Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation

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CONTENTS

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS

(A) APRA proposes blueprint for future regulation of general insurance
(B) Review of independent company auditing
(C) Government announces policy proposals on audit regulation and corporate disclosure
(D) APRA criticises audit performance
(E) U.S. Commission calls for major executive compensation reforms
(F) Superannuation Regulations Disallowed in the Senate
(G) Survey finds improved corporate governance
(H) Directors' personal liability under examination
(I) Federal Government releases financial services compensation issues paper
(J) Insider Trading Proposals Paper
(K) The Fraser Institute study: The Ontario Securities Commission should improve its own governance
(L) Australian Labor Party Directions Statement for improving corporate governance
(M) Corporate Social Responsibility: Unlocking the value
(N) U.S. regulators issue draft White Paper on Sound Practices to Strengthen the Resilience of the US Financial System
(O) UK Financial Services Authority publishes discussion paper on hedge funds
(P) Seventy-five percent of senior executives expect board of directors will be more assertive on key issues in wake of recent scandals
(Q) International Finance Corporation report challenges conventional wisdom on role of business in emerging markets
(R) Brookings Institute study details economic cost of recent corporate crises

2. RECENT ASIC DEVELOPMENTS

(A) ASIC releases Ramsay report on disclosure of fees and charges in managed investments
(B) ASIC amends policy on share purchase plans
(C) ASIC issues new Class Orders about warrants
(D) Coles Myer - ASIC calls for more information and shareholder activism
(E) Over 100 product disclosure statements lodged with ASIC since introduction of FSRA
(F) High Court refuses special leave in Yandal matter
(G) Simon Hannes found guilty
(H) ASIC concludes investment funds project, gives takeover relief to index funds
(I) Prospective financial information
(J) Discussion paper on administration obligations
(K) ASIC gives interim licensing relief for operators of pooled development funds

3. RECENT TAKEOVERS PANEL MATTERS

(A) Panel decision in relation to Colonial First State Property Trust Group
(B) Panel decision in relation to Online Advantage Limited
(C) Panel releases final guidance on conflicts of interest

4. RECENT CORPORATE LAW DECISIONS

(A) Whether certain resolutions proposed by members should be declared to be invalid
(B) Company not required to distribute a members' statement to members
(C) Appointment of an interim receiver and manager to a corporate trustee
(D) Application of accounting standards in proceedings before the Companies Auditors and Liquidators Disciplinary Board
(E) Application to wind up managed investment scheme
(F) The relevance of Chapter 6 principles to schemes of arrangement
(G) Is a premium payable to creditors under a deed of company arrangement permissible?
(H) Obtaining a court order to validate an invalid company resolution
(I) Banning orders and pecuniary penalties for related party payments under the Corporations Law
(J) Interim reports on ASIC investigations and procedural fairness
(K) Removal of directors by shareholders - Does the Corporations Act over-ride provisions in a public company's constitution?

5. RECENT CORPORATE LAW JOURNAL ARTICLES

6. CONTRIBUTIONS

7. MEMBERSHIP AND SIGN-OFF

8. DISCLAIMER

1. RECENT CORPORATE LAW AND CORPORATE GOVERNANCE DEVELOPMENTS

(A) APRA PROPOSES BLUEPRINT FOR FUTURE REGULATION OF GENERAL INSURANCE

On 26 September 2002 The Australian Prudential Regulation Authority (APRA) provided its Submission to the HIH Royal Commission on Future Policy Directions for prudential regulation of the general insurance industry.

This is APRA's response to a request by the Commission to provide its views on improvements in the regulation of insurance. While the recommendations centre upon the general insurance industry, many of the initiatives can be appropriately applied across the financial services industry in line with the integrated regulatory model adopted by APRA.

The three main areas where APRA proposes further improvements are:

(1) Consolidated supervision - it is essential that prudential supervision be applied across the whole of insurance groups on a consolidated basis, including their international operations, as well as focusing on the individual Australian insurers that are members of these groups.

(2) Disclosure - APRA is committed to improving the quality of insurance companies' disclosure to the market about their risk-adjusted financial strength and performance relevant to their ability to pay policy claims.

(3) Corporate governance and risk management - the Submission identifies areas for potential governance reform which aim to keep Boards and others honest, open, diligent and accountable by upgrading their responsibilities. Such measures could include:

- Personal attestations by directors and senior executives - requiring annual sign-off by individual directors and senior executives of regulatory compliance;
- Peer review of actuarial reports - the development of a process by which actuarial reports are subject to independent review to ensure appropriate standards are maintained;
- Separation of audit and actuarial firms - consideration will be given to prohibiting the use of actuaries and auditors from the same firm;
- Financial condition reports - a requirement for an Approved Actuary to carry out an overview of a company's financial soundness, not just its insurance liabilities;
- Whistle-blowing protection - protection for company directors and officers that advise APRA of issues they consider have the potential to damage policyholders' interests.

In addition, APRA recommends amendments to legislation to increase its enforcement powers; its operational independence; and its ability to deal with insurance-type activities that do not presently come under the Insurance Act 1973 No. 76 (Cth).

In its Submission, APRA also canvasses options for a compensation scheme that would be activated in the event that a general insurer, or other regulated entity, fails.

A copy of APRA's Submission is available at http://www.apra.gov.au/.

(B) REVIEW OF INDEPENDENT COMPANY AUDITING

In a media release dated 18 September 2002 Mr Bob Charles MP, Chairman of the Joint Committee of Public Accounts and Audit, announced that the Australian Federal Parliament's Public Accounts and Audit Committee had made 13 recommendations for changes to Australia's corporations law, corporate governance standards and private sector auditing practices following a six-month investigation of these issues.

Conducted in the wake of corporate collapses in Australia and overseas, the 144-page review of independent auditing by registered company auditors was released in parliament on 18 September 2002.

Key recommendations include:

- Amending the Corporations Act 2001 No. 50 (Cth) to clarify and enforce the requirement that directors and auditors must certify that accounts both comply with Australian accounting standards and represent a true and fair view of the company's affairs;
- Requiring CEOs and Chief Financial Officers of companies to sign statutory declarations attesting that the company's financial reports comply with the Corporations Act and are materially truthful and complete;
- Requiring all publicly listed companies to have an independent audit committee, with the Corporations Act prescribing minimum requirements which the committee must meet;
- Amending the Corporations Act to require audit firms to detail annually to the Australian Securities and Investments Commission (ASIC) how they are dealing with independence issues, reporting against benchmarks set by ASIC;
- Amending the Corporations Act to require auditors to report on whether the auditor believes a company is complying with new corporate governance standards to be developed by the Financial Reporting Council (including prescriptions for internal audit);
- Amending Australian Stock Exchange (ASX) Listing Rules to require additional reporting by companies against a range of criteria and performance indicators; and
- Introducing greater protection for auditors by replacing the principle of joint and several liability with proportional liability; allowing auditors to work within limited liability structures; and introducing a cap for professional liability claims, to limit damages awarded against auditors.

The full report is available on the Joint Committee of Public Accounts and Audit website at http://www.aph.gov.au/house/committee/jpaa/indepaudit/contents.htm

For information and background on the inquiry, contact the inquiry secretary, Mr Adam Cunningham on (02) 6277 2336, or visit the inquiry website at http://www.aph.gov.au/house/committee/jpaa/Indepaudit/inqinde2.htm

(C) GOVERNMENT ANNOUNCES POLICY PROPOSALS ON AUDIT REGULATION AND CORPORATE DISCLOSURE

On 18 September 2002 the Australian Federal Government released a comprehensive set of policy proposals on audit regulation and the wider corporate disclosure framework. The paper, "Corporate Disclosure: Strengthening the Financial Reporting Framework", is the next chapter in the Government's Corporate Law Economic Program and will be known as CLERP 9.

The paper proposes a fundamental reshaping of the financial reporting framework. It builds on existing institutions and clarifies responsibilities to focus on the quality of financial reporting.

Under the proposals the Government will, among other things:

- Expand the role of the Financial Reporting Council to include public oversight of audit independence and audit standard setting in Australia. Auditing standards will also have the force of law on the same basis as accounting standards issued by the Australian Accounting Standards Board.
- Make audit committees mandatory for Australia's top 500 listed companies.
- Make audit partner rotation compulsory after 5 years.
- Amend the law to require disclosure in annual reports of fees for all categories of all non-audit services provided by an audit firm.
- Amend the law to require audit committees to certify that receipt of certain non-audit services did not compromise audit independence.
- Amend the law to increase the maximum civil penalty for contraventions of continuous disclosure provisions from $200,000 to $1 million.
- Amend the law to give the Australian Securities and Investments Commission the power to impose financial penalties and issue infringement notices in relation to contraventions of the continuous disclosure regime.
- Amend the law to provide penalties for retaliation against a company employee who reports to ASIC a suspected breach of the law in good faith and on reasonable grounds.
- Reform areas of auditor liability by allowing auditors to incorporate and seek agreement of the States to introduce proportionate liability.
- Revise civil and criminal penalties applying to financial reporting offences to ensure consistency and adequacy.
- Establish a Shareholders and Investors Advisory Council to provide advice on disclosure reforms to ensure they meet the needs of retail investors.
- Encourage shorter, more comprehensible notices of meetings and facilitate improved shareholder participation by electronic means.

