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1.1 Draft
Code of Conduct for soft dollar payments
On 16 December 2003, the Investment and
Financial Services Association (IFSA) and the Financial Planning Association
of Australia (FPA) released a Draft Code of Conduct on Alternative
Remuneration (soft dollar payments) that regulates certain industry
remuneration practices and that will be adopted by members of each
Association.
The Draft Code incorporates
three key proposals:
· Banning of practices
such as gifts and conferences that are linked to product sales;
· The establishment
and maintenance of a public register for payments and receipts of appropriate
transactions with a value greater than $300;
· Comprehensive disclosure in appropriate
regulatory documents such as the Product Disclosure Statement (PDS) and
Financial Services Guide (FSG) of appropriate types of alternative
remuneration.
The Code is in
response to changing community expectations and is the latest initiative
implemented by the financial services industry to improve operating practices
and transparency on remuneration.
The Code will form a
key part of the FPA’s Professional Code of Conduct and will become an IFSA
Standard. Throughout the year both groups have implemented a number of joint
initiatives such as improvements to the Product Disclosure Statement,
Financial Services Guide and Statement of Advice. The draft Code of Conduct
is now being circulated for comment throughout the industry and the two
organisations hope to finalise it by the end of February, for operation
shortly thereafter.
For further
information please contact:
Richard Gilbert, CEO
of IFSA on 0417 247 998
Kerrie Kelly, CEO of FPA on 0400 513 585
For copies of the
Briefing paper “IFSA/ FPA Code of Practice – Disclosure of Alternative Forms
of Remuneration” please see the IFSA or FPA
websites.
 
1.2 CLERP
(Audit Reform and Corporate Disclosure) Bill introduced into Parliament
On 4
December 2003, the Treasurer, the Hon Peter Costello, introduced the Corporate Law Economic Reform Program (Audit Reform and
Corporate Disclosure) Bill into Parliament. The Bill represents the ninth
instalment of the Government’s corporate law reform program.
Significant measures contained
in the Bill include:
(a) Continuous Disclosure
· ASIC will have the power to
issue infringement notices to disclosing entities where ASIC has reason to
believe that have been breaches of the continuous disclosure provisions in
the Corporations Act. The notices will contain financial
penalties based upon a company’s market capitalisation, up to a maximum of
$100,000. The power will enable the corporate regulator with the ability to
deal with less serious contraventions of disclosure laws in a more timely
manner.
· The maximum civil penalty that a
court can impose on a body corporate for breaching continuous disclosure
requirements will increase from $200,000 to $1 million.
(b) Executive Remuneration
· Directors’ and senior
executives’ remuneration is to be clearly disclosed in a remuneration report,
contained in the directors’ report.
· The Bill expands the number of
executives whose remuneration must be disclosed, from the top 5 within the
listed company to the top 5 across the corporate group in addition to the top
5 within the listed company.
· Directors will be required to
hold a non-binding shareholder vote to adopt the remuneration disclosures
within the remuneration report. This recognises that directors, while
responsible for setting executive remuneration, are accountable to
shareholders for their decisions.
(c) Audit Oversight and Independence
· The Bill establishes a
regulatory framework governing audit oversight and independence. It provides
for the Financial Reporting Council (FRC) to have oversight over a
reconstituted Australian Auditing Standards Board, with a
Government-appointed Chair. The FRC will also have an oversight role to advise
the Treasurer in relation to auditor compliance with independence
requirements.
· Auditing standards will have the
force of law. There will be a 2 year transition period to enable the auditing
standards setter to re-issue standards in a format suitable for legal
enforcement.
· Mandatory auditor rotation for
listed companies will be required after 5 consecutive years (with an option
for ASIC to extend the period to 7 consecutive years where appropriate).
· Significant post-audit
employment restrictions, including a 2 year ‘cooling off’ period for auditor
partners wishing to join a client as a director or senior manager, will be
imposed.
The Bill responds to the
recommendations of the Ramsay Report on the independence of Australian
company auditors and takes account of relevant recommendations of Report 391
of the Joint Parliamentary Committee of Public Accounts and Audit. The Bill
also incorporates recommendations of the HIH and Cole Royal Commissions.
The Bill is available on the Parliament of Australia
website.
1.3 SEC
takes steps to address late trading, market timing and related abuses
On 3
December 2003, the United States Securities and Exchange Commission took action on
three measures to address late trading, market timing and related abuses in
the mutual fund industry.
