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Important notice: You may use this material for your own personal reference only. The material may not be used, copied or redistributed in any form or by any means without a LAWLEX enterprise wide subscription. Corporate Law Bulletin Bulletin No. 83, July 2004 Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation Published by LAWLEX on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Stock Exchange and the leading law firms: Blake Dawson Waldron, Clayton Utz, Corrs Chambers Westgarth, Freehills, Mallesons Stephen Jaques, Phillips Fox. Use the arrows to navigate easily across the bulletin | |
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Detailed Contents | |
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1. Recent Corporate Law and Corporate Governance Developments 1.1
Seminar (Sydney and Melbourne) - Recent developments in directors'
duties 2.1
ASIC facilitates shorter Statements of Advice 3.1
Changes to responsible executive regime 4. Recent Takeovers Panel Developments 4.1
Kaefer Technologies Ltd 02: Panel declines to commence proceedings 5. Recent Corporate Law Decisions 5.1
Use of unsecured group funds to meet insolvency test
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1.1 Seminar (Sydney and Melbourne) – Recent developments in directors’ duties There has never been more attention given to the important role of the
company director. Recent legislation has imposed new and significant
obligations on directors. There has also been a series of recent court
judgments dealing with the duties of directors. In addition, the Federal
Government's Corporations and Markets Advisory Committee has commenced an
inquiry into directors' duties and the personal liability of
directors.
Speakers
1.2 Report on insurance cover for directors and corporate officers On 22 July 2004, the Corporations and Markets Advisory Committee released a report on directors and officers insurance. The report was prepared in the context of a broader inquiry the Committee is carrying out into aspects of directors’ duties and personal liability. According to the Advisory Committees Convenor, Richard St John: "There is an increasing trend to impose personal liability on directors and other officers for the shortcomings of companies. In considering the practical consequences of this liability regime, it cannot be assumed that all those exposed to personal liability are able to obtain protection through insurance. The availability of insurance cover reflects the markets appreciation of relevant risks." The report provides a snapshot of the
availability in the Australian market of insurance cover for the personal
liability of directors and other corporate officers. The report notes that the
market for D&O insurance has tightened in recent years as the number of
insurers and the capacity of the market have declined. It also appears that
insurers have placed greater limitations on the coverage of policies offered and
that premiums have increased markedly, though the rate of increase may now be
levelling out.
1.3 More Australian companies report on sustainability The number of Australian companies that report annually on sustainability has doubled, the Minister for the Environment and Heritage, Dr David Kemp, announced on 14 July 2004 in releasing a report on the top 500 Australian companies. The Australian Government's “State of Sustainability Reporting in Australia 2004” surveyed companies in the ASX top 300, the top 100 private companies and the top 100 unlisted public companies. It shows the rate of sustainability reporting by Australian companies has doubled from 57 companies publishing public environmental reports in 2001-02, to 116 publishing sustainability reports in 2002-2003. The environmental component of a sustainability report is considered equivalent to an environmental report. The rate of reporting has increased in the finance and insurance sectors; the electricity, gas and water sectors; the property services sector and the wholesale trade sector. Sustainability reporting, or triple bottom line reporting, is the annual reporting of a company's performance against environmental, social and economic criteria. It can provide strong insights into a company's medium term risk management and financial performance. The “State of Sustainability Reporting in Australia 2004” forms part of the Australian Government's “Australian Sustainability Reporting Library”, a one-stop shop for analysts and other researchers looking for sustainability reports produced by Australian companies. It is the most comprehensive and up-to-date electronic resource of Australian non-financial reporting and is available at www.deh.gov.au/industry/corporate/reporting/reports/indexhtml.