The paper incorporates the Government's response to the report of Professor Ramsay on auditor independence. The Government has adopted virtually all of Professor Ramsay's recommendations.

The Government will continue to consult with business and the community on these proposals. Consultation will close on 22 November 2002. The Government will then release exposure draft legislation for comment, with legislation expected to be introduced early in 2003.

Copies of the paper are available from the Treasury website at http://www.treasury.gov.au/

* Comments on the paper should be sent to:

General Manager
Corporate Governance Division
Department of the Treasury
Langton Crescent
Parkes ACT 2600

Submissions are due by 22 November 2002. As submissions may be made public, any confidential material should be marked accordingly.

(D) APRA CRITICISES AUDIT PERFORMANCE

On 17 September 2002 the Australian Prudential Regulation Authority's (APRA) General Manager, Dr Darryl Roberts, told an Association for Compliance Professionals of Australia Incorporated (ACPA) seminar on "Compliance versus Enforcement" that the practice of auditor certification was working well below par.

Speaking at the ACPA/PricewaterhouseCoopers conference in Sydney, Dr Roberts said "While a key element of APRA's prudential safety net, our experience is that in many cases we cannot take much comfort from the work of the external auditor."

"A disturbing number of auditors seem ignorant of the relevant statutes and standards, and are failing to detect and flag weaknesses such as non-compliance with APRA prudential standards," Dr Roberts told conference delegates.

Cited among the areas of concern within regulated financial institutions, that auditors were failing to identify, were:

- delegations set at inappropriate levels of seniority;
- large credit exposures that breach prudential limits;
- lack of a strong, independent internal audit function;
- inadequate controls on lending to related parties; and
- inadequate controls on risky activity.

"The compliance function should be deeply embedded in a financial institution's everyday commercial culture, and not regarded as a mere mechanical or legalistic box-ticking exercise," said Dr Roberts.

For the financial year ended 30 June 2002, APRA will be questioning auditors where its on-site activity identifies compliance problems but the audit report remains unqualified.

Dr Roberts also highlighted the accountability of the board and senior management of regulated institutions.

"If APRA detects a failure to exercise good risk management - for example, serious problems are swept under the carpet - then we will not hesitate to deem board members and senior executives unfit for their roles and remove them," he said.

A copy of Dr Robert's presentation is available on APRA's website at http://www.apra.gov.au/.

(E) U.S. COMMISSION CALLS FOR MAJOR EXECUTIVE COMPENSATION REFORMS

On 17 September 2002 the United States Conference Board's Blue-Ribbon Commission on Public Trust and Private Enterprise proposed a wide-ranging series of reforms to strengthen corporate compensation practices.

The twelve person Blue Ribbon Conference Board Commission on Public Trust and Private Enterprise is comprised of major business leaders, major investors, former senior government and regulatory officials as well as a university professor of business ethics.

This report, the first in a series of three reports, focuses on executive compensation. Subsequent reports will deal with reforms on other areas of corporate governance as well as accounting and auditing issues.

The Conference Board Commission on Public Trust and Private Enterprise said, "it shares the public anger at the misconduct leading to the breakdown in public trust." Commission Co-Chair Peter G Peterson, Chairman of The Blackstone Group, noted the "lack of fairness" of the unprecedented levels of executive compensation, particularly the compensation of certain executives, even as their companies and the retirement savings of their employees have collapsed. Co-Chair John W Snow, Chairman, CSX Corporation, added, in referring to the malfeasance at Enron, WorldCom and other companies: "these egregious failures evidence a clear breach of the basic contract that underlies corporate capitalism." The Commission proposed wide ranging reforms on executive compensation including:

- retention and direction of compensation experts by compensation committees - not management;
- compensation committees setting compensation not by ratcheting up industry averages;
- uniformly expensing stock options;
- substantial director and top management stock ownership for extended holding periods;
- avoiding "special purpose entity" compensation to executives;
- greater disclosure of equity dilution and employment agreements;
- shareholder approval of option repricing; and
- advanced notice of executive stock sales.

(1) 'Excessive use' of stock options

The report declares that: "Executive compensation has become too 'delinked' from long-term performance goals in many corporations. There is an imbalance between unprecedented levels of executive compensation, with little apparent financial downside risk or relationship of this compensation to long-term company performance."

(2) Four guiding compensation principles

The Committee suggests a series of recommended principles as well as a series of specific best practices. The principles include:

(a) Focus on a much tighter linkage between executive operating performance and executive compensation, rather than simply on the ups and downs of the stock market, which are often not closely related to the executive's contribution to the long-term value of the enterprise.

(b) Focus on a fully independent, accountable, and vigorous compensation committee that takes primary responsibility for all aspects of executive compensation including employment, retention, and severance agreements.

(c) Focus on accounting neutrality so as to avoid bias and favour of any one form of equity based compensation, and, at the same time, facilitate comparability of results as between companies.

(d) Focus on full disclosure of all material information on an understandable and timely basis and, in particular, to reassure the public that management is not involved in stock transactions with advanced knowledge of material information not available to the public at that time.

(3) Recommended best practices

(a) The Compensation Committee should retain any outside consultants who advise it, and the outside consultants should report solely to the Committee.

(b) The Compensation Committee should be unconstrained by industry averages and statistics or by the company's past compensation practices and levels, which, in certain companies, have been excessive.

(c) Stock options should be expensed on a uniform and broadly accepted basis. This will eliminate the accounting treatment that makes stock options so desirable to companies at the expense of more performance-oriented forms of compensation including cash, and equity compensation.

(d) Senior management and directors should: 1) be required to own a meaningful amount of company stock on a long-term basis; and 2) be subject to substantial minimum holding periods for equity received as compensation, in each case in order to align the interests of management with those of the corporation. Holding periods for senior executives and directors should generally not be less than the holding periods for other employees.

(e) Companies should avoid the use of special purpose entities to compensate or enrich senior executives.

(f) There should be a strengthening of requirements for conspicuous disclosure of all material impacts of stock options and other compensation arrangements, including overall costs and earnings dilution effects, as well as disclosure of all employment agreements for top executives, including severance arrangements.

(g) Shareholders should approve modification of existing equity compensation arrangements, including repricing options or any actions that could dilute their holdings.

(h) Executive officers should be required to give advanced public notice of their intention to sell their stock.

(4) Commission will launch new national effort

The Commission applauded the new Sarbanes-Oxley Act and new stock exchange rules as actions to curb further abuses. The Commission will launch a national effort to encourage corporations and investors to take their own corrective actions by installing a series of recommended best practices and thus avoid additional legislation on executive compensation. As an example of the unintended effects of such legislation, the Commission pointed to earlier tax legislation and the intention to limit executive pay by disallowing tax deductions in excess of $1 million. Instead of accomplishing its intended purpose, this legislation contributed to fixed-price options becoming the dominant form of executive compensation.

The report is available on the Conference Board's website at http://www.conference-board.org/.

Members of The Conference Board's Commission on Public Trust and Private Enterprise include:

Peter G Peterson, Chairman of The Blackstone Group, former Secretary of Commerce and Chairman of the Federal Reserve Bank of New York
John W Snow, Chairman, CSX Corporation and former Chairman, Business Roundtable
John H Biggs, Chairman, President and CEO, TIAA-CREF
John C Bogle, Founder and former Chairman, Vanguard Group, Inc
Charles A Bowsher, former Comptroller General
Peter M Gilbert, Chief Investment Officer, State Employees' Retirement System, Commonwealth of Pennsylvania
Andrew S Grove, Chairman of Intel Corporation
Ralph S Larsen, former Chairman and CEO of Johnson & Johnson, former Chairman of The Business Council
Arthur Levitt Jr, former SEC Chairman and former Chairman of the American Business Conference
Professor Lynn Sharp Paine, John G McLean Professor of Business Administration Harvard Business School
Former Senator Warren B Rudman, Paul, Weiss, Rifkind, Wharton & Garrison
Paul A Volcker, former Chairman of the Board of Governors, Federal Reserve System

(F) SUPERANNUATION REGULATIONS DISALLOWED IN THE SENATE

On 16 September 2002 the Australian Labor Party combined with minor parties in the Senate to disallow the superannuation product disclosure regulations which had been made under the Financial Services Reform Act 2001 No. 122 (Cth). The regulations which have been disallowed put in place a heightened disclosure regime for superannuation products, including disclosure of the ongoing management charge for superannuation products. The reasons put forward by the Labor Party for disallowing these regulations included criticisms of the ongoing management charge and also criticism of the fact that the enhanced disclosure applied only to superannuation products and not to other types of managed investments.

