1. Recent Corporate Law and Corporate Governance Developments

1.1 Study: CEO tenure
1.2 NASD Mutual Fund Task Force report on soft dollars and portfolio transaction costs
1.3 Corporate governance rating agencies need to lift their game
1.4 Survey: fraud in Australia and New Zealand
1.5 Study: Australia’s socially responsible companies
1.6 US financial regulation: industry changes prompt need to reconsider regulatory structure
1.7 Adoption of IFRS – prudential implications
1.8 Australian corporate regulation - extension of the referral of corporations power
1.9 New guide on rebates and commissions for financial products
1.10 Investigation of malpractices in th European investment fund industry
1.11 Organisations failing to report on people issues to key stakeholders
1.12 New UK corporate governance laws
1.13 European Commission proposes to simplify the formation, maintenance and alteration of companies’ capital
1.14 European Commission proposes collective board responsibility and more disclosure on transactions, off-balance sheet vehicles and corporate governance
1.15 SEC proposes securities offering reform requires registration of hedge fund investment advisers
1.16 Report on crimes against business
1.17 SEC sanctions KPMG and four auditors for improper professional conduct
1.18 SEC proposes IPO allocation reforms
1.19 Proposed framework for insurance supervision
1.20 European Commission urges Member States to ensure a strong role for independent directors
1.21 European Commission sets out guidance on disclosure and shareholder control of directors’ pay
1.22 Shareholder meetings: key legal issues

2. Recent ASIC Developments

2.1 Most companies making good progress towards International accounting standards
2.2 ASIC releases policy on substantial holdings
2.3 ASIC Annual Report 2003-04
2.4 ASIC consults on delivery of superannuation product disclosure for investment strategy choice
2.5 ASIC issues guidance on managing conflicts for research analysts

3. Recent ASX Developments

3.1 Amendments to ASX Market Rule 7.10 (Managed Discretionary Accounts)
3.2 IAS/IFRS and continuous disclosure

4. Recent Takeovers Panel Developments

4.1 Takeovers Panel publishes revised guidance note 11: conflicts of interest
4.2 Emperor Mines Ltd - Panel declines to make declaration of unacceptable circumstances following review application
4.3 Panel releases consultation draft – lock-up devices (revised guidance 7)
4.4 Australian Leisure & Hospitality Group Limited 03: Panel concludes proceedings
4.5 Panel makes declaration of unacceptable circumstances and order: Skywest limited 04

5. Recent Corporate Law Decisions

5.1 Mutual claims involving an insolvent company must be set-off
5.2 Use of members’ information obtained from company registers
5.3 It's settled: Part 2F.1A applies to a company in liquidation
5.4 More fun with litigation funding
5.5 Use of the "no reasonable suspicion of insolvency" defence to a preference claim
5.6 Contracting prior to registration
5.7 The appointment of a liquidator on just and equitable grounds
5.8 No abuse of process where criminal proceedings brought following civil prosecution
5.9 Court's refusal to order the convening of a members meeting because of the invalidity of the initial request made to directors
5.10 The privilege against self-incrimination in the context of interrogatories
5.11 Directors’ belief about insolvency when resolving to appoint an administrator

1.1 Study: CEO tenure

Although the rate of CEO turnover in Australia declined in the past year, local CEOs are more likely to leave their jobs because of poor performance than their global counterparts, according to a study by international management consulting firm Booz Allen Hamilton and the Business Council of Australia published on 23 November 2004.

The study also found that overall CEO turnover in Australia – for reasons of performance, merger activity or normal transition – is still significantly higher than the global average in 2003. In 2003, 14.2% of Australian ASX 200 companies recorded a turnover event, compared to 9.5% for the global average.

The study also found average CEO tenure in Australia remains lower than the global average, while the trend for Boards to appoint replacement CEOs from outside the company is accelerating. ‘Outsiders’ last year made up 57% of new CEO appointments in Australia compared to 40% in 2002.

Booz Allen Hamilton conducted the Australian study – which examined Australia’s top 200 ASX-listed companies – jointly with the Business Council of Australia (BCA), as part of the annual global Booz Allen Hamilton CEO turnover study.

Among key findings of the study:

·         14.2% of Australian companies replaced their CEOs in 2003, compared to 16.8% the previous year. Globally, overall CEO turnover was 9.5% in 2003 and 10.7% in 2002.
·         Average tenure of Australian CEOs increased in 2003 to 5.6 years, up from 4.4 years in 2002 but still significantly below the 2003 global average of 7.6 years.
·         In Australia, outsider CEOs outperformed insider CEOs, as measured by shareholder returns delivered over their full tenure (16.4% returns for outsiders versus 10.0% for insiders).
·         Utilities were the ‘safest’ sector for Australian CEOs, with no performance-related departures in 2003; other safe sectors were financial services (24% of departures performance-related), materials (25%) and energy (29%). Health care was the riskiest sector for CEOs, with half of all departures related to performance.

To view a copy of the study visit the BCA website.

1.2 NASD Mutual Fund Task Force report on soft dollars and portfolio transaction costs

On 17 November 2004 the United States National Association of Securities Dealers (NASD), submitted the first set of recommendations by its recently appointed Mutual Fund Task Force to the US Securities and Exchange Commission.

The Report of the Mutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs represents the conclusion of the first phase of the task force’s work. Among its recommendations are: 

·         Narrowing the types of research services that may be obtained with soft dollars;
·         Expanding the disclosure in fund prospectuses about soft dollar practices and portfolio transaction costs;
·         Providing more explicit guidance about the types of information that fund boards should receive about soft dollar practices and portfolio transaction costs; and 
·         Considering soft dollar issues raised by other managed advisory accounts, such as hedge funds.