The Commission voted to propose
a rule requiring that fund orders be received by 4:00 p.m. Specifically, this
proposal would require that an order to purchase or redeem mutual fund shares
be received by the mutual fund — or its primary transfer agent or a
registered securities clearing agency — by the time that the fund establishes
for calculating its net asset value in order to receive that day's price (typically
4:00 p.m. for most funds). This rule would effectively eliminate the
potential for late trading through intermediaries that sell fund shares. A
public comment period concerning this proposal will run for 45 days following
its publication in the Federal Register.
The Commission also voted to
adopt a compliance rule that will require funds and advisers to (i) have
compliance policies and procedures, (ii) annually review them and (iii)
designate a chief compliance officer who, for funds, must report to the board
of directors. Designated compliance officers and written policies and
procedures will have several benefits, including having a designated person
charged with fund compliance who must answer to, and be accountable to, the
fund's board of directors, thereby enhancing compliance oversight by
directors, as well as allowing the SEC's examination staff to review the
reports made to the board. Compliance with this rule will be required no
later than nine months after its publication in the Federal Register.
Finally, the Commission voted to
propose enhanced disclosure requirements. These enhancements would require
funds to disclose (i) market timing policies and procedures, (ii)
practices regarding "fair valuation" of their portfolio securities
and (iii) policies and procedures with respect to the disclosure of their
portfolio holdings. This type of explicit disclosure would shed light on
market timing and selective disclosure of portfolio holdings so that
investors could better understand the fund's policies and how funds manage
the risks in these areas. A public comment period concerning these proposals
will run for 45 days following their publication in the Federal Register.
1.4
Committee reviewing Canada’s securities regulation
structure publishes research papers on regulatory reform efforts in the US, EU and Australia
On 25 November 2003, the Committee to
Review the Structure of Securities Regulation in Canada published three
research studies prepared by independent experts in the United States, the European
Union and Australia. The studies were
commissioned by the Committee to provide a comparative analysis of regulatory
structures and reform efforts in each of these jurisdictions.
The Committee expects to deliver its report to the Canadian Minister of
Finance in December.
The following studies, as well as submissions received from nearly 100 market
participants, are available at www.wise-averties.ca
·
"The
United States Federal-State Model of Securities Regulation" by Professor
Joel Seligman, Dean, Washington University School of Law, St. Louis, and
author of the definitive history, The Transformation of Wall Street: A History of the Securities and
Exchange Commission and Modern Corporate Finance.
·
"Securities
Market Regulation in the EU: The Relation Between the Community and Member States" by Karel
Lannoo and Mattias Levin, Centre for European Policy Studies (CEPS), Brussels.
·
"The
Impact of Federalising Securities Regulation in Australia: A View from the
Periphery" by Ralph Simmonds, Dean and Foundation Professor of Law,
School of Law, Murdoch University, and Ray Da Silva Rosa, Associate
Professor, Department of Accounting and Finance, The University of Western
Australia.
The mandate of the
Committee is to undertake an independent objective review of the current
securities regulatory framework and identify an appropriate model for
securities regulation in Canada.
1.5 United States Congress passes legislation to
reform the mutual fund industry
On 19
November 2003, the United States Congress approved the Mutual Funds Integrity and
Fee Transparency Act, H.R. 2420, which will benefit America’s 95 million mutual fund
investors by increasing transparency of fund fees and costs, by strengthening
corporate governance and management integrity, and by establishing measures
to prevent fraudulent trading practices.
H.R. 2420 would:
(a) Provide investors with more information about fees:
The Bill would direct the SEC to
issue rules requiring funds to provide investors with improved disclosure of
the following:
· Estimated operating expenses, in
dollar amounts, on a hypothetical $1,000 investment.
· Portfolio turnover rates in a
way that facilitates comparison among funds.
· Soft dollar arrangements.
· Directed brokerage arrangements
used to obtain fund distribution.
· Revenue sharing arrangements
used to obtain fund distribution.
(b) Increase transparency:
The Bill would give investors access
to enhanced information about fund internal operations and potential
conflicts of interest associated with mutual fund sales and internal workings
to help mitigate those conflicts and help investors make informed investment
decisions. Provisions included in the Bill would:
· Codify SEC rules requiring the
disclosure of votes cast on behalf of shareholders as well as the policies
and procedures for proxy voting.
· Require each fund to have a code
of ethics, which would have to be disclosed, as well as any waivers or
violations of such codes.
· Require that funds disclose the
structure of portfolio manager compensation.
· Require fund managers to
disclose any holdings they have in the funds they manage.
· Require that brokers disclose to
investors whether they have received extra financial incentives to sell a
particular fund or class of shares.