The result is that Schedule 10B of the Corporations Regulations 2001 No. 193 (Cth) is no longer effective and the special disclosure rules contained in that Schedule for superannunation products no longer apply. This means that the disclosure requirements applying to superannuation products are regulated solely by Part 7.9 of the Corporations Act 2001 No. 50 (Cth).

It has been suggested that product disclosure statements that have been prepared on the basis of complying with Schedule 10B can still be used provided they meet the requirements of Part 7.9 of the Corporations Act.

(G) SURVEY FINDS IMPROVED CORPORATE GOVERNANCE

The events of the last year have had a positive impact on the governance practices of corporate Australia a new survey has found, with an overwhelming number of companies overhauling their audit, disclosure and risk management practices.

According to the Chartered Secretaries Australia (CSA) survey of company secretaries in the Australian Stock Exchange Top 200 companies (published on 12 September 2002), 83 per cent have reviewed and improved their processes and procedures. Not surprisingly, a review of audit practices topped the list of 'must dos'. Also, many companies reported an increase in focus at Board and CEO levels on the importance of corporate governance.

Organisations have opted for wide-ranging improvements including the revision of the Audit Committee Charter, full disclosure of the relationship with auditors, and mandating that the auditors cannot provide other services. In addition 86 per cent of respondents are satisfied with the progress being made towards ensuring auditor independence in Australia.

The survey also found an increased focus on annual reporting particularly in terms of share options and audit committee function reporting.

The vast majority - 89 per cent - of company secretaries believe investors will increasingly reward companies with sound, transparent corporate governance practices and punish those with questionable ones.

There is also strong support for the United States' requirement for CFOs and CEOs to verify the accuracy of the accounts with 79 per cent of respondents agreeing that it will help restore investor confidence.

Increased accountability and deterrents are perceived as a key part of improving investor confidence, yet relatively few criminal convictions for corporate crimes are successful. In this context, 73 per cent of respondents believe the option of a civil action for such crimes would increase the chance of conviction, help recover losses for the company and act as a stronger deterrent.

There was little support for corporate governance practices in Australia to be regulated by the listing rules and enforced by the ASX (34 per cent) or by legislation enforced by the ASIC (30 per cent).

61 per cent of respondents believed there should be no change in the way corporate governance is currently regulated.

(H) DIRECTORS' PERSONAL LIABILITY UNDER EXAMINATION

On 11 September 2002 the Hon Senator Ian Campbell, Parliamentary Secretary to the Treasurer issued a press release advising that the Australian Federal Government had asked the Corporations and Markets Advisory Committee to identify any inconsistencies and compliance cost overlaps in existing laws relating to directors' liability.

Senator Ian Campbell said the committee would investigate the personal liability of directors at common law and under Federal and State/Territory statutes.

"The business judgement rule which came into effect two years ago as a result of the CLERP 3 reforms addressed directors' duty of care and diligence, however directors are also subject to a range of other duties and requirements by the Commonwealth, States and Territories," Senator Campbell said.

"Concerns have been raised that overlapping and inconsistent duties and potential liabilities are generating unnecessary compliance burdens and causing difficulties in obtaining insurance cover.

"The purpose of this examination is to identify the full range of impacts of existing laws with a view to rationalising the various requirements and duties."

He said the committee would also consider whether potential personal liability under the various requirements were disincentives to anyone considering board positions.

The committee is expected to start its investigation soon.

(I) FEDERAL GOVERNMENT RELEASES FINANCIAL SERVICES COMPENSATION ISSUES PAPER

On 6 September 2002 a Federal Government paper on compensation for loss in the financial services sector was released for public discussion.

The paper discusses issues and options for compensation for loss suffered by clients for any financial product. It includes services for market-traded products, those traded outside formal markets and those for which there is no secondary market.

It also includes financial products which are in the nature of investments as well as products designed to manage risk. It does not, however, cover loss caused by market fluctuations or the failure of the institution that issued the product.

The paper is available on the Treasury website at http://www.treasury.gov.au/ and in Commonwealth Government bookshops. There will be a two-month public exposure period.

(J) INSIDER TRADING PROPOSALS PAPER

On 3 September 2002 the Corporations and Markets Advisory Committee published a paper on insider trading proposals. Following is an extract from the paper's Introduction.

(1) The current review

- The Advisory Committee is currently reviewing Australia's insider trading laws.
- In undertaking this review, the Advisory Committee saw the need for clear and effective laws to protect and guide Australian financial markets. Lack of clarity can result in reduced compliance as well as unproductive uncertainty for market participants. Where necessary, insider trading laws should be strengthened to make them fully effective and assist enforcement. These laws should also not impede legitimate market activity.

(2) Earlier Discussion Paper

- The Advisory Committee published its Insider Trading Discussion Paper in June 2001. That Paper set out a framework for general debate, as well as raising specific issues, on the appropriateness of the insider trading laws for Australian financial markets. That Paper also contained a detailed legal analysis of insider trading laws in Australia and overseas jurisdictions. The Discussion Paper is available on the CAMAC website at http://www.camac.gov.au/.

(3) Legislative developments

- The application ambit of the insider trading laws has been considerably extended since the Discussion Paper was published in June 2001. In March 2002, the Financial Services Reform Act 2001 No. 122 (Cth) (FSRA) introduced amendments into the Corporations Act 2001 No. 50 (Cth) to harmonise the regulation of financial markets and services. These amendments included extending the insider trading laws beyond securities (including a limited class of over-the-counter-traded securities) and some futures contracts to a very broad range of financial products, including all derivatives, as well as any other financial products that can be traded on a financial market.

(4) Proposals Paper

- This Proposals Paper discusses the implications of the above developments, as well as the Advisory Committee's current thinking on the other matters raised in the Discussion Paper. Before settling its Final Report, the Advisory Committee takes the opportunity to outline, and seek comments on, important issues that have arisen in the review. The Paper is structured as follows.

(a) Chapter 1

- This Chapter outlines the key characteristics of the various financial markets that operate in Australia and the implications of the current insider trading laws for each of these markets. It raises for consideration various options on how best to apply the insider trading laws to each of those markets.

(b) Chapter 2

- This Chapter discusses the merits of introducing various statutory exemptions, independently of the matters discussed in Chapter 1, in areas where the application of the insider trading laws may be inappropriate. Areas discussed include share issues, buy-backs, off-market transactions in exchange-tradeable securities and transactions in unlisted entities.

(c) Chapter 3

This Chapter summarises the Advisory Committee's current thinking on other matters raised in the Discussion Paper that may require legislative change. These include strengthening the reporting requirements for directors, amending the test of generally available information and introducing rebuttable presumptions that would apply to senior corporate officers.

(d) Chapter 4

- This Chapter deals with matters raised in the Discussion Paper that the Committee considers should not be changed. These include retaining the existing law that applies to anyone with inside information, whether or not connected with the affected company, and ensuring that informed persons are liable, whether or not they use the information to trade.

(5) Request for comments

- In formulating this Paper, the Advisory Committee has very carefully considered the Submissions on the Discussion Paper. The Committee now invites comments on any matter raised in this Proposals Paper or any other matter relevant to insider trading. All Submissions and comments will be acknowledged in the Final Report.

Please send your comments to:

Mr John Kluver
Executive Director
CAMAC

by any of the following means:

Email: john.kluver@camac.gov.au
Fax: (02) 9911 2955
Post: Corporations and Markets Advisory Committee
GPO Box 3967
Sydney NSW 2001

By hand:

Level 16
60 Margaret Street
Sydney

Closing date for comments:

Please forward your comments by Friday 1 November 2002.

This Proposals Paper is available under What's New on the Advisory Committee's website http://www.camac.gov.au/.

(K) FRASER INSTITUTE STUDY: THE ONTARIO SECURITIES COMMISSION SHOULD IMPROVE ITS OWN GOVERNANCE

The Ontario Securities Commission (OSC), a vocal champion of good corporate governance for public companies, may be falling behind its international counterparts in its own governance, says a new study 'The Governance of the Ontario Securities Commission: Lessons from International Comparisons released on 5 September 2002 by The Fraser Institute.

The study compares the governance structure of the OSC with regulators in the US, Australia, UK, and Hong Kong, to explore governance practices that can be adopted by the OSC.

(1) The OSC and international securities regulators

There are similarities in governance between the OSC and modern securities regulators in other countries. These include: requirements for companies to submit annual reports, judicial processes for appealing administrative decisions, and a process of public comment for regulators that have rule-making powers.

But significant differences also exist across the regulators examined in the study. For example, in the United States, extensive use is made of the independent General Accounting Office (GAO) in the oversight of the Securities and Exchange Commission (SEC). In 2001, the GAO released nine different reports, commissioned by Congressional oversight committees, of various aspects of the SEC's operations.

In the UK, while the government has the power to commission similar reviews into the operations of the Financial Services Authority (FSA), operational oversight is primarily undertaken through a statutory non-executive committee composed of the independent board members of the FSA.