The second phase of the task force’s assignment, which will focus on mutual fund distribution arrangements, is expected to take several months to complete. 

The report is available at the NASD website.

1.3 Corporate governance rating agencies need to lift their game

Seventy-seven per cent of corporate governance professionals in Australia’s listed public companies believe that corporate governance rating agencies’ assessments of companies are not accurate and that the methodologies they use lack rigour and transparency.

According to a Chartered Secretaries Australia (CSA) survey published on 16 November 2004, there is a tremendous amount of concern about how the governance rating agencies collect and assess data. As a result, reports are being prepared and published on limited information, incorrect assumptions and with little or no verification from the companies which were being assessed.

In fact, only 26 per cent of respondents said that they were consulted on the facts of the report prior to it being published, and then only briefly (75 per cent of that 26 per cent).

According to CSA’s National President, Ms Sue Crook, there is no doubt that stakeholders do value rating agencies’ assessments of how a company is performing in terms of corporate governance. “However, these reports would be far more valuable if they accurately reflected a company’s corporate governance practices and procedures”. “At the moment we have arbitrary standards, little opportunity for comment and virtually no opportunity to access a report unless you are a subscriber”. “Rating agencies should be encouraged to develop and adopt consistent and robust methodologies to capture data accurately and consistently as well as put appropriate consultative processes in place to verify data and rectify any errors or inaccuracies,” Ms Crook says.

One hundred per cent of respondents would like to be consulted before the release of any report. Respondents claim that they should have an opportunity to rectify any misinterpretations before information is made public as it is almost impossible to correct any misconceptions once a report has been published.

The survey also found that 65 per cent of respondents have taken steps to correct any inaccuracies or misunderstandings, with most advising the agency of their company’s views on errors and inaccuracies either by letter, telephone or face to face.

Yet, despite the inaccuracies, 64 per cent of those surveyed believe that the reports provide useful information to subscribers, while 36 per cent think they are just a box-ticking exercise.

1.4 Survey: fraud in Australia and New Zealand

(a) Overview

Organisations in Australia and New Zealand lost in excess of $456 million to fraud during the period April 2002 to March 2004 according to KPMG’s 2004 Fraud Survey released on 8 November 2004.

A total of 27,657 incidents of fraud were reported by 221 organisations.

Despite organisations experiencing at least one fraud losing an average of $2.07 million, only seven percent of the 491 respondents believe that fraud is a major problem for their organisation. This is down from the 17 percent who felt that fraud was a major problem for their own organisation in the 2002 survey.

Of the seven incidents of financial statement fraud reported, three were nominated by the respondents as the largest single fraud incident in the survey period. The amount of the financial statement fraud across the seven cases reported varied from $1,500 to $10 million per incident.

While the typical fraudster was motivated by greed in 38 percent of cases, followed by gambling (21 percent), perpetrators of financial statement fraud were driven by other factors such as the desire to retain employment, qualify for bonuses linked to performance, cover up information that would show the business in a bad light or meet market expectations.

The major factor allowing fraud to occur was the overriding of internal control or poor internal controls generally. These two factors combined represent the most important pre-condition for fraud to occur being cited in 43 percent of the major cases.

(b) Survey highlights

·         78 percent of the major fraud cases reported accounting for 71 percent of the total value of loss was instigated by people within the organisation.
·         In 75 percent of the internal major cases reported, the perpetrator acted alone.
·         Corrupt conduct involving the payment of kickbacks in connection with the procurement process accounted for the highest average loss of $2.2 million within the major cases reported.
·         The most common type of major fraud reported was a misappropriation of funds with 39 individual cases of this type reported for a total loss of $15.4 million (an average loss of $395,000 per incident).
·         The incidence of fraud rises proportionately with the size of the organisation. Only 15 percent of organisations with less 100 employees experienced fraud compared to 48 percent of organisations with 501 to 1,000 employees, 66 percent of organisations with 1,001 to 10,000 people and 100 percent of organisations over 10,000 employees.
·         In one third of the reported major cases early warning signs were either ignored or not acted upon quickly enough. In some cases where early warning signs were ignored, the frauds continued for up to ten years.
·         In 44 percent of the major frauds, there was no recovery of the amount stolen. In the cases where funds were recovered, 33 percent of the loss was recovered from insurance.
·         Only 63 percent of major frauds discovered during the survey period were reported to the police.
·         An overwhelming 84 percent of respondents agreed or strongly agreed with the proposition that fraud control is a governance issue.
·         33 percent of organisations experienced unethical behaviour (specifically excluding fraud that was reported elsewhere in the survey) during the survey period. Some of the unethical behaviours reported included: unauthorised use of corporate equipment (16.5 percent), false claims for sick leave (14 percent), disclosure of confidential information (11.8 percent), sexual harassment (11 percent) and operating a business during work hours (9.4 percent).
·         22 percent of respondents believed that unethical behaviour was driven by a lack of senior management commitment to ethical conduct.

(c) Profile of the typical fraudster (for the survey period)

·         Male aged 31 years acting alone;
·         Non-management employee of the victim organisation with no known prior dishonesty with a previous employer;
·         Six years with the organisation and held his current position for four years at the time of detection;
·         Misappropriated funds to an average value of $337,734 and was motivated by greed;
·         Detected by a workplace colleague 13 months after the commencement of the fraud; and
·         The organisation recovered only 21 percent of the proceeds of the fraud.