· Require notification in
brokerage account statements that fees have been deducted.
· Direct the SEC to issue a
concept release on how to better disclose portfolio transaction costs.
· Direct the SEC to clarify the
definition of “no-load” funds to ensure that investors are not being misled.
· Require new recordkeeping of soft
dollar transactions.
· Call on the SEC to study the
recent increase in arbitration cases involving mutual funds.
(c) Enhance corporate governance
and management integrity, strengthen director oversight:
The Bill builds on the
Sarbanes-Oxley Act by furthering the independence and accountability of
mutual fund directors. Provisions included in the Bill would:
· Require two-thirds of all board
directors to be independent.
· Strengthen the definition of an
independent director by authorizing the SEC to issue rules to exclude from
that definition persons with business or close family relationships with the
fund company.
· Require that directors be
informed of any significant deficiencies in the operation of a mutual fund
discovered in a SEC inspection.
· Require independent directors to
certify that they have reviewed and approved portfolio manager compensation,
and certify that procedures are in place for valuation, oversight of fund
flows, provision of breakpoint discounts, establishment of appropriate
classes of shares, enforcement of codes of ethics, and oversight of internal
compliance.
· Require fund advisers to submit
an annual report to directors on revenue sharing, directed brokerage and
soft-dollar arrangements and impose a fiduciary obligation on fund directors
to review such arrangements and ensure that they are in the best interests of
the fund.
· Require additional recordkeeping
requirements for soft-dollar arrangements as well as a SEC study on their use
by investment advisers.
· Require each fund to have a
chief compliance officer who will report directly to the independent
directors, as well as whistleblower protections and internal compliance
procedures.
(d) Address recently revealed
fraudulent trading practices:
To protect mutual fund
shareholders from trading practices that may disadvantage long-term
investors, the Bill also includes provisions to eliminate conflicts of
interest in portfolio management, ban short-term trading by insiders, allow
higher fees to discourage short-term trading, encourage fair value pricing,
and strengthen funds’ compliance with rules. These provisions would:
· Prohibit the joint management by
the same person(s) of mutual funds and hedge funds. The ability of firms to
provide advisory services to both kinds of funds, however, would not be
limited.
· Prohibit insiders from
short-term trading of their own fund shares.
· Allow funds to charge higher
than the current limit of two percent for redemption fees in order to
discourage short-term trading that harms long-term investors.
· Require the SEC to issue clearer
rules that encourage fair value pricing, thereby eliminating the stale
pricing that makes market-timing profitable.
· Extend existing regulations
governing trading by insiders in the underlying securities owned by mutual
funds to trading in fund shares.
To ensure a full trading day,
investors could place orders up to but not after 4 p.m. In some cases, this
means intermediaries could place trades with funds after the close; however,
strict monitoring and an audit trail would be required to ensure that the 4
p.m. closing system is not being gamed. In this manner, those in the western
parts of the United States and pension funds or other investors using
intermediaries would not be disadvantaged. Investors would also be assured of
receiving same-day execution of orders.
(e) Apply audit committee reforms to mutual funds:
The Bill would also require all
mutual funds to abide by the same audit committee standards required of
exchange-listed companies under the Sarbanes-Oxley Act, which ensures
strengthened auditor independence and accountability.
1.6
Calvert survey on corporate responsibility and investor confidence
Released on 18 November 2003,
the Calvert study seeks to examine the public’s concern about unethical
business practices among potential investments and their interest in mutual
funds that consider ethics when making investments. The following is
extracted from the executive summary of the study.
(a) Investors have become less
trusting of corporate management over the last 2 years
· The large majority of investors
(77%) have become less confident in the trustworthiness of corporate
management.
· Confidence in management
trustworthiness has eroded among more people than has confidence in other
important areas such as the safety of financial markets (with 59% less
confident), mutual fund integrity (45%), and the ability to reach one’s
retirement goals (41%).
(b) Investors’ interest in
knowing more about the companies they are investing in has increased over the
last 2 years
· The large majority of investors
(79%) have become more interested in how corporations are governed.
· They are more likely to seek
financial and accounting information about their investments (68%)
(c) Investors want to invest in
companies they perceive as ethical
· Most investors (84%) would be
more likely to invest in a mutual fund if they knew one of its principles was
to invest in companies that engage in ethical business practices in terms of
operations and reporting.
· A focus on ethical business
practices is a great motivator for investment with a mutual fund than other
important issues, including the principals of selecting companies that do not
harm the environment (77%), are not involved in sweatshop labour (72%), have
a good record of hiring and promoting women (65%) or minorities (55%), are
not involved in tobacco (51%), nor manufacturing guns (40%).