In contrast, oversight of the OSC's operations has generally been confined to accounting and financial matters.

(2) Recommendations

There are a number of steps the OSC could take to improve its governance. For example, it could provide more information on its existing governance practices in its annual report, such as what sub-committees of the commission exist and what their functions are. This would enhance the transparency of the OSC's governance.

The Minister of Finance could take a more active role in the OSC's oversight under the existing legislative framework. For example, the minister could take up a 1988 recommendation of the Standing Committee on Government Agencies to ask the Provincial Auditor to undertake an efficiency audit of the OSC. This type of external review helps ensure that a regulator is directing its resources towards its mandated objectives in the most efficient way possible.

Ontario's securities laws are currently being put through a five-year legislative review. The legislative review provides an opportunity to consider more fundamental reforms to the OSC's governance structure. Consideration should be given to restructuring the OSC more along the lines of the UK's FSA so that the non-executive members of its Board are no longer responsible for exercising the OSC's administrative powers.

In such a structure, a regulatory committee operationally independent of both the commission and the OSC's staff would hold the administrative powers. The independent board members could form a committee to report on the OSC's execution of its responsibilities.

The study is available on the Fraser Institute's website at http://www.fraserinstitute.ca/shared/readmore.asp?sNav=nr&id=477.

(L) AUSTRALIAN LABOR PARTY DIRECTIONS STATEMENT FOR IMPROVING CORPORATE GOVERNANCE

On 29 August 2002 the Hon Senator Stephen Conroy, Shadow Minister for Finance, Small Business and Financial Services released a Directions Statement for improving Australian corporate governance.

Labor's policy commitments include:

- doubling the penalties for serious breaches of the Corporations Act 2001 No. 50 (Cth);
- introducing legislation to protect corporate whistleblowers;
- implementing the recommendations of Professor Ramsay and in addition, banning the provision of certain non-audit services to audit clients;
- requiring auditors to specifically report to shareholders and to a company's audit committee on instances of aggressive accounting;
- requiring auditors to attend and answer questions at annual general meetings;
- requiring the full disclosure of arrangements governing executive remuneration and enforcing the requirements for disclosure in the Corporations Act;
- expensing share options;
- providing to all shareholders any information provided to analysts during an analyst briefing;
- requiring shareholders to be given the following information about candidates for directorships:
. all relationships between the candidates and the company;
. any relationship between the candidate and the directors of the company; and
. any other directorships held by the candidate.
- improve analysts' independence by ensuring that they always act in the interests of the users of the reports - not in the interest of the analyst or the firm which employs the analyst; and
- requiring voting by trustees of superannuation funds supervised under the Superannuation Industry (Supervision) Act 1993 No. 78 (Cth) if the level of voting does not increase to levels comparable with overseas

Further policy options are suggested in the following areas:

- auditor independence and the integrity of financial statements;
- executive remuneration;
- corporate disclosures and information for investors;
- the composition of boards; and
- analyst independence.

The full statement can be obtained from the ALP website at http://www.alp.org.au/.

(M) CORPORATE SOCIAL RESPONSIBILITY: UNLOCKING THE VALUE

According to a new global survey released by Ernst & Young on 27 August 2002, 94 per cent of companies believe the development of a Corporate Social Responsibility (CSR) strategy can deliver real business benefits, however only 11 per cent have made significant progress in implementing the strategy in their organisation. CEOs are failing to recognise the benefits of implementing Corporate Social Responsibility strategies, despite increased pressure to include ethical, social and environmental issues into their decision-making processes.

Companies identified stakeholder awareness and investor and peer pressures as being key drivers for an increased business focus on developing a CSR strategy.

Research found company CSR programs influence 70 per cent of all consumer purchasing decisions, with many investors and employees also being swayed in their choice of companies. One of the other challenges facing companies implementing a CSR strategy is how to effectively measure its ultimate success via both financial and non-financial indicators.

Senior executives from 147 of the Global 1000 companies from a range of industry sectors throughout Europe, North America and Australasia were interviewed for the survey.

Further information:

Mr James Rickards
Ernst & Young
Tel: 61 2 9248 4336
E-mail: james.rickards@ernstyoung.com.au

(N) U.S. REGULATORS ISSUE DRAFT WHITE PAPER ON SOUND PRACTICES TO STRENGTHEN THE RESILIENCE OF THE US FINANCIAL SYSTEM

On 22 August 2002, four United States financial services regulatory agencies issued a "Draft White Paper on Sound Practices to Strengthen the Resilience of the US Financial System".

The sound practices identified reflect the preliminary conclusions of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the New York State Banking Department regarding the factors necessary to strengthen the resilience of critical US financial markets in the face of a wide-scale, regional disaster. The conclusions are based on recent interviews with industry participants and market utilities about actions being taken to strengthen their ability to recover and resume critical business activities in the event of future wide-scale, regional disruptions. The paper also discusses appropriate timetables for completing reviews and revisions of business continuity plans and implementation of the sound practices.

The sound practices apply most directly to "core clearing and settlement organizations" and "financial institutions that play significant roles in critical markets." Critical markets are defined as the markets for federal funds, foreign exchange, commercial paper, and government, corporate, and mortgage-backed securities.

The agencies request comment on the appropriate scope and application of the sound practices and related issues. After consideration of the comments received, the agencies intend to issue a final version of the White Paper.

Comments are requested by October 21, 2002.

The paper is available on the SEC website at http://www.sec.gov/.

(O) UK FINANCIAL SERVICES AUTHORITY PUBLISHES DISCUSSION PAPER ON HEDGE FUNDS

On 21 August 2002, the UK Financial Services Authority published a Discussion Paper titled 'Hedge Funds and the FSA'. In the Paper the FSA sets out how its regulatory regime bears on the UK activities of hedge funds. The paper asks for comments on:

- the current controls on the selling and marketing of hedge funds in the UK;
- the regulation of UK-based fund managers who manage off-shore hedge funds; and
- the FSA's approach to monitoring the effects of hedge funds on UK markets.

The FSA is seeking views, from industry and consumer groups, on whether it should change the rules on the sale and marketing of hedge funds, to make them more readily accessible. This could potentially increase the product choice available to UK investors. But it also raises significant consumer protection and education issues, which would have to be addressed satisfactorily before any changes were made. In particular, there are legitimate concerns about the comprehensibility to retail investors of the information provided by hedge funds about their activities and risk profiles.

Feedback on the discussion paper is sought by 29 November 2002. The FSA will then publish a feedback statement summarising the views of respondents. Any changes to the regime for authorising hedge funds would be made through the review of Collective Investment Scheme (CIS) regime. The current review of the Listing Rules would take forward any work proposed on listing of hedge funds.

The Discussion Paper is available on the FSA website at http://www.fsa.gov.uk/.

(P) SEVENTY-FIVE PERCENT OF SENIOR EXECUTIVES EXPECT BOARD OF DIRECTORS WILL BE MORE ASSERTIVE ON KEY ISSUES IN WAKE OF RECENT SCANDALS

PricewaterhouseCoopers' Management Barometer is a quarterly survey of top executives in large, multinational businesses spanning technology; financial services; and consumer & industrial products and services. 145 US CFOs and Managing Directors, and 97 in Western Europe were interviewed in 2002.

Following is a summary of the results of the latest survey.

(1) More board influence expected

According to the survey, 75 percent of executives believe their board generally will be more assertive. Respondents said their board will have more input in the following areas:

- identifying and managing risk - US 57% - Europe 57%
- the company's business structure and transactions - US 55% - Europe 52%
- auditor independence - US 55% - Europe 50%
- the code of conduct - US 47% - Europe 51%
- liquidity issues - US 37% - Europe 34%
- related party transactions - US 36% - Europe 33%
- off-balance-sheet financing - US 33% - Europe 37%
- review of quarterly earnings - US 32% - Europe 39%
- analysts, investors, and the media - US 27% - Europe 38%

(2) Audit committee changes

Executives report that their company has or will make changes in its audit committee in these ways:

- more-frequent audit committee meetings - US 32% - Europe 19%
- longer audit committee meetings - US 31% - Europe 13%
- additional education of audit committee members - US 26% - Europe 17%
- changes in audit committee composition - US 15% - Europe 13%
- changes in the committee's charter - US 15% - Europe 9%

According to Richard Steinberg, US corporate governance leader for PricewaterhouseCoopers "boards in the US meet on average five times a year, about half as often as in Western Europe. Given the number of corporate scandals that have come to light in the US, it seems appropriate that boards of US companies have moved toward more frequent and longer meetings as a means of fulfilling their responsibilities to shareholders".

(3) Value added by the board

Overall, more than 90 percent of executives gave their board good marks for knowledge of the key aspects of the company's business. However, in the US, a majority rated their board as very knowledgeable in just three areas - strategic direction, financial challenges facing the company, and overall performance. In Europe, a majority said their board was very knowledgeable about the company's industry as well.

