started stabilizing toward the end of 2003 with premium increases beginning to level off. The survey, which included 2,139 participants, is the 26^th in a series of studies on D&O liability claims and insurance purchasing patterns and the only study of its type.

The 2003 D&O Premium Index median and average premiums were the highest ever reported by survey participants, with 70% of US respondents reporting an increase in premiums from a prior policy and only 19% reporting a decrease. Signs of stabilization occurred toward the end of the year, with 62% of US participants with renewals reporting a premium increase in the third quarter, compared with 76% in the third quarter of 2002.

(a) Key findings from the survey include:

·         Coverage available despite decreased capacity levels: According to information provided by D&O insurance carriers, $1.35 billion in full limits capacity was available during 2003, which is the lowest capacity level since 1997. Yet few survey participants cited availability problems. 2003 was the eleventh consecutive year that less than 5% of all US participants not purchasing D&O coverage made their decision because coverage was completely unavailable to them.
·         Employment practices liability (EPL) saw the most significant increase in incidence of D&O claims: During 2003, 91% of D&O claims against nonprofits organizations were brought by employees. At for-profit companies with fewer than 500 shareholders, 50% of D&O claims were brought by employees, compared with 24% at companies with more than 500 shareholders. Employment discrimination (40%) was the most frequently cited employment-related claim, followed by wrongful termination (24%).
·         D&O claims decreased slightly: Though there was a dip in the frequency of D&O claims, severity excluding shareholder claims increased by 40%. The severity of shareholder claims averaged $14.2 million per claim award in 2003, down from $23.4 million in 2002. 
·         M&A activity more than doubled odds of D&O claims: Twenty-seven percent of US respondents were involved in a merger, acquisition or divestiture during 2003, and these companies were more than twice as likely to have at least one D&O claim. On average, they also had three times as many D&O claims as their counterparts that did not undergo such reorganization.
·         Brokers/Carriers: In the survey, the leading US D&O primary insurance brokers continue to be Woodruff-Sawyer & Company and Alburger Basso De Grosz, while Chubb and AIG continue to underwrite the largest share of US D&O primary insurance.

(b) Premium Index: record high, but hints of market stabilization

Since 1974, when Tillinghast developed a standardized premium index for D&O coverage, premium medians and averages have fluctuated with the highest values for both in the period 1994 to 1995. However, 2003 set a new record for both of these measures, with the median premium index for purchasers of D&O insurance up 13% from 2002 and the average up 33%. The spread between the average and median of premium has increased significantly since 1999.

(c) Predictions for 2004 D&O market

Tillinghast predicts the D&O market will take the following shape in 2004:

·         Capacity will increase: After bottoming in 2003, capacity should bounce back this year with new entrants coming into the market.
·         Market will remain hard: In spite of the increase in capacity, the market will not begin to soften. Though premium increases will stabilize overall, some industry sectors will still experience increases of 30% or more.
·         Narrowing of coverage: There will be some continued narrowing of coverage by virtue of more restrictive coverage forms and carriers imposing more exclusions. However, most of this is anticipated to occur in the first half of 2004 with coverage stabilization likely during the second half of the year.
·         Sarbanes-Oxley creates interesting dynamic: Regulation from Sarbanes-Oxley will likely make buyers more concerned about having enough coverage limits. However, insurers will be concerned about claim frequency increasing, and may become more selective in offering coverage limits.

(d) Participant profile

The 2,139 companies surveyed comprised 2,068 from the US and 71 in Canada, in 15 business classes across all major industry groups. In the US, the largest representation was from the technology and biotechnology & pharmaceuticals business classes. Companies with under $100 million in assets accounted for 69% of US respondents, while 13.5% had assets greater than $1 billion. A wide variety of Canadian industrial groups were represented by the 71 Canadian participants, 31% of which have under $100 million in assets and 34% had more than $2 billion. Nonprofits (including governmental) organizations represented 11% of participants in both the US and Canada.

Of the for-profit participants, 44% were publicly traded corporations. Within the past five years, 58% of the US for-profit participants reported an after-tax loss in one or more years, 10% were involved in an initial public offering (IPO) and 27% experienced merger, acquisition or divestiture activity. Among Canadian for-profit participants, the corresponding figures were 41%, 7%, and 66%.

1.12 US takeover defences slow in 2003

The pace of adoption of most takeover defences slowed in the last two years, says the United States Investor Responsibility Research Center in its 2004 edition of “Corporate Takeover Defenses” (CTD) as released on 21 January 2004. This may reflect heightened sensitivity in the aftermath of numerous corporate scandals, where lack of management and board accountability to shareholders were contributing factors in many cases. Nevertheless, a substantial majority of major US companies are still protected by a range of barriers that make it difficult for a hostile acquisition to succeed.