(d) And, most believe that doing
so will be associated with less investment risk and better returns
· 71% of investors agree that
companies that operate with higher levels of integrity carry less investment
risk.
· 67% believe that these companies
deliver better investment returns.
(e) Investors feel they are
ill-equipped to identify companies that are engaged in unethical business
practices
· 78% say that they are only a
little or not at all equipped to identify companies that are engaged in
unethical business practices; 23% believe they are fairly or very
well-equipped.
(f) Investors think it is
essential or very important that socially responsible mutual funds require
companies to be open and honest in reporting of finances and environmental
liabilities.
· To encourage ethical business
practices, the vast majority of investors think it is essential or very
important that mutual funds require companies to be open and honest when it
comes to: financial reporting (94%), and environmental liabilities (81%)
· Most investors also think it is
essential or very important that socially responsible mutual funds require:
o Independence in the Board of
Directors (76%);
o Reasonable executive
compensation (66%)
o Encouragement of shareholder
voting on key issues (66%)
o Diversity in the Board of
Directors (63%).
Details of the survey are
available on the Calvert
website.
1.7
European Commission proposes Directive on cross-border mergers
On 18 November 2003,
the European Commission presented a proposal for a Directive to make cross-border
mergers easier, by overcoming obstacles caused by different national laws. It
would make such mergers simpler for all companies with share capital.
However, it would be especially useful for small and medium-sized businesses
that want to operate in more than one Member State, but not throughout
Europe, and thus are not likely to seek incorporation under the European
Company Statute.
The proposed Directive
would set up a cross-border merger procedure whereby mergers would be
governed in each Member State by the principles and rules applicable to
"domestic" mergers. The proposed Directive would fill an important
gap in company law and is the first measure to be presented under the
Commission's Action Plan on company law and corporate governance in the
European Union, published in May 2003 (see IP/03/716 and MEMO/03/112). The
proposal for a Directive will be submitted for adoption under the so-called
'co-decision' procedure to the EU's Council of Ministers (subject to
qualified majority voting) and the European Parliament.
As EU law now stands,
cross-border mergers are possible only if the companies wishing to merge are
established in certain Member States. In other Member States, the differences
between the national laws applicable are such that companies wanting to merge
have to resort to complex and costly legal arrangements. These arrangements
often complicate the operation and are not always implemented transparently
and with legal certainty. Moreover, they usually result in the acquired companies
being wound up, which can be a very expensive operation.
The present proposal,
which covers all companies with share capital, both public limited liability
companies and others, aims to make cross-border mergers possible and easy all
over the European Union by approximating the cross-border merger procedure to
the procedures used for "domestic mergers" between companies
governed by the laws of the same Member State.
In other words, each
company taking part in a cross-border merger would, under the Directive as
proposed, do so in accordance with the laws of its own Member State (except
in specific cases provided for in the Directive related to the cross-border
nature of the merger). Operators are already familiar with these national
procedures through use.
Protection is afforded
under national laws, and would thus be maintained by the proposed Directive,
for creditors, debenture holders, the holders of securities other than
shares, minority shareholders and employees.
In the specific case of
employees' rights, the general principle of the national law of the company
created by the merger applies. If there were no employee participation, this
would continue to be the case and if the merged company were created in a
Member State with rules on employee participation, it would be governed by
those rules. However, if at least one of the companies taking part in the
cross-border merger were governed by rules on employee participation in its
home Member State and if the merged company were to be created under the
rules of a Member State where such rules do not apply, then a negotiation
procedure, as provided for under the European Company Statute, would apply
(Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a
European Company and the accompanying Council Directive 2001/86/EC of 8
October 2001). This procedure would allow for interested parties to define an
agreed participation regime on employee participation. It would only be where
interested parties failed to reach agreement that, as a fall-back, the
pre-existing co-determination regime would be extended.
In a situation where
two companies merged and both operated under a compulsory co-determination
regime, they could choose to incorporate in a Member State which has a
compulsory regime but which is not equivalent to the most stringent
co-determination regime, without having to enter into negotiations as
foreseen in the European Company Statute.
The full text of the
proposal is available on the Europa website:
A complementary
proposal to update, clarify and broaden the scope of the European Community's
Directive that provides for tax deferral in the case of cross-border mergers
and divisions of companies, transfers of assets and exchanges of shares
(90/434/EEC) was presented recently by the Commission (see IP/03/1418).