Senior executives see their board as adding considerable value in the following areas:

- acquisitions, strategic alliances, joint ventures - US 63% - Europe 64%
- corporate strategy - US 56% - Europe 62%
- executive compensation and incentives - US 52% - Europe 45%
- financial reporting - US 50% - Europe 44%
- risk management - US 47% - Europe 50%
- feedback on operating plans - US 47% - Europe 42%

Nearly three-fifths of US respondents (59 percent), and over half in Europe (51 percent) rate their board's advice and counsel to management during times of corporate crisis or economic distress as very or extremely helpful. But ten percent in the US, and eight percent in Europe said the board was not particularly helpful in such situations.

(4) Executive compensation

A majority of US respondents (52 percent), and 43 percent in Europe, view the executive compensation programs set by their board as very or extremely effective for motivating management.

The survey is available on PricewaterhouseCoopers Barometer Surveys website at http://www.barometersurveys.com/.

(Q) INTERNATIONAL FINANCE CORPORATION REPORT CHALLENGES CONVENTIONAL WISDOM ON ROLE OF BUSINESS IN EMERGING MARKETS

A recent report published by the International Finance Corporation (IFC) asserts that it does pay for businesses in emerging markets to pursue a wider role on environmental and social issues.

The business case for sustainability in emerging markets challenges the myth that sustainability is only for rich companies in developed nations, and does not apply to the private sector in the emerging markets. Based on more than 240 real-life examples in over 60 countries, the study analyzes the 'business case' for sustainability in emerging markets - the opportunity for businesses to achieve benefits such as higher sales, reduced costs, lower risks and enhanced reputation from better corporate governance, improved environmental practices, and investments in social and economic development.

Highlighting examples from businesses in Africa, Asia, Central & Eastern Europe, the Middle East and Latin America the report refutes the argument that the business case holds only in developed markets and pinpoints the many opportunities available to diverse businesses. The case studies cover all types of companies, ranging from a small Latvian dairy to an eco-tourism outfit in Peru to an aluminum smelter in Mozambique.

Examining information across six business success factors and seven sustainability factors, the report finds the greatest evidence for business benefits in emerging markets in the areas of cost reductions, productivity, revenue growth and market access. On the sustainability side, environmental process improvements and human resource management represent some of the most significant opportunities for creating value.

The report is the result of collaboration between the International Finance Corporation (IFC), the private sector arm of the World Bank Group; the strategy consultancy SustainAbility; and the Ethos Institute in Brazil.

Copies of the report are available for sale through SustainAbility at http://www.sustainability.com/store or through the World Bank at http://www.worldbank.org/publications.

(R) BROOKINGS INSTITUTE STUDY DETAILS ECONOMIC COST OF RECENT CORPORATE CRISES

The Brookings Institute has released the results of a new study which estimates that the Enron and WorldCom scandals will cost the U.S. economy approximately $37 to $42 billion off Gross Domestic Product (GDP) in the first year.

The study, "The Bigger They Are, The Harder They Fall: An Estimate of the Costs of the Crisis in Corporate Governance," bases its findings on conservative estimates of the effects of the crisis on stock market wealth which are calibrated according to the Federal Reserve Board's model of the U.S. economy.

The authors of the study also describe the likely effect of the corporate governance scandals on other aspects of the economy, including unemployment, inflation, and foreign investment in the United States as well as possible spillover effects beyond U.S. borders. For example, because the crisis has almost certainly discouraged foreign investment into the United States, the result has been a decline in the value of the dollar.

"The Enron and WorldCom bankruptcies resulted from corporate mismanagement and accounting malpractice and symbolize the broader crisis in corporate governance-a crisis that involves top blue chip companies, has reached political leaders at the highest levels of government, and has resulted in high levels of volatility in U.S. stock markets," write the authors. The report concludes with a timeline of significant corporate disclosure breakdowns since the Enron scandal.

The study is available on the Brookings Institute website at
http://www.brook.edu/views/papers/graham/20020722.htm

2. RECENT ASIC DEVELOPMENTS

(A) ASIC RELEASES RAMSAY REPORT ON DISCLOSURE OF FEES AND CHARGES IN MANAGED INVESTMENTS

On 25 September 2002 ASIC released 'Disclosure of fees and charges in managed investments: review of current Australian requirements and options for reform', a report about the disclosure of fees and charges for investment products.

The report was prepared for ASIC by Professor Ian Ramsay, Dean of the Faculty of Law and Director of the Centre for Corporate Law and Securities Regulation at The University of Melbourne.

The report contains:

- an overview of approaches to disclosure of fees and charges in a number of international jurisdictions as well as in Australia; and
- options for improving the quality and comparability of fees and charges disclosure, particularly in Product Disclosure Statements and periodic statements.

The report was compiled after consultation with a cross-section of industry participants and consumer representatives.

'The report is a significant contribution to the current debate about how to take forward the disclosure of investment fees and charges within the Financial Services Reform Act (FSRA) framework', Peter Kell, ASIC's Executive Director, Consumer Protection, said.

'Professor Ramsay's report canvasses a number of disclosure options designed to promote consumer understanding of fees and charges for investment products, and to assist consumers make comparisons between similar products', Mr Kell said.

'The report will facilitate further consultation by ASIC with industry and consumer representatives about the future direction of disclosure for investment products under the FSRA regime', Mr Kell said.

This work is being undertaken with the encouragement of the Parliamentary Secretary to the Treasurer, who has written to industry encouraging their participation.

'It is, however, important to note that while Professor Ramsay's report will assist consideration of disclosure options it does not represent ASIC endorsement of any specific disclosure proposals', Mr Kell said.

ASIC also announced that it will be introducing an investment fees calculator on its consumer website. Introducing such a calculator is one of the report's recommendations and ASIC expects it to be on-line by early next year.

'ASIC's calculator will assist consumers to work out the charges they may incur when considering different investments', said Mr Kell.

The report has been welcomed by the Federal Government, the Labor Party, industry groups and the Australian Consumers' Association.

In a media release dated 25 September 2002, the Association of Superannuation Funds of Australia welcomed the publication of the report and said that it broadly supported the report's recommendations.

The Investment and Financial Services Association, in a media release dated 27 September 2002, has also welcomed the report. IFSA CEO Richard Gilbert commented that "Professor Ramsay has, as we have come to expect over the years, made a significant contribution by adding to the body of knowledge in yet another area of research. The report puts forward many innovative and constructive ideas for better disclosure, in relation to both PDSs and periodic statements".

The report is available from the ASIC website at http://www.asic.gov.au/.

Following is summary of the report's recommendations.

The report makes recommendations relating to:

- Improved disclosure and comparability of fees and charges in Product Disclosure Statements (PDS); and
- Improved disclosure and comparability of fees and charges in periodic statements.

Recommendations relating to PDSs

(1) There should be standardised descriptions and definitions of fees including:

(a) all fees to be shown in the one place in PDS (a 'fees section');

(b) disclosure of the purpose of any fees imposed; and

(c) standardised fees table identifying significant fees (eg entry, exit, switching and investment management fees).

(2) There should be separate disclosure of administration fees and investment fees.

(3) There should be improvements in the disclosure of entry/contribution fees and exit/withdrawal fees including:

(a) use of common terminology across all products;

(b) the purpose of these fees should be disclosed (including if used for adviser remuneration).

(4) The capacity to increase fees and maximum fees should be disclosed in the fees section of PDS.

(5) The concept of an ongoing management charge (OMC) should be used as measure of ongoing expenses ('expense measure') across all products (not just superannuation related products) including:

(a) expense measure should not include discretionary fees (eg. entry or exit fees);

(b) standardised description of the expense measure; and

(c) conversion of expense ratio to a dollar amount for an account balance of $10,000 for managed funds (not just superannuation related products).

(6) The effect of fees on returns should be shown over various periods via a table (subject a specified rate of return being set for industry participants and appropriate disclosure of assumptions used).

(7) There should be disclosure in dollar terms, to the maximum extent possible, in addition to showing percentages.

(8) There should be disclosure of fees paid to advisers in fees section of PDS (both for initial investment and on an ongoing basis) including:

(a) showing source of adviser payments (eg. trailing commission comes out of investment management fee); and

(b) disclosure, via a general statement, of the existence of 'soft commissions' and cross-reference to Financial Services Guide (FSG) and Statements of Advice (SoA) for more detail.

(9) There should be standardised descriptions of buy/sell spreads.

(10) The fees section of PDSs should be adjacent to section of PDS which discloses returns.

(11) There should be standardised disclosure of ability to negotiate rebates with advisers (eg. statement that adviser can determine amount of entry fee).

Recommendations related to periodic statements

There should be disclosure of actual fees relating to a person's investment (where this can be calculated) subject to ASIC obtaining information from industry about the costs of providing this sort of disclosure or, alternatively, disclosure of an indicative amount (either an amount determined by multiplying a fund's per share (unit) asset value by the fund's expense ratio and then by the average number of shares (units) a person owned during the reporting period OR a dollar amount based on a fund's actual expenses of a standardised investment amount (eg $10,000) assuming a standardised return (eg 5%).