(d) About the survey

The findings of the Fraud Survey 2004 were derived from 491 responses received to a survey questionnaire sent in June 2004 to 2164 of Australia and New Zealand largest organisations across public and private sectors. The questionnaire, consisting of 54 questions, sought information about fraud incidents within the respondent’s business operations during the period April 2002 to March 2004.

1.5 Study: Australia’s socially responsible companies

On 8 November 2004 RepuTex announced Australia’s and New Zealand’s most socially responsible companies.

As part of its public research program, RepuTex has rated Australia’s Top 100 companies and New Zealand’s Top 20 companies, examining their activities and policies in four areas: Corporate Governance, Environmental Impact, Social Impact and Workplace Practices. Each company received a rating of either AAA (outstanding), AA (high), A (satisfactory), B (low) C (very low) or D (inadequate). The main results are:

(a) Australia

Top 10 companies: AAA: Westpac (the only company to receive AAA); AA: (in alphabetical order) Australian Postal Corp, BHP Billiton, Energex, Hewlett-Packard Australia, IBM Australia, Insurance Australia Group, National Australia Bank, Queensland Rail, Visy Industries.

·         Just over half the companies (51) were satisfactory or better (ie. A, AA or AAA), 42 were rated low or very low (ie. B or C) (7 companies were not rated due to insufficient information available and given I/A)
·         Corporate Governance: 76 companies satisfactory or better, 19 low (5 received I/A)
·         Environmental Impact: 21 companies satisfactory or better, 78 low, very low or inadequate (1 received I/A)
·         Workplace Practices: 29 companies satisfactory or better, 57 low, very low or inadequate (14 received I/A)
·         Social Impact: 54 companies satisfactory or better, 37 low or very low (9 received I/A)

(b) New Zealand

Top 5 companies: AA - The Warehouse Group; A+ (in alphabetical order) Carter Holt Harvey, Telecom Corporation of NZ; A (in alphabetical order) ACC NZ, New Zealand Post.

·         7 companies were satisfactory or better (ie. A, AA or AAA), 12 were low or very low (ie. B or C) (1 company was not rated due to insufficient information available and given I/A);
·         Environmental Impact: 7 companies satisfactory or better, 13 low, very low or inadequate;
·         Corporate Governance: 12 companies satisfactory or better, 8 low;
·         Workplace Practices: 7 companies satisfactory or better, 9 low, very low or inadequate (4 received I/A); and
·         Social Impact: 7 companies satisfactory or better, 8 low or very low (5 received I/A).

1.6 US financial regulation: industry changes prompt need to reconsider regulatory structure

On 8 November 2004, the US Government Accountability Office (GAO) released a report titled “Financial Regulation: Industry Changes Prompt Need to Reconsider US Regulatory Structure”.

In light of the passage of the 1999 Gramm-Leach-Bliley Act and increased competition within the financial services industry at home and abroad, GAO was asked to report on the current state of the U.S. financial services regulatory structure. This report describes the changes to the financial services industry, focusing on banking, securities, futures, and insurance; the structure of the U.S. and other regulatory systems; changes in regulatory and supervisory approaches; efforts to foster communication and cooperation among U.S. and other regulators; and the strengths and weaknesses of the current regulatory structure.

The financial services industry has changed significantly over the last several decades. Firms are now generally fewer and larger, provide more and varied services, offer similar products, and operate in increasingly global markets. These developments have both benefits and risks, both for individual institutions and for the regulatory system as a whole. Actions that are being taken to harmonize regulations across countries, especially the Basel Accords and European Union Financial Services Action Plan, are also affecting U.S. firms and regulators.

While the financial services industry and the international regulatory framework have changed, the regulatory structure for overseeing the U.S. financial services industry has not. Specialized regulators still oversee separate functions--banking, securities, futures, and insurance--and while some regulators do oversee complex institutions at the holding company level, they generally rely on functional regulators for information about the activities of subsidiaries. In addition, no one agency or mechanism looks at risks that cross markets or industry segments or at the system and its risks as a whole.

Although a number of proposals for changing the U.S. regulatory system have been put forth, the United States has chosen not to consolidate its regulatory structure. At the same time, some industrial countries--notably the United Kingdom--have consolidated their financial regulatory structures, partly in response to industry changes. Absent fundamental change in the overall regulatory structure, U.S. regulators have initiated some changes in their regulatory approaches. For example, starting with large, complex institutions, bank regulators, in the 1990s, sought to make their supervision more efficient and effective by focusing on the areas of highest risk. And partly in response to changes in European Union requirements, SEC has issued rules to provide consolidated supervision of certain internationally active securities firms on a voluntary basis.

Regulators are also making efforts to communicate in national and multinational forums, but efforts to cooperate have not fully addressed the need to monitor risks across markets, industry segments, and national borders. And from time to time regulators engage in jurisdictional disputes that can distract them from focusing on their primary missions.

GAO found that the U.S. regulatory structure worked well on some levels but not on others. The strength and vitality of the U.S. financial services industry demonstrate that the regulatory structure has not failed. But some have questioned whether a fragmented regulatory system is appropriate in today's environment, particularly with large, complex firms managing their risks on a consolidated basis. While the structure of the agencies alone cannot ensure that regulators achieve their goals--agencies also need the right people, tools, and policies and procedures--it can hinder or facilitate their efforts to provide consistent, comprehensive regulation that protects consumers and enhances the delivery of financial services.

The report is available at: http://www.gao.gov/new.items/d0561.pdf

1.7 Adoption of IFRS – prudential implications

The Australian Prudential Regulation Authority (APRA) released on 8 November 2004 an overview paper on the ‘Adoption of International Financial Reporting Standards - prudential implications’ that will assist APRA-regulated institutions in their preparations for IFRS, which come into effect from the first reporting period on or after 1 January 2005. The paper is available at: http://www.apra.gov.au/.