1.8 Centre
for Corporate Law and Securities Regulation releases Prospectus Survey report
In November 2003, the Centre for
Corporate Law and Securities Regulation, The University of Melbourne released
the report “Use of Prospectuses by Investors and Professional Adviser”. The
research report contains the results of two surveys of recipients of
prospectuses: investors and their professional advisers. The objective of the
surveys was to obtain information on how prospectuses are used and obtain
views on the utility of prospectuses.
The distribution of the surveys
was as follows:
· 4,000 surveys were distributed
to individual investors who are members of the Australian Shareholders
Association with 891 returned (22.3%)
· 2,000 surveys were distributed
to professional investment advisers with 171 returned (8.6%)
(a) Summary – Investor
Survey
(i) Background information
·
891 responses were
received.
·
Respondents range
from a student with $2000 in managed funds, to a retiree with over $15
million invested directly in shares and $1 million in managed funds to
benchmark his own investment decisions.
·
76% of respondents
are aged over 55 years.
·
81% are male.
·
56% are retired and
27% are in a professional occupation.
·
The range of annual
household income is fairly evenly spread above $30,000, with 24% having an
income between $50,000 and $74,999 per annum.
·
Respondents have a
total of $101,923,500 invested in shares through managed funds, and
$605,018,250 invested directly in shares.
(ii) Shares owned directly
·
Half of the
respondents own shares in less than 20 companies each, but all have
diversified investments.
·
The industry most
heavily invested in is banking and finance, followed by resources and mining,
then retail.
·
60% of respondents
use a stock broker who provides an advisory service, but only 27% have a
financial planner.
·
The most popular
source of information before making an investment decision is the newspaper,
followed by prospectuses. However, when investors are asked about sources of
information for their most recent investment decision, the prospectus falls
to fourth position, after newspapers, investment magazines and brokers.
·
76% of respondents
check share performance at least weekly (44% daily), mainly in newspapers or
on the internet.
·
80% of respondents
trade shares at least annually, the majority of those, at least quarterly.
·
82% receive an
annual report for each company in which they own shares, and the majority
spend less than 1 hour reading them. Those who do not receive or read annual
reports regard them as too long, too detailed, containing out of date
information and not an effective use of resources. Respondents who do read
the reports are primarily interested in performance projections, followed by
details about the executive team and management, and returns.
·
Over half of the
respondents spent between 30 minutes and an hour reading the prospectus for
their most recent investment. Those who did not read it were deterred by its
complexity. Those who did read it were primarily interested in performance
projections, followed by details about the executive team and management, and
returns.
·
Respondents were
ambivalent about their confidence in the content of prospectuses, and the
importance of a prospectus in comparison with other sources of information in
making an investment decision, ranking both in the mid range between not at
all important, and extremely important.
(iii) Managed investment fund
prospectuses
·
460 respondents
completed this section. 23% have money in only one managed fund.
·
23% of respondents
have money invested in an international equity fund, 22% invest in Australian
industrial equity funds and 20% invest in Australian diversified equity. 14%
invest in combined Australian and international industrial equity funds. 1%
of respondents are not sure what type of fund they invest in. 11% invest in
property trusts.
·
The need for
diversification scored highest when respondents were asked for their main
reasons for investing in managed funds, followed closely by capital growth.
·
45% of respondents
learnt about the funds in which they invested through the media. 40% learnt
about them through their financial adviser and 14% through friends or family.
·
All of the
respondents who completed this section of the survey own shares directly as
well as investing in managed funds. The primary reason for combining the two
is diversification.
·
57% of respondents
sought professional advice before investing in a managed fund, the majority
from an investment adviser. After professional advice, prospectuses,
newspapers and investment magazines are the most used sources of information
about managed funds. For information about their most recent investment, most
respondents cited newspapers and investment magazines, just ahead of advisers
and prospectuses, as the main sources.
·
Respondents were
fairly evenly divided between yes and no when it came to knowing the asset
allocation of their managed fund investments.
·
Most respondents
have never withdrawn money from their managed fund investments, or switched
between managed funds.
·
94% receive the
annual report of their managed fund, and most spend 30 minutes or less
reading it, looking mainly for information about performance. Most of those
who do not read it find it too long and boring.
·
When respondents
received the prospectus for their most recent managed funds investment, most
spent 1 hour or less reading it. Of those who did not read it, most said it
was because their investment decision was already made. Those who did read it
were looking for information about performance, the executive team, the
investment strategy and the asset allocation.
·
Most respondents
were ambivalent about the importance of the prospectus in making their
investment decision.