(B) ASIC AMENDS POLICY ON SHARE PURCHASE PLANS

On 18 September 2002 ASIC announced changes to its policy for share purchase plans contained in ASIC Policy Statement 125: Small offers of shares to existing shareholders by listed companies - share purchase plans [PS 125].

These changes were made following submissions by various shareholder and industry groups.

In brief, the amendments made to ASIC's policy are:

- the yearly limit that can be raised under ASIC's policy will be increased from $3000 to $5000 for each eligible participant. This change has been made to take into account increases in the Consumer Price Index and changes in market participation since the Class Order was first released in 1998;
- a clarification of who can receive offers under the relief. The relief will make it clear that a trustee or nominee expressly noted on a company or scheme register may receive an offer for each occasion they are separately recorded as a trustee or nominee for a different beneficiary named on that register; and
- extension of the relief to registered managed investment schemes listed on the Australian Stock Exchange Limited (ASX).

The changes in policy are consistent with ASIC's policy rationale to allow share purchase plans when:

- the risk to the investor is limited because the amount which may be invested by each investor per annum in the scheme is restricted; and
- the benefits to investors (such as savings on brokerage) outweigh the disadvantages and risks of not having full prospectus disclosure.

These changes will assist shareholders and industry to participate in more cost-effective fundraising without unduly compromising investor protection.

ASIC considers any further expansion of its policy in this area is more appropriately an issue to be dealt with by law reform.

A share purchase plan is a plan for the offer of shares by a corporation listed on the ASX, where ASIC will give relief so that they can offer existing shareholders the opportunity to acquire small numbers of additional shares without the benefit of a disclosure document or Product Disclosure Statement (PDS).

The class orders which give effect to the changes to ASIC's policy are:

- Class Order [CO 02/831], which provides disclosure relief for securities;
- Class Order [CO 02/832], which provides disclosure relief for managed investment products from Part 7.9 of the Corporations Act 2001 No. 50 (Cth); and
- Class Order [CO 02/991], which varies Class Order [CO 98/52]. It gives relief from some of the managed investment provisions for purchase plans made available by some responsible entities.

ASIC plans to make consequential changes to PS 125 before the end of this year.

Copies of the amended Class Orders are available from the ASIC website at http://www.asic.gov.au/, or by calling Infoline on 1300 300 630.

For further information contact:

Mark Adams
Director, Regulatory Policy
ASIC
Tel: (02) 9911 2622
Mobile: 0402 428 025

(C) ASIC ISSUES NEW CLASS ORDERS ABOUT WARRANTS

On 17 September 2002 ASIC issued new Class Orders covering takeovers and substantial holdings warrants.

The new Class Orders contain technical changes that take into account legislative amendments and some developments in warrant products, particularly 'instalment' and 'endowment' warrants.

The new Class Orders issued to replace the existing Class Orders are as follows:

- Class Order 02/929 [CO 02/924] replaces [CO 00/451];
- [CO 02/925] replaces [CO 00/452];
- [CO 02/926] replaces [CO 00/453]; and
- [CO 02/927] replaces [CO 00/454].

(1) Call warrant holders CO 02/924

Currently, under section 609(6)(b) of the Corporations Act 2001 No. 50 (Cth), a person docs not have a relevant interest merely because they have a right to acquire the securities given by a derivative. ASIC is continuing to provide relief for holders because some warrants may be securities rather than derivatives.

Additionally, section 609(6)(b) only applies to a relevant interest that the holder has because of their right to acquire the securities. Without relief, the holder may have a relevant interest because of any right under the warrant to require the securities be kept in trust.

While as a result of the relief, no relevant interest arises for the purposes of the takeover provisions (Chapter 6) as a consequence of holding a call warrant, any interest that would arise but for the relief, is taken into account for the purposes of the substantial holding provisions (Chapter 6C). This is consistent with the treatment of derivatives under the definition of 'substantial holding' in section 9 and section 671B(7).

(2) Association CO 02/925 and CO 02/926

The new Class Orders take account of the new definition of 'associate' in s12 of the Corporations Act as amended by the Financial Services Reform Act 2001 No. 122 (Cth). For certainty, they give relief to disregard any association between warrant issuers and warrant holders merely because or the warrant.

(3) Put warrant issuers CO 02/926

A warrant issuer may have a relevant interest in the underlying security because the holder, under the terns of the warrant (or the trust securing obligations under the warrant), has given the issuer a right in relation to the securities.

In particular, this may arise in relation to instalment or endowment warrants with a loan component. Under such a warrant, the holder may be required to place the underlying security in trust to secure their obligations, Without relief, the issuer may have a relevant interest because of section 608(8)(b)(ii) of the Corporations Act, as the issuer has a right to dispose of the securities held in trust if the holder does not exercise the put option.

Former Class Order 00/453 only dealt with the issuer's relevant interest arising under section 608(8)(b)(ii) as a result of the put option.

(4) Warrant trustees CO 02/927

CO 00/454 gave takeover and substantial holding relief to a trustee that holds shares as cover under a warrant trust deed. It only applied to the trustee's discretions dealing with insolvency or default of the issuer or holder.

The new Class Order recognises that the purpose of the trust may be to secure the obligations of the warrant holder under the warrant as well as the warrant issuer.

It recognises that under the terms of the warrant, a trustee may exercise a range of discretionary powers over securities in trust. It is unlikely these powers would be used as a means of gaining control of a company.

It also addresses additional matters, including:

- discretions in relation to transactions affecting share capital, such as rights issues or capital reconstructions;
- discretions in relation to takeover bids or schemes of arrangement (the relief allows for a discretion to bring forward the time for exercise but not a discretion to decide whether to accept or reject a bid); and
- discretions to lend the securities.

(5) Second option contained in warrant

Some instalment and endowment warrant products contain a second option. For example, a covered call warrant may also allow the holder to put the shares to the issuer in certain circumstances and receive a cash payment. Relief for put warrants applies to such products as well as relief for call warrants.

(6) Policy Statement 143 Takeover Provisions: Warrants

ASIC will continue to apply the broad principles set out in Policy Statement 143 Takeover Provisions: Warrants when assessing the appropriate regulatory treatment of particular warrant products.

For further information contact:

Richard Cockburn
Director, Corporate Finance
ASIC
Tel: (03) 9280 3201
Mobile: 0411 549 034

(D) COLES MYER - ASIC CALLS FOR MORE INFORMATION AND SHAREHOLDER ACTIVISM

In a media released dated 16 September 2002, Mr David Knott, Chairman of ASIC emphasised the importance of restoring long-term stability to Coles Myer Limited's governance structure.

'The current instability at Coles Myer is a serious cause of confusion and concern. It appears increasingly likely that shareholders will be required to make important decisions at the November annual general meeting affecting the composition of the Board and the future direction of the company', Mr Knott said.

'In order for them to do so, they need to be fully informed of the contested issues and of any differences in strategic direction being advocated for Coles Myer by relevant directors or shareholders. The current level of publicly available information about all of these matters is inadequate', he said.

ASIC is also calling on all shareholders of Coles Myer to inform themselves of the issues at stake ahead of the annual general meeting and to exercise their votes in person or by proxy.

'The widespread shareholding register of Coles Myer will empower retail shareholders to strongly influence the outcomes at the annual general meeting. They need to take an active role in ensuring that the performance of their company is not undermined by prolonged instability at Board level', said Mr Knott.

Mr Knott also drew attention to ASIC's class order designed to ensure that institutional investors are able to discuss and agree in advance of such meetings about how they will vote on corporate governance issues.

Policy Statement 128: Collective Action by Institutional Investors provides relief from the provisions of Chapter 6 of the Corporations Act 2001 No. 122 (Cth), which may otherwise prohibit large institutional shareholders, whose collective votes exceed 20 per cent of the voting power in a company, from agreeing in advance on how to vote on issues such as the election or removal of directors.

'ASIC recognises that issues of governance are generally in the hands of the Board and shareholders. However, there are serious implications for the broader market when major divisions appear at Board level of a large listed company. For that reason, ASIC will closely monitor the Coles Myer situation in the period leading up to the annual general meeting in November', said Mr Knott.

(E) OVER 100 PRODUCT DISCLOSURE STATEMENTS LODGED WITH ASIC SINCE INTRODUCTION OF FSRA

On 16 September 2002 ASIC announced that more than 100 Product Disclosure Statements (PDS) in-use notices have been lodged with ASIC since the introduction of the Financial Services Reform Act 2001 No. 122 (Cth) (FSRA) on 11 March 2002.

ASIC has also announced the results of its regular monitoring and enforcement program in relation to the PDS requirements under the Corporations Act 2001 No. 50 (Cth).

A PDS is the point-of-sale document that sets out the significant features of a financial product, including its risks, benefits and costs, and applies to all products issued since the FSRA commenced on 11 March 2002. It is designed to help consumers compare and make informed choices about financial products.