APRA’s Chairman, Dr John Laker, said the paper would aid key decision-makers in APRA-regulated institutions to identify and assess the prudential impact and any associated risks for their entity as a result of implementing IFRS. It will be followed by a series of more detailed discussion papers dealing with key issues.

The paper also provides a qualitative overview of APRA’s approach to IFRS; interim prudential and statistical reporting arrangements; key issues arising from adoption of IFRS and accounting and prudential implications for each key issue; and industry-specific concerns arising from IFRS.

From 1 January 2005, authorised deposit-taking institutions should apply Australian accounting standards current as at 31 December 2004 to the clean sale requirements of Prudential Standard APS 120 and Guidance Note AGN 120.3 in relation to securitisation transactions. This approach will apply until further notice from APRA and also pertain to any extension of these requirements to general insurers as envisaged in APRA’s discussion paper ‘Prudential Supervision of General Insurance - Stage 2 Reforms (November 2003)’.

The treatment of Tier 1 capital covered in APRA’s letter of 5 April 2004, ‘Treatment of Tier 1 Capital Instruments’, is applicable until further notice.

In addition, APRA will use Australian accounting standards current as at 31 December 2004 for assessing Tier 1 instruments until further notice.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $2 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.

1.8 Australian corporate regulation - extension of the referral of corporations power

On 5 November 2004 the Honourable Chris Pearce MP, Parliamentary Secretary to the Treasurer and Chairman of the Ministerial Council, announced that at a meeting of the Ministerial Council for Corporations held on 5 November, Ministers unanimously endorsed a five year extension to the current references of corporations and related power from the States to the Commonwealth.

The current arrangements commenced in 2001, and were due to expire in 2006. The new agreement extends these arrangements until 2011.

The purpose of addressing this issue now is to ensure a constitutional foundation for regulating Australia’s 1.3 million companies.

Meanwhile, the Standing Committee of Attorneys General is continuing its consideration of possible amendments to the Constitution as an alternative basis for such legislative schemes. The aim of such an amendment would be to provide a sound constitutional basis for ‘co-operative’ schemes, such as the scheme for the regulation of corporations and related matters which existed in the 1990s. Such schemes rely directly on both State and Commonwealth power, and do not involve a referral of power.

The meeting was attended by Ministers representing the Commonwealth, all the States, and the Northern Territory.

1.9 New guide on rebates and commissions for financial products

On 4 November 2004 the Financial Planning Association of Australia (FPA) and the Investment and Financial Services Association (IFSA), jointly released a finance industry guide on rebates and related payments.

The Guide forms part of a broader initiative by the two bodies to improve payment and remuneration practices in the financial services industry in Australia. It sets out standard definitions and summarises all of the rebate practices and disclosure requirements at different stages of the advisory and sales process.

 The key principles underlying the Guide are:

·         Consumers should know what discounts they are receiving when paying for advice and/or investments, and which service they relate to. The Guide specifies that only discounts that are passed through to the consumer should be called ‘rebates’; and
·         Consumers need to be made aware of the revenue received by their adviser and the licensee when the adviser recommends a platform or product. The Guide says that any payment received from a platform or fund manager which is not passed straight through to the consumer should be disclosed as ‘commissions’.

Similar provisions apply to fees paid by a fund manager to a platform / licensee and fees paid by the platform provider to a licensee.

The FPA is engaged in a three phase process to improve the clarity and transparency of payment and remuneration practices in financial planning and to improve client understanding. Phase 1 was completed on 1 August 2004 with release of the Code of Practice on Alternative Remuneration in the Wealth Management Industry. Phase 2 is complete with the adoption of the industry Guide on rebates & related payments and work is well developed on phase 3, the establishment of principles to help members manage areas where potential or perceived conflicts of interest may exist.

The FPA Position Paper on improving payment and remuneration practices in financial planning is available on the FPA website, with the full text of the industry guide on rebates and related payments.

1.10 Investigation of malpractices in the European investment fund industry

On 4 November 2004 the Committee of European Securities Regulators (CESR) published a report which sets out the findings of CESR members following their investigations into the possibility of malpractices such as late trading or market timing practices in the European investment fund industry.

CESR members conducted extensive investigations to assess whether malpractices were prevalent in Europe’s investment fund industry, following the US regulatory authorities’ findings in autumn 2003, in which they found evidence of abusive practices in the US mutual fund market. The main conclusion is that there is little evidence of these practices occurring in Europe. However, a key finding of the investigation was that internal processes of the management companies should be improved as this may be a source of potential weakness in the future which could lead to cases of malpractices developing.

In particular, CESR members have taken action to develop supervisory programmes and tools to increase their monitoring of potential cases of malpractice, such as developing programmes geared to identifying samples of transactions to review, which may indicate potential signs of late trading and market timing. Secondly, CESR members have initiated regulatory changes or, in some cases where appropriate, amended processes to reform the functioning of the collective investment management activity to avoid the possibilities of malpractice. Such changes include requirements concerning the internal control mechanisms of fund management companies, and the way in which forward pricing and fair value approaches are used in the valuation of assets of investment funds. A summary of the actions taken by each CESR member following the findings of the investigation are included in the annex of the report.

For further information please go to the CESR website.

1.11 Organisations failing to report on people issues to key stakeholders

More than 40 per cent of organisations do not see human capital measurement as a priority for their business and a fifth of large firms never expect to report on it within their annual reports, according to UK research released on 2 November 2004 by Deloitte.