1.4 US Securities and Exchange Commission votes to propose requirement that hedge fund advisers register under Investment Advisers Act On 14 July 2004, the United States Securities and Exchange Commission voted to publish for comment proposed new Rule 203(b)(3)-2 that would require hedge fund advisers to register with the Commission under the Investment Advisers Act of 1940. The Commission also voted to propose related rule amendments. The Commission's staff estimate that approximately 40 to 50 percent of all hedge fund advisers are currently registered with the Commission. Registration under the new rule would permit the Commission to:
The proposed new rule would require advisers to "private funds" to register with the Commission by requiring the advisers to "look through" the funds and to count the number of investors (rather than the fund) when determining whether the advisers are eligible for the Adviser Act's exemption for advisers with 14 or fewer clients. A "private fund" would be one that:
The proposed rule would contain special provisions for advisers located outside the United States designed to limit the extraterritorial application of the Advisers Act to offshore advisers to offshore funds that have U.S. investors. Comments on the proposed provisions should be submitted to the Commission by 15 September 2004. Further information is available on the SEC website.
1.5 APRA releases draft Prudential Standards for
business continuity management
APRA's Chairman, Dr John Laker, said APRA has undertaken detailed
assessments of regulated institutions BCM arrangements for a number of years as
part of its regular on-site reviews and has used this experience in formalising
prudential requirements in this area. As business operations have become
increasingly complex and vulnerable to disruption from external events,
effective BCM has become an essential component of a regulated institution's
risk management framework, said Dr Laker.'
1.6 International Auditing and Assurance Standards Board calls on auditors to plan audits more rigorously On 12 July 2004, the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) released a revised International Standard on Auditing (ISA) requiring auditors to be more rigorous in the planning of their audits. The revised ISA 300, “Planning an Audit of Financial Statements”, builds on the new audit risk standards issued last year and requires the auditor to plan the audit so that the engagement will be performed in an effective manner. The standard emphasises that planning is a continual and iterative process throughout the engagement and that unexpected events, changes in conditions or other circumstances may lead the auditor to re-evaluate the planned audit procedures. The standard, effective for audits of financial statements for periods beginning on or after 15 December 2004, requires the auditor to establish the overall strategy for the audit that sets the scope, timing and direction of the audit. "Audit planning plays a critical role is setting the tone and direction of the audit, and in ensuring that the right resources are allocated to the higher risk areas at the appropriate time. The establishment of the overall audit strategy helps guide the development of the more detailed audit plan and ensures that risk assessment procedures and further detailed audit procedures are appropriately targeted. The revised standard on audit planning provides the necessary requirements and guidance for the auditor to perform this important aspect of the audit and will assist in improving auditor performance," comments John Kellas, IAASB Chairman.
1.7 Criminal and civil charges against Kenneth L Lay, Enron’s former Chairman and Chief Executive Officer On 8 July 2004, it was announced that criminal and civil charges had been brought against Kenneth L Lay, former Chairman and Chief Executive Officer of Enron Corp. (a) Criminal charges On 8 July a federal grand jury in Houston indicted Kenneth L Lay on charges of conspiracy, securities fraud, wire fraud, bank fraud and making false statements. The indictment charges Lay with conspiracy to commit securities fraud, four counts of securities fraud and two counts of wire fraud, one count of bank fraud and three counts of making false statements to a bank. The indictment joins Lay as a defendant in a case pending against former Enron CEO Jeffrey K Skilling and former Enron Chief Accounting Officer Richard Causey. Causey was originally indicted in January 2004, and Skilling was added to the case in February 2004. The new indictment also adds a money laundering conspiracy count and four counts of money laundering against Causey in connection with fraudulent hedging vehicles, and expands certain factual allegations against Causey. The indictment alleges that at various times between at least 1999 and 2001, Lay, Skilling, Causey and other Enron executives engaged in a wide-ranging scheme to deceive the investing public, the US Securities and Exchange Commission and others about the true performance of Enron’s businesses. The alleged scheme was designed to make it appear that Enron was growing at a healthy and predictable rate, consistent with analysts’ published expectations, that Enron did not have significant write-offs or debt and was worthy of investment-grade credit rating, that Enron was comprised of a