(iv) General results on
prospectuses
·
Only 36% of
respondents said that the prospectus gives them sufficient information to
make an investment decision. 52% still feel the need to seek professional
advice after reading the prospectus.
·
56% of respondents
think that, as a general rule, prospectuses are not easy to understand. They
have most difficulty with legal or technical jargon. They also find
prospectuses too detailed and repetitive and also have difficulty with the
section dealing with financial matters. 66% of respondents think that
prospectuses are too long.
·
51% of respondents
find prospectuses for shares easier to understand than those for managed
funds. 39% find those for managed funds easier to understand, and 10% thought
that there was no difference.
·
52% of respondents
do not find it easy to find the information they want in a prospectus.
Suggested improvements are to summarise key points, simplify and clarify the
contents, use less jargon, and make the prospectus more concise.
·
81% of respondents
would apply for shares if the government were to privatise a profitable
business, although 181 of these respondents gave a qualified yes, depending
on factors such as the price, type of business, or their investment needs at
the time. Most feel that the business would be more profitable after
privatisation, particularly if it has a monopoly, and cite the success of
previous similar floats. 115 respondents believe that the government always
sells such businesses under value, for political gain. Along similar lines,
the investment is seen as low risk because of confidence that the government
would not risk political backlash by “selling a lemon”. Many respondents also
express a desire to keep such businesses in the hands of Australians.
(b) Summary –
Professional Adviser Survey
(i) Background information
· 171 responses were received.
· The majority (80%) of
respondents considered themselves independent advisers as defined in ASIC
Policy Statement 116.
· Client bases consist mainly of
less well-informed investors, including a large number of retirees.
· Investment in shares is
recommended primarily to spread risk, although investment through managed
funds was the preferred option. Many advisers put clients into direct share
investment only at the client’s request, and on the understanding that the
client will monitor the investment. Investment in managed funds is perceived
as providing more diversification, less risk and a better sector spread.
Investment in managed funds is also recommended in order to utilise fund
manager expertise.
· Most respondents work from
dealer group recommended lists. Only 27% of respondents conduct their own
research and analysis of companies.
· For those respondents who
conduct their own research, the most important sources of information are
analysts’ reports and prospectuses, followed by company annual reports, the
internet and management presentations.
(ii) General results on
prospectuses
· 85% of respondents found that
clients have difficulty understanding prospectuses, finding them too long,
too detailed, and too full of legal or technical jargon.
· Most responses indicated that
clients don’t want to read, or can’t understand, a prospectus, and rely on
their adviser to describe and interpret the investment.
· Clients have more questions
about fees and charges than any other aspect of the prospectus.
· The majority of respondents
stated that the role of the prospectus in the process of providing advice to
clients is either “very little”, a legal formality, an application form, a
sales tool, or at most, a backup to the adviser.
· 72% of respondents believe that
clients do not fully understand risks associated with certain investments, at
least until the adviser explains the risks.
· 83% believe that simpler
prospectuses would be beneficial and 89% regard it as part of their role to
explain prospectuses to investors. 73% believe that simpler prospectuses
would make their task easier although 94% said that simpler prospectuses
would not make their role less important.
· Most respondents to this
question believe that it would be more cost effective to convey information
currently contained in prospectuses through the internet, although many also
suggested “less gloss” and longer life for prospectuses. Other suggestions
included separate documents for advisers and investors.
· 75% think that the level of
disclosure on the part of companies and fund managers is sufficient to
provide informed investment advice.
(iii) Share prospectuses
· 19 respondents did not complete
this section, saying they are unlicensed to offer advice on direct share
investments.
· Risk factors, the company’s
dividend policy, the company’s liabilities and the company’s operations and
business are seen as the most useful information in providing investment
advice to clients.
· Prospectuses most successfully
convey information on a company’s directors and management, its industry, its
operations and business, and how to apply for shares.
· 65% of respondents do not
believe that any topics can be omitted from a prospectus without affecting
the quality of advice to clients, although there were a number of suggestions
regarding format – in particular, that there should be a standard format so
that investors can find and compare information quickly.
· Most respondents stated that
share prospectuses held too much information. 80% of advisers said that the
information contained in them is set out in a manner that makes it
incomprehensible to clients. However, 79% said that the information is set
out in a manner that makes it comprehensible to investment advisers.
· Suggestions to improve
comprehension included summaries, less jargon, more graphics and standard
formats.
· Overall, there is no essential
information currently not being included in prospectuses. However, most
respondents felt that prospectuses should include information on strategic
goals, market share and product development and quality.