The research, carried out in conjunction with Personnel Today, finds that one year after Denise Kingsmill published the recommendations of the Accounting for People Taskforce, a significant percentage of companies are still not undertaking any measurement of their human capital.

They survey found just 12% of organisations expect to report on human capital in their Operating and Financial Reviews (OFRs).

On a positive note, the overall picture is more encouraging than the previous survey, with more organisations measuring the contribution employees make to the overall organisational performance than two years ago. In addition, the survey shows that the benefits organisations are obtaining from their measurement approaches have generally increased.

Many organisations have made changes that enable them to collate human capital data, including collecting quantitative information and specific activities such as exit interviews and employee surveys.

As with the 2002 survey, there are differing views about the best tool to measure human capital. Deloitte questioned respondents about the five most common techniques and found the most popular approach,  HR benchmarking, is used by 47 per cent of respondents - but owing to limitations associated with each technique, more than a quarter of organisations are using more than one approach.

The study is on the Deloitte website.

1.12 New UK corporate governance laws

On 29 October 2004 the Companies (Audit, Investigations and Community Enterprise) Act received Royal Assent. The Act implements safeguards recommended by post-Enron/WorldCom reviews and creates a new form of company for social enterprise. In particular it strengthens the independent regulation of the UK audit profession and the enforcement of company accounting requirements, both concerns highlighted by the Enron and WorldCom scandals. It gives auditors greater powers to get the information they need to do a proper job, and increases company investigators' powers to uncover misconduct.

The Act aims to improve the reliability of financial reporting and the independence of auditors and auditor regulation in the UK by:

·         requiring directors to make a statement in the directors' report about the disclosure of relevant information to their auditors;
·         giving the Government the power to require large and quoted companies to publish details of non-audit services provided by their auditors;
·         requiring the professional accountancy bodies that supervise auditors to sign up to independent auditing standards, monitoring and disciplinary procedures;
·         strengthening the role of the Financial Reporting Review Panel (FRRP) in enforcing good accounting and reporting, by giving it new powers to require documents and broadening its scope; and
·         allowing the Inland Revenue to pass information about suspect accounts to the FRRP.

The Act also strengthens company investigations by:

·         improving investigators' access to relevant information;
·         reducing the possibility of delay or obstruction by companies under investigation;
·         removing a possible deterrent to individuals volunteering information when complaints are vetted for possible investigation; and
·         introducing more effective sanctions.

The Act also relaxes the current prohibition on companies indemnifying directors against liability and permits companies to pay directors' defence costs as they are incurred. The Act requires disclosure in the directors' report by companies that indemnify directors. Shareholders will also have the right to inspect any indemnification agreement. Companies that do not indemnify directors will not have to make any disclosure.

In addition the Act will create community interest companies (CICs), a new type of company for social enterprises, or businesses that use their profits for the benefit of the local community or the wider public.

CICs will offer the certainty and flexibility of the standard company form, but with a new feature - a legal "lock" to ensure that assets and profits will be used for the community interest, not private gain. CICs will face fewer legal restrictions than charities and will not get charity-style tax breaks. They will be commercial enterprises, competing with other businesses, but for a social aim.

CICs will be:

·         easy to set up, but subject to an objective and transparent eligibility test;
·         able to issue shares to raise investment, but the dividends paid on those shares would be capped, to protect the "asset lock";
·         required to produce annual reports (which will be made publicly available) on how they have pursued their social or community objectives and how they have worked with their stakeholders; and
·         allowed to transfer assets to other suitable organisations, such as other CICs or charities.

Organisations and individuals will be able to set up CICs from July 2005 onwards.

1.13 European Commission proposes to simplify the formation, maintenance and alteration of companies’ capital

 On 29 October 2004 the European Commission presented a proposal for a Directive to make it easier for public limited liability companies to take certain measures affecting the size, structure and ownership of their capital. The proposal would amend the parts of the 1976 Second Company Law Directive covering the formation, maintenance and alteration of capital. This proposal is part of the Commission’s Action Plan on Company Law and Corporate Governance, announced in May 2003 and will be submitted for adoption under the 'co-decision' procedure to the EU's Council of Ministers and the European Parliament.

Stakeholders find some aspects of the current legal capital regime under the Second Company Law Directive too inflexible and costly. To remedy this, the new proposal would enable Member States, under certain conditions, to eliminate specific financial reporting requirements and to facilitate specific changes in share ownership. It would also bring into line across the EU the basic elements of legal procedures for creditors when capital is reduced.

Among the changes would be:

·         limiting the need for an expert valuation of contributions in kind when a company is established or increases capital;
·         relaxing current rules on the limitation or withdrawal of pre-emption rights, to make the procedure of issuing new shares less burdensome while maintaining shareholders’ protection from dilution of their shareholdings;
·         partially relaxing the prohibition on companies providing financial assistance for acquisition of their shares by third parties;
·         introducing “squeeze out”- and “sell out”-rights (i.e. the right of the majority shareholder, under certain conditions, to buy out minority shareholders at a fair price and the complementary right of minority shareholders to compel the majority shareholder to buy their shares); and
·         introducing a right for the company to acquire its own shares up to the limits of distributable reserves.

These modifications should enable companies to react more promptly and efficiently to market developments. Provision for protecting shareholders’ interests is made in the proposed amendments.