number of successful business units, and that the company had an appropriate cash flow. It had the effect of inflating artificially Enron’s stock price, which increased from approximately $30 per share in early 1998 to over $80 per share in January 2001, and artificially stemming the decline of the stock during the first three quarters of 2001. The indictment alleges that Lay had a significant profit motive for participating in the scheme. As stated in the indictment, between 1998 and 2001, Lay received approximately $300 million from the sale of Enron stock options and restricted stock, netting over $217 million in profit, and was paid more than $19 million in salary and bonuses. During 2001 alone, Lay received a salary of over $1 million, a bonus of $7 million and $3.6 million in long term incentive payments. Additionally, during the period of 21 August through 26 Oct 2001, Lay sold 918,104 shares of Enron stock to repay advances totaling $26,025,000 he had received from a line of credit extended to Lay by Enron. As a part of the alleged scheme, unrealistic and unattainable earnings goals were set for Enron, based on analysts’ expectations rather than on actual or reasonably achievable business results. When, as expected within the company, Enron consistently fell short of those goals, Lay, Skilling, Causey and others allegedly orchestrated a series of accounting gimmicks designed to make up the shortfall between actual and predicted results. Enron then announced publicly that it had met or exceeded analysts’ expectations when, as Lay, Skilling and Causey allegedly knew, it made its numbers only by engaging in fraud. The indictment also alleges that Lay, Skilling and Causey made false and misleading representations about Enron’s finances and business operations to analysts, at press conferences, in SEC filings and elsewhere. Lay is principally charged for his conduct during the third quarter of 2001. As the indictment alleges, upon Skilling’s abrupt departure from Enron in August 2001, Lay resumed his position as CEO of the company, intensified his oversight of Enron’s day-to-day operations, and took control as leader of the conspiracy. Starting in August, according to the indictment, Lay was briefed extensively about mounting and undisclosed financial and operational problems, including overvaluation of Enron’s assets and business units by several billion dollars. As a result of these and other issues confronting Enron, Lay privately considered a range of potential solutions, including mergers, restructurings, and even divestiture of Enron’s pipelines, assets that Lay considered to be the crown jewels of the company. However, the indictment alleges he failed to disclose Enron’s problems to the investing public and affirmatively misled the investing public about Enron’s financial condition, while falsely claiming that he was disclosing everything that he had learned. For example, the indictment states that during August 2001, Lay participated in Management Committee meetings at which reports were presented showing earnings shortfalls in virtually every Enron business unit, totaling approximately $1 billion. During early September 2001, Lay attended a Management Committee retreat in the Woodlands, Texas, at which the serious problems besetting Enron, including underperforming business units and troubled assets, were further discussed. Among other things, executives discussed the need to take in the third quarter of 2001 at least a $1 billion charge and that Enron had committed an accounting error in the amount of $1.2 billion. The indictment alleges that throughout the remainder of September 2001, Lay engaged in a series of high-level meetings to discuss the growing financial crisis at Enron and the likely impact on Enron’s credit rating. Among other things, Lay knew that the total amount of losses embedded in Enron’s assets and business units was, at a minimum, $7 billion. Lay also knew that Enron’s auditors had changed their position concerning the accounting treatment of four off-balance sheet vehicles called the Raptors, which required Enron to determine in short order whether an acceptable alternative methodology existed or whether, instead, Enron would have to restate its earnings and admit the error. Despite knowing these negative facts, on 26 Sept 2001, in an online forum with thousands of Enron employees, many of whom were investors in Enron stock, Lay allegedly stated that Enron was going to “hit [its] numbers.” Lay allegedly created the false impression that his confidence in Enron’s stock was such that he had increased his personal ownership of Enron stock in the past two months as a sign of his belief in what he was espousing. As the indictment alleges, during the prior two months, Lay actually purchased $4 million in Enron stock while also selling $24 million in Enron stock through nonpublic transactions. The indictment states that in the weeks leading up to Enron’s third quarter earnings release on 16 Oct 2001, Lay determined that Enron could not publicly report a loss in excess of $1 billion without triggering negative action by Enron’s credit rating agencies. Lay thus artificially capped Enron’s losses to that amount. Also during this time, Lay learned that changes to the accounting rules governing goodwill (i.e., the difference between what Enron paid