In general, under the Corporations Act (as amended by FSRA), a retail client must receive a PDS before acquiring a financial product, including managed investments, superannuation products, insurance products, retirement savings accounts, deposit products and derivatives.

In the first six months since the new PDS regime commenced, 102 PDS in-use notices (Form FS53) have been lodged with ASIC, which cover the following product types:

Managed Investment (38)
Superannuation (excluding SMSF) (6)
Life Risk Insurance (8)
Investment Life Insurance (5)
Derivatives (7)
Self Managed Super Funds (37)
General Insurance (1)
Total (102)
11 March to 5 September 2002

As part of its general compliance program, ASIC selected 45 of these PDS documents for review. As a result of deficiencies identified in a number of these documents, ASIC has issued four interim stop orders and one final stop order, and accepted two supplementary, and one replacement PDS document.

(1) Mediterranean Olives Estate Limited

ASIC placed a final stop order on the PDS document issued by Mediterranean Olives Estate Limited due to concerns it did not include updated information on the status of the tax product disclosure ruling, in contravention of the Corporations Act. It also failed to support material assumptions underpinning prospective financial information. The final
stop order was issued following a hearing.

ASIC also placed an interim stop order on the PDS documents of Environinvest Limited, the New World RE Ltd forestry plantation, and the Heydon Park Limited ginseng project.

(2) Environinvest Limited

ASIC was concerned that the original PDS did not clarify the fees to be charged to investors and clauses in material agreements, and that the information provided to investors was not set out in a clear and concise matter, as required under the law.

Environinvest has subsequently issued a supplementary PDS, dated 29 August 2002, addressing ASIC's concerns. The interim stop order has now been lifted.

(3) Heydon Park Limited

ASIC placed an interim stop order on the Heydon Park Limited PDS due to a lack of disclosure in relation to let out clauses in a fixed contract for the sale of the product, other assumptions that formed the basis of the financial forecasts, and the financial strength of the purchaser. Heydon Park Limited has now issued a supplementary PDS that provides additional disclosure in relation to these issues, resulting in the lifting of the interim stop order.

(4) New World RE Ltd

An interim stop order was issued on the PDS of New World RE Ltd, because it failed to accompany headlined rates of return with prominently displayed references assumptions. It also failed to provide sufficient evidence to demonstrate reasonable grounds for including prospective financial information, including the inflation rate, predictions on costs and stumpage prices, and did not specify the species of trees to be planted.

New World RE Ltd has agreed to issue a replacement PDS to deal with these issues.

'Product issuers are responsible for ensuring that a PDS meets the PDS requirements, and that information is presented clearly, concisely and effectively', said ASIC Director Financial Services Regulation, Mr Sean Hughes.

'In general, ASIC will not vet any PDS prior to its release to consumers, and will take appropriate remedial action to ensure consumers' interests are protected', he said.

Further information about PDS's can be obtained from the ASIC website at (http://www.asic.gov.au/), or Policy Statement 168 -Disclosure: Product Disclosure Statements (and other disclosure obligations).

For further information contact:

Mr Sean Hughes
Director Financial Services Regulation
ASIC
Tel: (03) 9280 3646
Mobile: 0411 549 026

(F) HIGH COURT REFUSES SPECIAL LEAVE IN YANDAL MATTER

On 13 September 2002 Mr David Knott, Chairman of ASIC welcomed the decision of the High Court to refuse an application for special leave to appeal the decision of the Federal Court in the Yandal litigation.

ASIC commenced the litigation in March 1933 to protect the interests of shareholders it believed were disadvantaged by the takeover of Great Central Mines Ltd in early 1999.

As all avenues of appeal have been exhausted, shareholders who accepted the bid for Great Central Mines are now assured of receiving the $28.5 million compensation ordered by Justice Merkel, as well as interest accrued since June 1999', Mr Knott said.

'Given the lapse of time since Justice Merkel made this order, the parties will need to return to the Federal Court for further directions on the formal process for offering shareholders their withdrawal rights, and the subsequent distribution of money. ASIC is hopeful that all necessary directions and administrative requirements can be finalised in time for compensation payments to be mailed to relevant shareholders within the next three months', Mr Knott said.

(1) Background

In June 1999, Justice Merkel found that Yandal Gold Pty Ltd, Edensor Nominees Pty Ltd (the trustee of the Gutnick Family Trust) and subsidiaries of Normandy Mining Ltd, breached the takeover provisions of the Corporations Law in relation to the takeover of Great Central Mines Ltd.

Justice Merkel found that the contraventions 'enabled the Normandy group and Edensor using Yandal Gold as the bid vehicle, to make a highly successful takeover bid for Great Central Mines shares at a significantly lower price than would have had to be paid at that time had the bid proceeded without the unlawful "agreements" which secured Edensor's "support" and contravened section 615'.

Justice Merkel found that these arrangements 'resulted in a significant detriment to shareholders', and ordered that:

- Edensor Nominees pay $28.5 million (plus interest) to shareholders who had accepted into the bid for Great Central Mines and not withdrawn their acceptance; and
- each person who accepted the offer by Yandal Gold or had their shares compulsorily acquired, be entitled to withdraw their acceptance and return any money paid for their shares to Yandal Gold.

ASIC commenced the action after becoming concerned that the Great Central Mines takeover was not occurring in an informed and efficient market.

Edensor appealed Justice Merkel's decision to the Full Federal Court, which found in March 2000 that Justice Merkel's order that Edensor pay $28.5 million was invalid for want of jurisdiction, and that the Federal Court had no jurisdiction to hear and determine the proceedings under the Corporations Law.

ASIC successfully appealed that decision to the High Court which subsequently ordered in August 2000 that the Full Federal Court orders regarding jurisdiction be set aside and that the matter be sent back to the Full Federal Court.

The matter then returned to the Full Federal Court for a decision on the merits of the balance of Edensor's appeal.

In March 2002, the Full Federal Court upheld Mr Justice Merkel's orders.

Endensor then sought special leave to the High Court to appeal the Full Federal Court's decision. It was this application that was refused on 13 September 2002.

Edensor was ordered to pay ASIC's costs of the special leave application.

For further information contact:

Ms Jan Redfern
Deputy Executive Director, Enforcement
ASIC
Tel: (02) 9911 2191
Mobile: 041 1 119 210

(G) SIMON HANNES FOUND GUILTY

On 11 September 2002 Mr Simon Gautier Hannes, a former executive director of Macquarie Bank Limited, was convicted on one charge of insider trading in the securities of TNT Limited (TNT) and two charges under the Financial Transaction Reports Act 1988 No. 64 (Cth).

The conviction of Mr Hannes follows a 15-week retrial in the Supreme Court of New South Wales, which was prosecuted by the Commonwealth Director of Public Prosecutions.

Mr Hannes was originally convicted on the same charges in the Sydney District Court in August 1999 and was jailed for two years and two months and fined $110,000.

However, the convictions were quashed following a decision by the New South Wales Court of Criminal Appeal in December 2000, and he was released after serving 15 and a half months of the sentence. The convictions are the result of a retrial.

The insider trading charge related to Mr Hannes, using the name 'Mark Booth', acquiring 5,000 TNT $2 call options in September 1996 through Ord Minnett Limited, when he had knowledge that TNT was likely to be the subject of a takeover bid.

The ASIC investigation of 'Mark Booth's' trading started within 24 hours of the announcement of a takeover by Dutch company Royal PTT Nederland NV (KPN) at $2.45 on 2 October 1996.

Within two days, ASIC obtained court orders freezing the $2 million profit from 'Mark Booth's' trading, and this profit was ultimately returned to the people who had sold the call options.

ASIC's investigation into the circumstances surrounding 'Mark Booth's' purchase of call options was conducted in collaboration with the Australian Federal Police and the Australian Stock Exchange. ASIC was able to identify Mr Hannes as the person who had bought the TNT $2.00 call options.

The Financial Transactions Reports Act charges relate to Mr Hannes making six cash withdrawals in one day from different bank branches and then using the cash to acquire 9 bank cheques, again from various banks and branches, with a view to avoiding the reporting requirements under the Act.

Mr Hannes, who remains on bail, will appear for sentencing on 7 November 2002.

(H) ASIC CONCLUDES INVESTMENT FUNDS PROJECT, GIVES TAKEOVER RELIEF TO INDEX FUNDS

On 11 September 2002 ASIC announced that it would not give broad relief from the takeover regime to investment funds, but may give a case-by-case exemption to index funds.

ASIC reached this decision after considering the submissions received in response to the discussion paper 'Investment funds: takeovers and substantial holding relief' issued in November 2001.

The discussion paper sought comments on proposals that the current legislative settings for takeovers and disclosure by substantial security holders disadvantaged members of public investment funds.

The discussion paper canvassed options including no change, ASIC exemptions or legislative change. While the majority of submissions opposed broader relief from the takeover regime, ASIC received submissions in both support and opposition.

ASIC has referred its findings to Treasury so that the issues raised in response to the discussion paper may be considered as part of any future review of the Corporations Act 2001 No. 50 (Cth) takeover provisions.