The full text of the proposal and a working document with further detailed information are available at: http://europa.eu.int

1.14 European Commission proposes collective board responsibility and more disclosure on transactions, off-balance sheet vehicles and corporate governance

On 28 October 2004 the European Commission proposed four key revisions of the Accounting Directives to enhance confidence in financial reporting by companies. First, establishing that board members are collectively responsible for financial statements and key non-financial information. Second, making unlisted companies transactions with related parties more transparent. Third, ensuring that all companies provide full information about off-balance sheet arrangements, including Special Purpose Vehicles which may be located offshore. Fourth, making listed companies issue an annual corporate governance statement. The proposals are part of the Commission Company Law Action Plan, published in May 2003.

(a) Responsibility of board members

The proposal would confirm that board members of limited liability companies are collectively responsible to the company for the financial and other key information that they publish and that Member States must have appropriate sanctions and liability rules where board members do not comply with accounting rules. This is in line with what currently exists in all Member States. In some, there is debate on going further, so the Commission considers this proposal may be a first step at EU-level.

(b) Related party transactions

For listed companies, disclosure requirements on transactions with all related parties such as family members and company managers already exist under International Accounting Standards (IAS). The proposed amendments would extend these to unlisted companies, though the amendments would apply only to significant transactions with related parties not carried out under normal commercial conditions. Member States would be able to exempt small unlisted companies.

(c) Off-balance sheet arrangements

Certain financial instruments can involve Special Purpose Entities located offshore that are not captured in the balance sheet. The Commission proposes that all companies - listed or not - should disclose all off-balance sheet arrangements, including their financial impact, in notes to the annual and consolidated accounts.

(d) Corporate governance statement

Companies that perform well tend to be well-governed. Investors need transparency on corporate governance to make informed investment decisions. The Commission is proposing that all listed EU companies should provide a corporate governance statement in their annual report. That statement would cover key issues such as whether the company complies with a corporate governance code, information about shareholders meetings and the composition and operation of the board and its committees.

The proposed amendments to the Accounting Directives follow consultations earlier this year. The proposed amendments are available at:

http://www.europa.eu.int/comm/internal_market/accounting/board/index_en.htm

1.15 SEC proposes securities offering reform, requires registration of hedge fund investment advisers

On 26 October 2004 the United States Securities and Exchange Commission took the following actions:

(a) Proposals regarding securities offering reform

The Commission voted to propose modifications to the registration, communications, and offering processes under the Securities Act of 1933. The proposals would address communications related to registered securities offerings, delivery of information to investors, and registration and other procedures in the offering and capital formation process.

(i) Categories of issuers

In many cases, the amount of flexibility granted to issuers under the proposed revisions to the registration, communications, and offering processes would be contingent on the characteristics of the issuer, including the type of issuer, the issuer's reporting history, and the issuer's equity market capitalization or historical debt issuance. The proposals divide issuers into four categories:

·         A non-reporting issuer would be an issuer that is not required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act;  
·         An unseasoned issuer would be an issuer that is required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act, but does not satisfy the requirements of Form S-3 or Form F-3 for a primary offering of its securities;  
·         A seasoned issuer would be an issuer that is eligible to use Form S-3 or Form F-3 to register a primary offering of securities; and 
·         A well-known seasoned issuer would be a new class of issuer that is eligible to register a primary offering of its securities on Form S-3 or Form F-3 and has either $700 million of public common equity float or, for limited purposes, has issued $1 billion of registered debt in the preceding three years.

The most significant revisions to the Commission's communications rules and registration processes would apply to well-known seasoned issuers.

(ii) Liberalising communications around the time of registered offerings

The proposals would update and liberalise permitted offering activity and communications to allow more information to reach investors by revising the "gun-jumping" provisions under the Securities Act of 1933. The cumulative effect of the proposals under the gun-jumping provisions would be the following:

·         Well-known seasoned issuers would be permitted to engage at any time in oral and written communications, including use at any time of a new type of written communication called a "free writing prospectus, "subject to enumerated conditions (including, in some cases, filing with the Commission); 
·         All reporting issuers would, at any time, be permitted to continue to publish regularly released factual business information and forward-looking information; 
·         Non-reporting issuers would, at any time, be permitted to continue to publish factual business information that is regularly released to persons other than in their capacity as investors or potential investors; 
·         Communications by issuers more than 30 days before filing a registration statement would not be considered prohibited offers so long as they did not reference a securities offering; 
·         All issuers and other offering participants would be permitted to use a free writing prospectus after the filing of the registration statement, subject to enumerated conditions (including, in some cases, filing with the Commission); 
·         A broader category of routine communications regarding issuers, offerings, and procedural matters, such as communications about the schedule for an offering or about account-opening procedures, would be excluded from the definition of "prospectus";  and
·         The exemptions for research reports would be expanded.

A number of these new proposals would include conditions of eligibility. Most of the proposals, for example, would not be available to blank check companies, penny stock issuers, or shell companies.

The proposals would address the treatment under the Securities Act of electronic communications, including electronic road shows and information located on or hyperlinked to an issuer's website.

Comments on the proposals should be submitted to the Commission within 75 days following publication in the Federal Register.

The full text of the detailed release concerning these proposals is posted on the SEC website.

(b) Registration under the Advisers Act of certain hedge fund advisers

The Commission voted to adopt new Rule 203(b)(3)-2 that will require hedge fund advisers to register with the Commission under the Investment Advisers Act of 1940 by 1 February 2006. The Commission also adopted related rule amendments.