(iv) Managed investment fund
prospectuses
· Clients most frequently ask
about fees and charges relating to funds (31%) followed by performance
history (18%), risk (13%) and what the funds invest in (12%) A total of 17%
either ask if they need to read the prospectus, ask the adviser to interpret
the prospectus or rely solely on the adviser’s recommendation.
· Only 2% of respondents said
clients found share prospectuses easier to understand than those of managed
funds, while 43% answered “neither”.
· Asset allocation, risk and tax
implications are regarded as the most important topics in providing advice to
clients. However, prospectuses are most successful at conveying information
on past performance.
· 64% of respondents said that
managed funds prospectuses provide all information required to provide advice
to clients.
· Assessment of the
appropriateness of the amount of information contained in prospectuses varied
among respondents. Overall, they contained either too much (45%) or the right
amount (45%), with only 10% of respondents believing that they had too
little.
· Most of the problems of
prospectus content related to the length and detail of the document, and its
format.
The full report is available
from the Centre for
Corporate Law and Securities Regulation website.
1.9 Centre
for Corporate Law and Securities Regulation releases ASIC Enforcement report
(a) Overview of research report
·
This research
report reports the findings of an empirical study of court-based enforcement
activities undertaken by the Australian Securities and Investments Commission
("ASIC").
· This research builds on a 1999
empirical study by members of the Centre for Corporate Law and Securities of
how ASIC used civil penalties as enforcement tools against company directors.
· The current research project has
two aims:
· To produce a detailed study of
ASIC's enforcement activities and to identify patterns in those activities;
· To determine whether ASIC
enforcement activities are consistent with the findings of past sociological
studies of legal regulation and enforcement. Sociological theories contend
that the effectiveness of laws as forms of regulation depends on the process
by which those laws are received, interpreted and responded to by the
participants in the regulatory process. Those participants include ASIC, the
Commonwealth Director of Public Prosecutions, and the pool of persons and
companies influenced and controlled by company and financial services laws.
(b) Research Methodology
·
The project
involves an empirical study of AISC court-based enforcement activities over
the period January 1997 to December 1999.
· The dataset was generated in
collaboration with ASIC, comprising information regarding all ASIC
court-based enforcement activities during the sample period. Information was
also obtained from the Commonwealth Director of Public Prosecutions
("DPP") detailing enforcement activities referred to the DPP by
ASIC during the sample period. The amalgamation of data from various sources
has enabled the creation of a unique dataset with a high degree of detail.
(c) Key findings of the study
·
The empirical study
analyses three aspects of ASIC court-based enforcement activities during the
sample period:
o The characteristics of the
participants in the regulatory process, apart from ASIC and the DPP;
o The types of enforcement
activity undertaken by ASIC and the legislation applied in those activities;
o The outcomes of ASIC enforcement
activities.
(i) Characteristics of regulatees
The
study found that ASIC was more likely to pursue court-based enforcement:
·
against individuals
(rather than companies);
· against men (rather than women)
aged between 41-50 years in their capacity as directors of companies working
in the finance and insurance industry; and
· in relation to private companies
rather than public companies and, in particular, private companies that were
no longer a going concern.
(ii) Types of enforcement
activity
The study found that ASIC was
more likely to pursue penal enforcement in relation to:
·
laws that were
mandatory (rather than enabling) in nature;
· laws that were oriented towards
social, rather than economic, regulation. In particular, the external
administration and misconduct provisions of the Corporations Law, rather than
the disclosure provisions; and
· laws with an ethical foundation
that address conduct that is widely condemned because it exploits and
defrauds shareholders and creditors.
(iii) Enforcement outcomes
The study found evidence of:
·
the predominant use
of penal enforcement activities by ASIC over civil enforcement activities;
· targeted enforcement by ASIC
specifically in relation to external administrator assistance actions;
· the predominant use of a
limited, severe set of penal sanctions (specifically fines and custodial
sentences) despite the availability of a much wider range of sanctions;
· the predominant use of
settlements by ASIC as outcomes for civil enforcement activities; and
· ASIC court-based enforcement
activity being predominantly in the middle to higher bands of the pyramid of
enforcement.
(iv) General conclusions
·
The study
highlights the predominant use of penal enforcement activities and sanctions
within the dataset of ASIC court-based enforcement work.
· This finding reflects the
traditional conception of the role of court enforcement in legal regulation
as a "last resort" strategy.
· The study also highlights the
reality that the majority of enforcement activities in the dataset concern
breaches of mandatory, socially oriented or ethically-based laws by
regulatees in circumstances where their behaviour is widely regarded as
undesirable.