for an entity and the book value of that entity’s net assets) would require Enron to disclose impairments to certain of its assets, including its interest in Wessex Water, a business located in Bath, England. In order to hide the impact of asset impairment, Lay allegedly claimed, falsely, that Enron was committed to engaging in a “water growth strategy,” which would have required Enron to expend between $1 billion and $28 billion in capital investments in the water industry. Lay allegedly knew that Enron had no intention of pursuing such a strategy and did not have the capital to support it. According to the indictment, on 16 Oct 2001, when Enron announced losses of approximately $1 billion, Lay allegedly sought to minimize the import of the reported losses by falsely describing the losses as “nonrecurring,” that is, a one-time or unusual earnings event. Enron also disclosed the same day an approximate $1.2 billion reduction in shareholder equity, which Lay again sought to minimize by falsely attributing it to the unwind of the Raptor vehicles, rather than to an accounting error. According to the indictment, on 12 October, Lay misled a representative of a national credit rating agency about the need to take additional writedowns and the extent of Enron’s goodwill problems. On both 16 October and 23 October, Lay told the investing public that Enron had determined that its goodwill impairment was up to $200 million. However, he failed to disclose the impact on Enron of an additional goodwill impairment of up to $700 million in connection with Wessex. Also on 23 October, Lay allegedly espoused faith in Elektro, a Brazilian power plant which Enron carried on its books as worth in excess of $2 billion. In fact, as Lay allegedly knew, Elektro was overvalued by up to $1 billion. Lay also allegedly distributed materials at the road shows that misleadingly described the value of the international portfolio as $6.5 billion. In reality, as Lay knew, this vastly overstated the true value of the international assets by billions of dollars. These and other schemes alleged in the indictment quickly unraveled, and on 2 Dec, 2001, Enron filed for bankruptcy, making its stock, which less than a year earlier had been trading at over $80 per share, virtually worthless. Lay was also charged in four counts with bank fraud and making false statements to three banks arising out of his obtaining and using four personal lines of credit worth over $60 million. Lay allegedly promised the banks that the loans would not be used to purchase stock. As a result of these false representations, the banks extended far greater loans to Lay than they otherwise would. The indictment alleges that in spite of his promises, Lay repeatedly used the lines of credit to buy the stock. The lines of credit were collateralized mainly by artificially inflated shares of Enron stock and were repaid with the same. In relation to the Enron investigation, thirty-one defendants have been charged to date, including 21 former Enron executives. Eleven defendants have been convicted to date, including former CFO Andrew Fastow and former Treasurer Ben Glisan. To date, the Enron Task Force has restrained more than $161 million in proceeds derived from criminal activity. The investigation is continuing. (b) Civil charges Also on 8 July 2004, the United States Securities and Exchange Commission initiated civil charges against Kenneth L Lay, for his role in a wide-ranging scheme to defraud by falsifying Enron's publicly reported financial results and making false and misleading public representations about Enron's business performance and financial condition. The Commission also alleges Lay profited from the scheme to defraud by selling large amounts of Enron stock at prices that did not reflect its true value. The sales also occurred while Lay was in possession of material non-public information concerning Enron and generated unlawful proceeds in excess of $90 million during 2001. Specifically, Lay old over $70 million in Enron stock back to the company to repay cash advances on an unsecured Enron line of credit. In addition, while in possession of material non-public information, Lay amended two program trading plans to enable him to sell an additional $20 million in Enron stock in the open market. Lay's proceeds from the sales constitute illegal gains resulting from his scheme to defraud. In this action, the Commission is seeking disgorgement of all ill-gotten gains, civil money penalties, a permanent bar from acting as a director or officer of a publicly held company, and an injunction against future violations of the federal securities laws. The Commission, subject to the approval of the Honorable Melinda Harman, US District Court Judge, filed a Second Amended Complaint seeking to add Lay to its pending action against Jeffrey K Skilling, Enron's former President, CEO and Chief Operating Officer, and Richard A Causey, Enron's former Chief Accounting Officer. The proposed amended complaint charges Lay with violating, and aiding and abetting violations of, the antifraud, periodic reporting, books and records, and internal controls provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5; and for aiding and abetting the violation of Sections 13(a), and 13(b)(2)(A) and (B) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-11.