The latest edition of CTD surveys corporate control features at a total of 1,982 public firms as of the end of 2003. As in previous years, the most prevalent defences of the profiled firms re-main blank check preferred stock, advance notice requirements, classified boards, poison pills, and golden parachutes, each of which is found at a majority of the nearly 2,000 firms tracked. The prevalence of classified boards appears to have peaked at just under 60 percent of companies, and poison pill adoptions and supermajority merger vote requirements are also holding steady at about 55 percent and 15 percent, respectively.

On the other hand, companies continue to establish advance notice requirements for shareholder proposals—prevalence of that impediment to shareholder protestation rose to 77 percent as of the end of 2003, from less than 72 percent two years earlier and only about 44 percent when these were first tracked in 1995. The only other anti-takeover feature to show significant gain in the past two years is golden parachute arrangements—typically consisting of severance based on three-times pay in the event of a change-in-control related termination—which jumped from 67.7 percent of the companies analysed two years ago to 73.4 percent today. That extends the pattern of steady expansion of these often costly benefits since 1995, when IRRC tracked them at only 53 percent of companies.

Meanwhile, shareholders are not sitting idly by as anti-takeover measures continue to proliferate. Shareholders have made it clear they object to boards using these devices to impede investor value or entrench management at their expense. In the last few years, shareholder proposals to eliminate classified boards and supermajority vote requirements, and to eliminate or allow a shareholder vote on poison pills, have garnered support averaging at least 60 percent at the 2,000 companies where IRRC tracks voting results on an annual basis. More than a quarter of the profiled companies has faced one or more corporate governance shareholder proposals since 1984.

1.13 Canadian securities regulators implement new investor confidence measures

On 16 January 2004 securities regulators in Canada released three new rules to address investor confidence and uphold the reputation of Canada’s capital markets.

National Instrument 52-108 Auditor Oversight has been adopted in all Canadian jurisdictions.  Multilateral Instruments 52-109 Certification of Issuers’ Annual and Interim Filings and 52-110 Audit Committees have been adopted in every Canadian jurisdiction except British Columbia. These new rules will take effect March 30, 2004, pending provincial ministerial approvals.

Nationally, the new rules will require reporting issuers to hire auditors who are members of the Canadian Public Accountability Board (CPAB).

In most provinces and territories, the new rules will require:

·         chief executive officers and chief financial officers of reporting issuers to provide annual and interim certifications with respect to their issuer’s annual information form, audited financial statements, and management’s discussion and analysis (MD&A), and
·         reporting issuers to have an independent and financially literate audit committee with prescribed duties.

Exemptions from certain requirements are available to venture issuers, controlled companies and U.S.-listed companies that are subject to the Sarbanes-Oxley requirements.

The CSA is moving ahead with the new requirements after a thorough public consultation process designed to ensure that the proposed regulations are appropriate for Canada’s capital markets.

Copies of the adopted rules as well as summaries of comments received can be found on the websites of several provincial securities commissions.

The CSA is a council of the 13 securities regulators of Canada's provinces and territories. It coordinates and harmonizes regulation for the Canadian capital markets. More information is available at the CSA website.

1.14 Canadian securities regulators propose corporate governance rules for issuers

On 16 January 2004, the Ontario Securities Commission (OSC) published proposals that describe best corporate governance practices and require issuers to make disclosures relating to these best practices. The proposals are being considered as well by securities regulators in Saskatchewan, Alberta, Manitoba, Nova Scotia, Newfoundland and Labrador, New Brunswick, Prince Edward Island, the Yukon Territory, the Northwest Territories and Nunavut.

"The proposed policy describes best corporate governance practices that have evolved through legislative and regulatory reforms and through initiatives of other capital market participants" said OSC Chair David Brown. "Our proposals provide greater transparency for the marketplace regarding the nature and adequacy of issuers' corporate governance practices."

The best practices include measures related to the composition of the board, its mandate and its committees; director education and assessment; as well as codes of business conduct and ethics.

"We propose to require issuers to disclose the corporate governance practices they adopt," added Mr. Brown. "However, because we appreciate that many smaller issuers may have less formal procedures in place to ensure effective corporate governance, our proposal provides for lesser disclosure for venture issuers."

In order to avoid regulatory duplication and overlap, the Toronto Stock Exchange intends to revoke its corporate governance guidelines and related disclosure requirements when the proposals become effective.

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