· What the study cannot do is
comment on whether any of these trends are predominant in all ASIC
enforcement work, or merely court-based enforcement work, the subject of this
study. A study of non-court based enforcement activities undertaken by ASIC
is required before this would be possible.
The full report is available
from the Centre for
Corporate Law and Securities Regulation website.
1.10
Survey reveals more US companies report detecting fraud
A KPMG survey of 450 medium
to large United States companies published on 1 December 2003 has found that
75% of the companies surveyed reported at least one instance of fraud this
year, compared to 62% in 1998. This reflects not so much an increase in the
incidence of fraud but increased awareness resulting in uncovering more
instances of fraud, said KPMG. Thirty-six percent of the companies reported
losses of US$1 million or more from fraud in 2003, compared to 21% in 1998.
Theft of assets and expense account fraud more than doubled since 1998, and
the number of companies that said they were uncovering financial fraud also
doubled from 3% in 1998 to 7% in 2003. About 77% of firms polled had taken
steps to detect fraud through internal controls, up from 51% in 1998; while
65% of companies conducted internal audits, up from the previous 43%.
Sixty-three percent of fraud cases were uncovered in employee reports, up
from 58% five years earlier. Some 43% of corporate and government officials
expect fraud cases to decline in the next 12 months, with only 7%
anticipating an increase.
The survey is available on the KPMG
website.
1.11
Group of 100 releases “Guide to Compliance with ASX Principle 7”
The Group of 100, an association
of senior Australian finance executives, has released the “Guide to
Compliance with ASX Principle 7: ‘Recognise and Manage Risk’”. The guide,
which was prepared for the Group of 100 by Deloitte, is designed to give
general guidance in relation to compliance with Principle 7.
The guide identifies issues and
provides recommendations in the following areas:
· formal framework;
· breadth of controls;
· layers of controls;
· level of assurance;
· period of coverage;
· corporate reach;
· operating efficiently and
effectively; and
· reporting templates.
The Guide is available from the Group of 100 website.
1.12
Study of shareholder resolutions at meetings of US companies
In November 2003, a study of
shareholder resolutions and shareholder voting at meetings of US companies
was released. The study, by the consulting firm Georgeson Shareholder,
covered meetings held during the first seven months of 2003.
The key findings of the study
are:
· Fifty-six percent more
governance proposals came to a vote – 427 in 2003, versus 273 for the same
period in 2002. This represents the largest increase in years.
· Executive compensation dominated
the 2003 governance agenda. Nearly 40% of the resolutions dealt with
compensation-related matters, with the leading proposal calling for stock
options to be expensed on grant date. Sixty-seven such resolutions drew
support on average from 45% of votes cast (32% of outstanding shares).
· The number of governance
proposals achieving support from a majority of votes cast also increased,
from 88 proposals in 2002 to 140 in 2003. In terms of raw numbers, this
represents a 59% increase. However, measured against the total number of
proposals presented, the approval rate is almost unchanged, from 32.2%
(88/273) in 2002 to 32.8% (140/427) in 2003.
· Proposals seeking shareholder
approval for, or rescission of, poison pills topped the list again this year
with the highest number of resolutions – 82.
· Board declassification continued
to attract the highest levels of support – an average of 62% of votes cast
and 45% of outstanding shares.
· The demographics of shareholder
proponents continued to evolve, with sponsorship by special interest groups
continuing to dominate the agenda. Labor unions overtook individual
shareholders as the leading proponents of governance resolutions, sponsoring
nearly half of all resolutions that came to a vote in 2003. Public pension
funds’ sponsorship shrank to a low of just 2%, down from 6% of proposals in
2002, and far from the dominant levels of institutional sponsorship that
signaled the start of the governance movement in the 1980s.
· Surprisingly, the average level
of shareholder support for governance proposals in 2003 did not increase.
Measured as a percent of votes cast, average shareholder support was 36%,
unchanged from 2002. As a percent of outstanding shares, the average
favourable vote in 2003 was 26%, also unchanged from 2002.
· Binding shareholder proposals
continued to languish. Five were presented this year, down from a peak of 13
in 1999.
· The impact on shareholder voting
of the much-discussed governance ratings was far from clear in 2003. The
proliferation and activities of governance raters made headlines during the
proxy season, but a correlation between their ratings and voting results, if
any, was difficult to assess. A number of commentators remarked that
governance scores – high or low – did not seem to affect shareholder support
for governance proposals, and cited this as further evidence that
institutions tend to make voting decisions narrowly on the merits of the
proposal and without regard for a company’s governance fundamentals.
The study is on the Georgeson
Shareholder website.
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