The rule is the culmination of an initiative to study hedge funds and their advisers that commenced over two years ago. Registration under the new rule will permit the Commission to:

·         collect important information about the operations of hedge fund advisers, which represent a significant and growing component of the U.S. financial system; 
·         conduct examinations of hedge fund advisers. Examinations permit the SEC to identify compliance problems at an early stage, identify practices that may be harmful to investors and provide a deterrent to unlawful conduct; 
·         require all hedge fund advisers to adopt basic compliance controls to prevent violation of the federal securities laws; 
·         improve disclosures made to prospective and current hedge fund investors; and 
·         prevent felons or individuals with other serious disciplinary records from managing hedge funds.

The new rule will eliminate the ability of hedge fund advisers to rely on an exemption from adviser registration designed for advisers providing advice only to a small number of clients.

The new rule contains 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.

The compliance date for the new rule will be 1 February 2006.

The full text of the detailed release concerning this rule is available on the SEC website.

1.16 Report on crimes against business

On 21 October 2004, the Australian Institute of Criminology (AIC) released a report titled “Crimes Against Business: A Review of Victimisation, Predictors and Prevention”. The following is an extract from the executive summary.

The impact of crime on the business community can be substantial, with offences ranging from traditional business crimes such as burglary and shoplifting, through to internally perpetrated crimes such as employee fraud and theft. However, despite the vast extent of crime and its considerable costs, there has not always been a strong research focus on business crimes. This report attempts to address this issue by reviewing the literature pertaining to the scale of the problem, possible causal explanations, and strategies for prevention.

The review of literature examines studies conducted both in Australia and overseas. First, findings are presented on the nature and extent of business crime, with data relating to victimisation, reporting, and costs. This section includes findings for different types of business crime, as well as an overview of important findings from the AIC study of crimes against small business in Australia conducted in 1999. The report then goes on to consider possible predictors for business crime, from individual and situational perspectives. Finally, there is a focus on the preventative aspect of business crime, first presenting findings from various studies which have reported on business owners' own efforts to fight crime. The paper then details case studies of successful crime prevention strategies, along with guidelines for business.

In the conclusion, the literature review is summarised and a number of relevant recommendations are proposed. It is suggested that:

·         further research should be conducted to investigate in greater depth the nature and extent of crime against particular types of businesses;
·         there should be an increased focus in research on repeat victimisation;
·         recording of crime should be improved and consistently administered;
·         police should provide an improved response for business complainants and simplify reporting procedures to encourage increased reporting; and
·         businesses should be encouraged to implement crime prevention measures.

The report is available on the AIC website.

1.17 SEC sanctions KPMG and four auditors for improper professional conduct

On 20 October 2004, the United States Securities and Exchange Commission (SEC) announced that it had sanctioned KPMG LLP, the national accounting firm based in New York City, two former KPMG partners, and a current partner and senior manager for engaging in improper professional conduct as auditors for Gemstar-TV Guide International, Inc. KPMG and the auditors agreed to settle the action without admitting or denying the SEC's findings. As part of the settlement, KPMG was censured and agreed to pay $10 million to harmed Gemstar shareholders. This represents the largest payment ever made by an accounting firm in an SEC action. The auditors, all of whom are certified public accountants, agreed to suspensions from practicing before the SEC.

The SEC's administrative order finds that from September 1999 through March 2002, the respondents' conduct resulted in repeated audit failures in connection with KPMG's audits of Gemstar's financial statements. The order also finds that the respondents reasonably should have known that Gemstar improperly recognized and reported in its public filings material amounts of licensing and advertising revenue. Gemstar, based in Hollywood, Calif., publishes TV Guide magazine and licenses and sells advertising on an interactive program guide (IPG) for television that enables consumers to navigate through and select television programs.

More information is available on the SEC website.

On 13 October 2004 the United States Securities and Exchange Commission proposed amendments to Regulation M that would prohibit certain market activities that undermine the integrity and fairness of the offering process, particularly with respect to the allocation of Initial Public Offerings (IPOs). The amendments would also enhance the transparency of underwriters’ aftermarket activities.

Adopted in 1996, Regulation M governs the activities of underwriters, issuers, selling security holders, and others in connection with offerings of securities. Regulation M is designed to prohibit activities that could artificially influence the market for the offered security, including for example, supporting the IPO price by creating the perception of scarcity of IPO stock or creating the perception of aftermarket demand.

The proposed amendments would:

·         Lengthen the “restricted period” for IPOs beyond the current 5-day period. The restricted period is the time period during which distribution participants must refrain from activity that could stimulate the market for the security in distribution. Under the proposal, the restricted period for an IPO generally would begin when the issuer reaches an understanding with an underwriter to proceed with a distribution; 
·         Require syndicate covering bids, indicating that the underwriter is buying shares to cover its short position, to be publicly disclosed to the market, similar to what is required for stabilizing bids under the current rule; 
·         Prohibit the use of penalty bids, which also can function as an undisclosed form of stabilization. Penalty bids occur when an underwriter reclaims a selling concession from a syndicate member if the offering security is immediately sold by the initial purchaser; 
·         Adopt a new rule under Regulation M that would expressly prohibit certain IPO abuses that occurred in the late 1990’s and in other “hot issue” periods, including conditioning or “tying” an allocation of shares on an agreement by the customer to buy shares in another less desirable (“cold”) offering, or to pay excessive trading commissions on unrelated securities transactions; 
·         Require recordkeeping in connection with the rule’s “de minimis exception,” which excepts inadvertent bids and purchases during the restricted period that total less than 2% of the distributed security’s average daily trading volume (“ADTV”). Frequent reliance on the exception could indicate that a firm’s compliance policies and procedures are inadequate to achieve compliance with Regulation M; and 
·         Update the ADTV value and public float value thresholds (which are used to determine a security’s restricted period and the availability of the exception for actively-traded securities) to reflect the increase in market value since Regulation M’s adoption in 1996.