1.8 UK Financial Services Authority (FSA) undertakes a fundamental review of projections On 5 July 2004 the United Kingdom Financial Services Authority published a discussion paper which takes forward the fundamental review of the role the regulator plays and the standards it expects the industry to adopt with regard to projections. Projections are the means by which firms give their customers information about the potential future returns and associated charges from a wide range of investment products. These projections are currently governed by a prescriptive regulatory regime originally devised about 15 years ago. The paper, “Projections review – the case for change”, also sets out some broad options for change to provide consumers with better information about potential future returns. The objective of the review is to devise a system that:
The work on projection rates will form part of the wider review of the information received by consumers. As part of that wider review, the FSA is putting further development into a Key Facts document which aims to simplify the information it requires firms to give to their customers and to ensure that risks associated with a product are explained clearly and effectively. This work will also include a look at whether there is a practical and consumer-friendly form of standardised risk indicator which can be adopted. Responses on the broad options set out in the paper should be received by 5 October 2004. The paper is available on the FSA website.
1.9 Inquiry into Australia’s corporate insolvency laws On 1 July 2004, Senator Grant Chapman, (Liberal, SA) Chairman of the Parliamentary Joint Committee on Corporations and Financial Services, announced that the Committee has published its report “Corporate Insolvency Laws: a Stocktake”. “Witnesses appearing before the Committee were concerned to improve the integrity, accountability and efficiency of Australia’s insolvency laws in the public interest”, Senator Campbell said. “In formulating recommendations the Committee placed importance on encouraging early intervention in the affairs of companies in financial difficulties and restoring companies to profitable trading where practicable; protecting the interests of creditors and, in particular, employees in circumstances of financial difficulty and corporate malpractice,” he said. “A key theme of our recommendations is promoting the good management of companies and deterring malpractice and, in particular, abuses of the corporate form and insolvency procedures generally”, he said. The report covers numerous aspects of Australia’s insolvency laws including:
The Report is available on the Committee’s website http://www.aph.gov.au/senate/committee/corporations_ctte/index.htm or from the secretariat, 02 6277 3541.
1.10 The changing role of the CFO In June 2004, the Institute of Chartered Accountants in Australia (ICAA) and KPMG published a survey of the views of Chief Financial Officers of Australia's largest companies. The three key themes identified in the survey are:
The survey is available on the ICAA website at: http://www.icaa.org.au/upload/download/CFOofthefuture.pdf
1.11 Trends in Australian and New Zealand internal auditing In
June 2004, the Institute of Internal Auditors in Australia and New Zealand and
Ernst & Young published a survey of trends in internal auditing in Australia
and New Zealand. 100 of the largest companies in the two countries responded to
the survey.
The survey is available on the Ernst & Young website at: http://www.ey.com/global/download.nsf/Australia/AABS_InternalAuditSurvey_June2004/$file/Internal%20Audit%20Survey%20(June%2004).pdf
1.12 Governance principles for
charities
1.13 The effects of dual-class ownership on ordinary shareholders The Wharton Business School has published an article on the effects of dual-class ownership of shares. The article notes that when Google announced in April that it would go public this year, it was also announced that there would be an issue of a class of super shares to ensure that the founders keep control. Each of the Class B shares reserved for insiders will carry 10 votes, while the ordinary Class A shares sold to the public will have just one vote each - a common ratio among the approximately 600 dual-class companies. The largest such companies are Berkshire Hathaway Inc., Viacom Inc., Comcast Corp., Cox Communications Inc. and Columbia Hospital Corp. Super shares are designed to give specific shareholders voting control, and in most cases these shares are not publicly traded. Shareholders-rights groups have long complained that dual-share systems violate the key one-share, one-vote principle. Do
these arrangements really undermine the interests of people who own ordinary
single-vote shares? Or do they help stabilise companies by insulating against
takeover attempts and other disruptive events, as their proponents claim? The
answers have important implications for the vast majority of companies that
issue just one class of shares, because they shed light on another, broader
question: Do ordinary shareholders benefit when a company's executives,
directors and founders own large blocks of shares?