(1) Index funds

ASIC may give a case-by-case exemption from the takeovers prohibition (section 606) for index funds within financial services groups, on the basis that an index fund has a limited discretion in the acquisition and disposal of securities.

Index funds invest in a portfolio of securities and are a designed in such a way that their value tracks a nominated market index.

ASIC does not believe that an index fund should be compelled to refuse further subscriptions, or increase its tracking error, merely because group holdings in a company represented in the index are close to the 20 per cent takeover threshold.

ASIC will impose conditions to ensure that to qualify for the relief an index fund closely tracks the index. Relief will be made on the condition that an index fund does not vote shares held by the fund.

At this stage, the index fund relief will 'sunset' after two years. ASIC will assess the operation of a fund's relief before granting or denying a further extension.

The relief for index funds does not extend to the substantial holding provisions.

(2) Requirements applying to index funds relief

Requirements for index funds applying for exemption from section 606 include that:

- the offer document or investment mandate of a fund states an objective to maintain a tracking error of less than 0.5 per cent per annum, and the fund maintains systems and processes which give a reasonable assurance that the tracking error will be maintained;
- the index fund's holding in shares in a company is not more than 5 per cent over the company's index weighting in the relevant index;
- an independent third party must review compliance with the tracking error requirements every six months;
- the index fund does not vote shares held in the fund, unless this takes place in accordance with a direction by a client under a client mandate agreement; and
- after 18 months, the fund must provide ASIC with a report on the practical operation of the exemption, including details of voting shares acquired in reliance on the exemption.

(I) PROSPECTIVE FINANCIAL INFORMATION

On 6 September 2002 ASIC released a final policy statement on the use of prospective financial information, including financial forecasts, in prospectuses, disclosure documents and product disclosure statements.

The final policy statement contains expanded guidance in particular areas, including an outline of what is not considered reasonable grounds for prospective financial information, and what ASIC expects of an expert who prepares a report for a disclosure document.

ASIC notes that in addition to its policy statement, further guidance for independent accountants has also been recently released. AGS 1062 'Reporting in Connection with Proposed Fundraisings' is available through [another website] http://www.aarf.asn.au/.

Copies of Policy Statement 170 can be obtained by logging on to ASIC's website at http://www.asic.gov.au/ or by calling ASIC's Infoline on 1300 300 630.

(J) DISCUSSION PAPER ON ADMINISTRATION OBLIGATIONS

On 5 September 2002 ASIC released a discussion paper about the financial reporting and annual meeting obligations of companies under administration or subject to a deed of company arrangement.

'ASIC believes that the appointment of an external administrator does not remove the obligation on a company to prepare and lodge its financial reports. Many companies do not appear to be aware of this obligation when they go into external administration', ASIC Director, Corporate Finance, Richard Cockburn said.

'This paper reminds administrators and companies, that their obligations to prepare financial reports do not cease or become suspended as a result of the administration.'

'It also emphasises that ASIC can give relief from these obligations where it is appropriate. In crafting relief, we will consider how best to protect the interests of members and other parties in financial information about a company in administration yet recognise the priority tasks for administrators', he said.

ASIC has issued a class order giving interim relief during the consultation period. The relief provides many companies in external administration with a moratorium from any upcoming requirement to prepare and lodge a financial report. The class order is published on the ASIC website.

However, companies should be aware that this class order does not extend to holding a company's Annual General Meeting (AGM). Companies seeking an extension to hold their AGM will still need to make an individual application to ASIC in the usual manner.

ASIC is seeking public comment on the proposals in the paper by 31 October 2002.

(K) ASIC GIVES INTERIM LICENSING RELIEF FOR OPERATORS OF POOLED DEVELOPMENT FUNDS

On 2 September 2002 ASIC released a new Class Order giving interim relief to operators of pooled development funds (PDF operators) from the Australian financial services licensing requirements in the Corporations Act 2001 No. 50 (Cth).

The new Class Order [CO 02/0930] enables PDF operators to raise capital (ie. issue securities of the PDF) without having to be licensed under the Act.

The relief applies for a period of 12 months from 17 August 2002 until 17 August 2003. The relief only applies in relation to a PDF that is registered under the Pooled Development Funds Act 1992 No. 100 (Cth), and where the PDF operator:

- has entered into an enforceable contract with a third party licensee (including a licensee under the old Act during the transition for the financial services reforms), for the purpose of administering its investments, under which it obtains financial product advice;
- issues securities of the PDF to wholesale clients, as defined in s761G(4) of the Act;
- offers to issue securities of the PDF are made under an offer document that does not contain any personal advice, as defined in s766B(3) of the Act; and
- does not carry on any other financial service, such as providing financial product advice.

ASIC will provide this relief for a period of 12 months only to allow the PDF industry sufficient time to have their case for a permanent licensing exemption considered by Treasury. ASIC's interim relief should not be construed as a recognition of the merits of any industry submission.

ASIC is aware that some PDF operators may not be able to meet the requirements of the new class order relief.

Therefore, in addition to the class order relief, ASIC will continue its current general no-action position relating to the licensing of PDF operators for a similar period of 12 months from 17 August 2002 until 17 August 2003.

PDF operators relying on ASIC's no-action position should note that while ASIC will not enforce the licensing requirements against them during this 12 month period, third parties may still be able to take action to enforce provisions of the Act against PDF operators. A copy of Class Order [02/0930] can be obtained from the ASIC's Infoline on 1300 300 630, or from the ASIC website at http://www.asic.gov.au/.

3. RECENT TAKEOVERS PANEL MATTERS

(A) PANEL DECISION IN RELATION TO COLONIAL FIRST STATE PROPERTY TRUST GROUP

On 12 September 2002 the Takeovers Panel advised that it had accepted undertakings in relation to the proposal (Merger Proposal) for the merger of Colonial First State Property Trust Group (Colonial Funds) with the Commonwealth Property Office Fund (Commonwealth Fund) and the Gandel Retail Trust (Gandel Fund). On the basis of the undertakings the Panel has decided not to make a declaration of unacceptable circumstances in response to applications by Mirvac Funds Ltd. (Mirvac) as the responsible entity for Mirvac Property Trust (Mirvac Fund) made on 29 August and 2 September 2002.

The Panel received submissions from ASIC and the responsible entities of the funds.

The Panel received undertakings from:

(a) CFS Managed Property Ltd (CFS) the Responsible Entity for the Colonial Fund; and

(b) those associates of both Commonwealth Bank of Australia (CBA), and the Gandel Group of companies, which are unitholders in the Colonial Funds and which owe either statutory or fiduciary duties to the persons on whose behalf they hold or control the units (Associated Unitholders).

The undertakings from CFS relate to disclosure issues in the notice of meeting for the meetings proposed to be held in the Colonial Funds to consider the Merger Proposal (Meetings).

The undertakings from the Associated Unitholders affirm their obligations to act in the best interests of the persons on whose behalf they hold or control the units, given the potential for conflict of interest that the related nature of the various fund management entities in the Merger Proposal generates.

One associate of the Gandel Group is a small unitholder in one of the Colonial Funds. It has undertaken not to vote at the Meetings.

(1) Mechanism

The Panel does not accept the proposition put forward by Mirvac that the Merger Proposal (of the Colonial Funds with the Commonwealth and Gandel Funds) should not proceed by way of resolutions under section 601GC and Item 7 of section 611 of the Corporations Act 2001 No. 50 (Cth). It also advises that it considers that the Merger Proposal as formulated had deficiencies, which have been dealt with by the undertakings.

(2) Disclosure

The Panel considers that there are some material deficiencies in the explanatory statement accompanying the notice of meeting (Explanatory Statement) which was sent to the unitholders in the Colonial Funds. Accordingly, the Panel invited CFS to undertake to send a supplementary notice to unitholders in the Colonial Funds setting out, as a minimum, the following issues:

- Full disclosure of the relationship to CBA and the Gandel Group of the Associated Unitholders (to the extent known by CFS);

- A statement concerning the undertakings made by the Associated Unitholders referred to above;

- A statement clarifying the effect of the liability disclaimers made in the Explanatory Statement dated 30 July 2002, and disclosing clearly that such purported disclaimers do not reduce any statutory liability imposed under the Corporations Act in relation to misleading and deceptive conduct, and clearly explaining the limit of the effect of the disclaimers;

- The effects on the amount of management fees that are likely to be payable to the Responsible Entity of the Commonwealth Fund and Gandel Fund in the event that the Merger Proposal is approved, and the relationship of the Commonwealth and Colonial Responsible Entities with each other and with CBA. CFS has undertaken to do this by providing examples based on the new fees and how they would have applied for the year ending 30 June 2002 if the funds had been merged throughout that year; and

- A full explanation of the effect of all changes to the fees and charges of the Responsible Entities of the two ongoing trusts if the Merger Proposal proceeds, taking into account all changes announced on or before the date of the supplementary notice.

(a) Directors' recommendation