The comment period for the proposals will end 60 days from the date of publication of the proposed rules in the Federal Register. The full text of the detailed release concerning this proposal is available on the SEC website.

The International Association of Insurance Supervisors (IAIS) has released its new framework for insurance supervision, and invited public consultation. The framework underpins the IAIS’s past and future standard-setting activities on insurance supervision and proposes the development of cornerstones for the assessment of insurer solvency, which takes a central position in the framework.

The IAIS paper outlines the proposed IAIS Framework for Insurance Supervision and shows where the financial components of insurance supervision (which include the assessment of insurer solvency) fit within this Framework. A significant current focus for the IAIS is the development, as part of the Framework, of the key elements or ‘‘cornerstones’’ of a common structure and common standards for the assessment of insurer solvency.

A common structure and common standards for the assessment of insurer solvency will address the IAIS’s first objective of improving supervision of the insurance industry for the benefit and protection of policyholders by:

• assisting both industry and the insurance supervisory community in the determination and assessment of the risk and solvency position of insurers, reinsurers and financial groups;
• serving to enhance the transparency and comparability of insurers worldwide, to the benefit of consumers, the industry, investors and other interested parties;
• supporting a level playing field;
• offering further opportunities for international cooperation;
• reducing opportunities for unwanted regulatory arbitrage;
• increasing public confidence in the insurance sector;
• reducing reporting and compliance costs; and
• enabling a more effective use of resources by industry and the supervisory community.

The remainder of the paper presents the structure of the IAIS Framework for Insurance Supervision and the proposed future development of the ‘cornerstones’ of a common structure and common standards for the assessment of insurer solvency.

The paper is available on the IAIS website.

The European Commission has formally invited Member States, through a Commission Recommendation, to reinforce the presence and role of independent non-executive directors on listed companies boards. Protecting shareholders, employees and the public against potential conflicts of interest, by an independent check on management decisions, is particularly important to restore confidence in financial markets after recent scandals.

The non-binding Recommendation concentrates on the role of non-executive or supervisory directors in key areas where executive or managing directors may have conflicts of interest. It includes minimum standards for the qualifications, commitment and independence of non-executive or supervisory directors.

The main principles in the Recommendation are:

·         The administrative, managerial and supervisory bodies should include overall an appropriate balance of executive/managing and non-executive/supervisory directors so that no individual or small group can dominate decision-making;
·         Boards should be organised so that a sufficient number of independent non-executive or supervisory directors play an effective role in defining and dealing with potential conflicts of interest. To this end, nomination, remuneration and audit committees should normally be created within the (supervisory) board. The Recommendation defines minimum standards for the creation, composition and role of those committees;
·         A director is considered independent when free from any business, family or other relationship - with the company, its controlling shareholder or the management - which might jeopardise his or her judgement;
·         The (supervisory) board should be composed of members who, taken together, have the diversity of knowledge, judgment and experience to properly complete their tasks; and
·         All directors should devote to their duties the necessary time and attention. When the appointment of a director is proposed, his or her other significant professional commitments should be disclosed.

The Recommendation is addressed to Member States. Since differing approaches to corporate governance are deeply rooted in national traditions, particular care has been taken to provide for maximum flexibility in the ways Member States can apply the principles in the Recommendation. The Recommendation takes account of efforts already made in Member States and aims by identifying best practices to foster convergence on these issues in the EU.

The Commission will closely monitor the application of this Recommendation to identify whether additional measures may be desirable in the medium term.

The full recommendation is at: http://www.europa.eu.int/comm/internal_market/company/independence/index_en.htm

1.21 European Commission sets out guidance on disclosure and shareholder control of directors’ pay

The European Commission has adopted a Recommendation on directors’ remuneration. It recommends that Member States should ensure listed companies disclose their policy on directors’ remuneration and tell shareholders how much individual directors are earning and in what form, and ensure shareholders are given adequate control over these matters and over share-based remuneration schemes.

The non-binding Recommendation invites Member States to adopt measures in four areas:

·         Remuneration policy: all listed companies should release a statement of their policy on directors’ remuneration for the following year. It should include information on the breakdown of fixed and variable remuneration, on performance criteria and on the parameters for annual bonus schemes or non-cash benefits. It should also explain the company’s contract policy. The company should not have to disclose commercially-sensitive information.
·         Shareholders meeting: remuneration policy for directors should be on the agenda of the shareholders general meeting. To increase accountability, it should be submitted to a vote which may be either binding or advisory. An advisory vote would require neither directors’ contractual entitlement or remuneration policy to be amended.
·         Disclosure of the remuneration of individual directors: this should include detailed information about: the remuneration and/or emoluments of individual directors; the shares or rights to share options granted to them; their contribution to supplementary pension schemes; and any loans, advances or guarantees to each director.
·         Approval of share and share option schemes: variable remuneration schemes under which directors are paid in shares, share options or any other right to acquire shares should be subject to prior approval of the Annual General Meeting of Shareholders. The approval relates to the system of remuneration and the rules applied to establish individual remuneration under the scheme. It would not relate to the individual remuneration of directors.

The recommendation takes due account of efforts already made by several Member States and aims to foster these developments by identifying best practices to ensure greater convergence in the EU. The Commission will closely monitor the application of the Recommendation to identify whether additional measures may be desirable in the medium term.

The full text of the Recommendation is at:

http://www.europa.eu.int/comm/internal_market/company/directors-remun/index_en.htm

1.22 Shareholder meetings: key legal issues

A new