1.14 Sarbanes-Oxley implementation survey Jefferson Wells International and the US Institute of Internal Auditors (IIA) have published a survey of 200-plus internal auditors regarding Sarbanes-Oxley implementation. The survey results shed light on compliance progress, internal controls gaps and the crucial role of the internal audit function as the Act continues to be interpreted and implemented by corporate America. In March, the Public Company Accounting Oversight Board placed great emphasis on the value of internal audit functions that are “highly competent” and “independent from company management” when it finalised the auditing standard that guides external auditors in their attestation of internal controls over financial reporting and financial statements. The vast majority of survey respondents indicated that their internal audit functions are heavily involved in Sarbanes-Oxley Act compliance initiatives, which for the most part still have significant ground to cover before Section 404 deadlines begin to take effect in November. A primary reason for that sluggish progress is a lack of internal audit resources, which was the most significant compliance challenge identified by survey respondents. To address that challenge, half of the respondents rely on co-sourcing relationships with external service firms. More might consider following suit given the fact that 92 percent of respondents have identified gaps in their organisation’s internal controls framework. Other results focus on:
The survey is available on the Jefferson Wells website.
1.15 Study of audit and non-audit fees at US companies Glass, Lewis & Co., a US research firm, has released a study of audit fees paid in 2003 and 2002 by more than 2250 public companies in the United States. The report reviews fees paid, trends in audit fees and how Glass Lewis recommends investors view audit fees when they vote their proxies. The audit fee study's key findings include:
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2.1 ASIC facilitates shorter Statements of Advice On 21 July 2004, the Australian Securities and Investments Commission (ASIC) announced the release of a new class order, [CO 04/576] Statements of Additional Advice, to facilitate shorter Statements of Advice (SOAs) where the adviser has an ongoing relationship with the client. [CO 04/576] provides relief to permit Statements of Advice (SOAs) to 'incorporate by reference' certain information that the client has already received in a previous SOA. The class order has been issued as part of further guidance from ASIC about how it expects licensees (and their representatives) to prepare their SOAs: see Item 2.2 of this Bulletin. 'The class order will benefit consumers and industry by facilitating the provision of shorter disclosure documents. This promotes the objective of clear, concise and effective disclosure and should make it easier for consumers to read and understand the information provided to them', ASIC Executive Director of Financial Services Regulation, Mr Ian Johnston said. 'It will also help avoid the unnecessary duplication of information already provided to consumers and, in many cases, will result in documents consisting of no more than a few pages. 'The class order provides that when an adviser gives an existing client a further SOA (called a Statement of Additional Advice), that document can 'incorporate by reference' information previously given to that client in the original SOA, provided certain conditions are met. The conditions are designed to prevent consumer confusion and ensure that the adviser's potential liability for the disclosure document is not diminished', Mr Johnston said. In short, ASIC expects a Statement of Additional Advice to be dated and to:
If the client requests it, a copy of the original SOA must be provided free of charge. The class order does not affect or reduce the requirement to give appropriate advice. The obligation of the adviser to comply with the suitability rule (s945A of the Corporations Act) when providing personal advice to clients is unchanged. Copies of the class order can be obtained from ASIC's Infoline by calling 1300 300 630 or from the ASIC website at http://www.asic.gov.au/co.
2.2 ASIC provides further guidance on Statements of Advice On 21 July 2004, the Australian Securities and Investments Commission (ASIC) provided further guidance on how it expects licensees (and their representatives) to prepare Statements of Advice (SOAs). The guidance should assist industry in producing SOAs that are clear, concise and effective, as required under the Corporations Act. This guidance complements earlier guidance issued by ASIC as part of its implementation of the Financial Services Reform Act. ASIC has also announced the release of a new class order, [CO 04/0576] Statements of Additional Advice, to facilitate shorter SOAs in the context of an ongoing client relationship: see Item 2.1 of this Bulletin. This class order will allow the production of documentation that in some cases consists of no more than a few pages. 'Statements of Advice are intended to help consumers make an informed decision about whether or not to follow the advice provided by their financial adviser. This advice should take into account the consumer's specific needs. ASIC therefore expects these documents to be easy to read and understand', ASIC Executive Director of Financial Services Regulation, Mr Ian Johnston said. 'However, we recognise industry concerns about the volume of documentation currently being produced and have issued this guidance to clarify our expectations in relation to the provision of clear, concise and effective SOAs', Mr Johnston said. The guidance forms part of ASIC's ongoing commitment to facilitate and promote the production of clear, concise and effective disclosure in SOAs and other disclosure documents: see Media Release [MR 04/062] FSR disclosure to be clear, concise and effective and Information Release [IR 04/11] ASIC's approach to regulation of financial services: breach notification and disclosure. Clear, concise and effective SOAs When preparing SOAs, advisers should keep the following in mind:
Advisers should also refer to guidance ASIC has already issued about disclosure documents: see Policy Statement 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) [PS 168], which includes the Good Disclosure Principles, and Policy Statement 175 Licensing: Financial product advisers – conduct and disclosure [PS 175]. Further information is available on the ASIC website.
2.3 Audit notifications under CLERP 9 On 20 July 2004, the Australian Securities and Investments Commission (ASIC) announced details of its procedures for dealing with new audit notifications required as a result of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9). The new procedures have been put in place as part of the new notification requirements for registered company auditors, audit firms or audit companies, arising from the expansion of auditors' duties under CLERP 9. These changes are necessary to ensure that ASIC can streamline and address these matters on a timely basis, as strict time periods apply to these notifications and for the resolution of the matters reported. Under amendments made to the Corporations Act 2001 (the Act) by CLERP 9, auditors must report certain matters to ASIC. These include matters where the auditor has reasonable grounds to suspect a significant contravention of the Act, or if someone has attempted to mislead or interfere in the proper conduct of the audit. See section 311 of the Act and the revised ASIC Practice Note 34 issued on 1 July 2004, which is available from the ASIC website. Auditors must also notify ASIC of certain conflicts of interest as soon as the auditor becomes aware of the relevant circumstances. These matters need to be resolved and ASIC needs to be notified within a prescribed time period or the auditor, audit firm or audit company will cease to be the auditor of the entity and be removed from the database as auditor of the entity by ASIC. See section 324 of the Act. ASIC has developed a fast track process for dealing with these notifications and such notices can be either emailed to auditor.notification.team@asic.gov.au or mailed to the Auditor Notification Team, Corporate Finance Division, Australian Securities and Investments Commission, GPO Box 9827, Brisbane QLD 4001. This will enable ASIC to respond to these matters within the required timeframes. The changes noted above take effect immediately.
2.4 Stop orders on prospectuses On 14 July 2004, the Australian Securities and Investments Commission (ASIC) announced that in the last three months, it has placed 11 interim stop orders and 3 final stop orders on defective prospectuses that were seeking to raise more than $300 million from investors. ASIC also extended the exposure period on another three prospectuses and obtained further disclosure from the issuers during that period and did not need to place an interim stop orders on these prospectuses. In 2003-04, ASIC protected the public from investing a total of $2.2 billion in defective prospectuses. 'ASIC continues to undertake a risk-based review of selected fundraising documents to ensure that investors have adequate information upon which to make their investment decisions', said Mr Richard Cockburn, ASIC's Director of Corporate Finance. 'We are disappointed that some of the issues uncovered in ASIC's review should have been dealt with in the due diligence process associated with the prospectus. 'If we continue to see fundraising documents with defects of the type listed below we may need to recommend further action be taken against the directors and others responsible to change the unsatisfactory behaviour', he said. The three final stop orders were issued with the consent of the relevant company after they decided not to proceed with the particular fundraising, rather than seeking to address the disclosure deficiencies. One of the most common defects identified between March and June 2004 was the use of financial forecasts that did not have a reasonable basis. This is despite Policy Statement 170: Prospective Financial Information having now been in the market place for nearly two years. A prospectus should only include prospective financial information if there are reasonable grounds for its inclusion. To demonstrate such reasonable grounds, an issuer must be able to point to some facts or circumstances existing at the time of publication of the information in the prospectus on which the issuer in fact relied which are objectively reasonable and which support the information. Other common defects related to:
ASIC intends that publication of the various defects identified in fundraising documents will assist issuers and the advisers who prepare fundraising documents to adequately discharge their duties.
2.5 ASIC provides relief for payments into insurance brokers section 981B accounts On 9 July 2004, the Australian Securities and Investments Commission (ASIC) announced interim class order relief until June 2005 that permits insurance brokers to pay monies that are received in a single payment from a client into an account that must be established and maintained under section 981B of the Corporations Act 2001 (the Act). The
relief, which is provided under Class Order [CO 04/673] Insurance brokers
trust accounts under s981B, will only apply where the insurance broker holds
an Australian Financial Services (AFS) licence and reasonably believes that at
least part of the payment constitutes client monies.
ASIC is of the view that it will generally be reasonable for an insurance
broker to believe that a payment may comprise client monies if it was paid in
connection with a financial service provided by the broker or a financial
product held by the broker's client. This is because under the Act, brokers are
under a duty to separate their financial services business from any
non-financial services business they may also carry on.
2.6 Appointment of ASIC Deputy Chairman On 8 July 2004, the Treasurer, the Hon Peter Costello MP, announced the appointment of Jeremy Cooper as Deputy Chairman of ASIC for a five year term. Mr Cooper was, until recently, a partner with the law firm Blake Dawson Waldron. The Treasurer also announced the reappointment of Professor Berna Collier as a Commissioner for a four year term.
2.7 ASIC announces interim position on transaction costs for managed investment scheme constitutions On
8 July 2004 the Australian Securities and Investments Commission (ASIC)
announced its interim position on transaction costs for registered managed
investment scheme constitutions.
2.8 ASIC issues four CLERP 9 policies On 1 July 2004 the Australian Securities and Investments Commission (ASIC) issued two policy statements and two practice notes to explain the new requirements of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP 9). The CLERP 9 policies issued are:
'ASIC welcomes the important reforms that CLERP 9 makes to corporate
reporting and disclosure laws', said Mr Malcolm Rodgers, ASIC Executive Director
of Policy and Markets Regulation. 'We are issuing these CLERP 9 policies today
to give as much notice as possible about how ASIC will administer the CLERP 9
provisions. We have concentrated on developing policy for requirements in CLERP
9 that will have an immediate effect. (a) Issues raised in the PPPs but not dealt with in the
policies PS 180: Auditor registration
PS
180 also sets out the process ASIC will follow in assessing an application for
approval of a competency standard.
PS 173 also discusses when ASIC will use a new power to exclude people from using the legislative secondary sales exemptions under CLERP 9.
2.9 ASIC and ASX sign supervisory Memorandum of Understanding On
1 July 2004 a new agreement to improve the efficiency of market supervision by
minimising overlap and increasing regulatory cooperation was signed by the
Australian Securities and Investments Commission (ASIC) and the Australian Stock
Exchange (ASX).
2.10 ASIC and FRC sign Memorandum of Understanding An
agreement to cooperate and exchange information has been signed by the
Australian Securities and Investments Commission (ASIC) and the Financial
Reporting Council (FRC).
On
29 June 2004 the Australian Securities and Investments Commission (ASIC)
provided guidance on some regulatory issues arising from the increased use of
stapled securities in the Australian market.
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