1. Recent Corporate Law and Corporate Governance Developments

1.1 Centre for Corporate Law Conference – Corporate Governance - 13 February 2004
1.2 ASA releases poor performer list
1.3 Parliamentary Committee Report recommends improvements to rural/remote banking services
1.4 Andrew S Fastow, former Enron Chief Financial Officer, pleads guilty, settles civil fraud charges and agrees to cooperate with ongoing investigation
1.5 SEC proposes new investment company governance requirements, new investment adviser codes of ethics requirements, and new confirmation and point of sale disclosure requirements
1.6 OECD Invites Comment on Draft Revision of its Corporate Governance Principles
1.7 Treasury releases position paper on compensation in the services sector
1.8 FSA finalises rules on past performance in advertising
1.9 SEC Releases Guidance Regarding MD&A
1.10 2003 US Proxy Season Roundup
1.11 SEC approves NYSE governance structure changes; proposes mutual fund disclosure rules; solicits comment on fund transaction cost issues
1.12 EU Takeover Directive adopted
1.13 Macroeconomics and Governance - New Research Report
1.14 Canadian Committee calls for single securities regulator built on joint federal provincial model
1.15 Managed Investments: An Industry Report - Centre for Corporate Law Research Report
1.16 UK corporate governance bill introduced into Parliament
1.17 UK Government consultation on director and auditor liability

2. Recent ASIC Developments

2.1 ASIC acts on conflicts of interest in public companies
2.2 ASIC policy approach to the regulation of managed discretionary account services
2.3 ASIC focuses on defective debenture prospectuses
2.4 ASIC issues licensing relief for certain wholesale foreign financial services providers
2.5 ASIC provides further relief for joint product disclosure statements
2.6 ASIC provides temporary relief during period of consultation
2.7 ASIC releases 2003 Codes monitoring report

3. Recent ASX Developments

3.1 ASX releases 2003 market highlights
3.2 Other developments at ASX

4. Recent Takeovers Panel Decisions

4.1 Novus Petroleum Limited: Panel accepts undertakings
4.2 Citigold Corporation Limited bid for Great Mines Limited: Panel accepts undetakings
4.3 Breakfree 04 – Review Panel confirms Initial Panel Decision

1.1 Centre for Corporate Law Conference – Corporate Governance - 13 February 2004

The University of Melbourne’s Centre for Corporate Law and Securities Regulation is hosting a one-day conference featuring two of the United States’ leading commentators on corporate governance.

The governance-related failures of many high-profile companies – including Enron in the US and HIH and One.Tel in Australia – have seen corporate governance assume an unprecedented importance. An initial focus on auditor independence has been followed by legislative, stock exchange and investor action on executive remuneration, board composition and financial disclosure.

This conference is an opportunity for professional advisers, regulators, directors, auditors and academics to hear, and speak to, leading corporate governance advisers commentators and scholars from the US, the UK and Australia.

Further details are available from the Centre’s Administrator on 03 8344 5281 or from the Centre’s website.

1.2 ASA releases poor performer list

On 21 January 2004, the Australian Shareholders' Association (ASA) released its seventh annual list of 'poor performers'. The list contains 19 companies that the ASA has highlighted for special attention during 2004. The companies have been selected using Shareholder Rate of Return (SROR) figures provided by The Australian newspaper in a special issue titled 'Shareholder Scorecard'.

The SROR calculation is a composite of the movement in share price, dividend and imputation tax credits. It takes account of changes in capital and is defined as the annualised total return to shareholders from maintaining their investment in a stock over a period.

Compared with their ASX sectors up to 30 June 2003, companies on the 'poor performer' list have substantially under-performed over three years. In all cases, the SROR has been negative over a three-year period, and the one-year SROR has not justified the exclusion of a company from the list.

Mr Wilson, CEO of ASA stated, 'The ASA uses this list to focus its company monitoring resources where they will best benefit shareholders. The Association's monitoring activities cover most major companies as well as the companies appearing on the poor performer list. Following on from monitoring activities in 2003, the ASA will again be pursuing questions about performance and corporate governance. Where we are not satisfied with the answers, we will be raising those issues publicly.'

ASA Poor Performer List

* indicates member of earlier list(s)

1.3 Parliamentary Report recommends improvements to rural/remote banking services

On 15 January 2004, the Parliamentary Joint Committee on Corporations and Financial Services, published its report ‘Money Matters in the Bush’, on the level of banking and financial services available to people living in rural, regional and remote Australia and its Supplementary Report on ATM fees.

The major recommendations of the report call for:

1. improved customer access to trained bank officers with local knowledge, to overcome the breakdown in the customer/bank relationship;
2. banks to provide more effective education and training programs in the use of new technology, such as internet and telephone banking, especially to ensure older and indigenous Australians have the skills, confidence and motivation to use these technologies;
3. a review of the Rural Transaction Centre Program to enhance its success;
4. financial institutions to make greater use of Australia Post’s Giropost;
5. the introduction of industry standards for electronic banking in remote Australia;
6. the protection against unreasonable differential rural foreign ATM fees in areas where there is only a foreign ATM;
7. the Branch Closure Protocol to incorporate comprehensive community consultation, a community impact statement, six months notice and cost free transfer of accounts into its provisions;
8. improved portability of accounts between financial institutions, especially in the situation of branch closures;
9. measures to be taken to remove unnecessary regulatory impediments that prevent smaller approved deposit taking institutions from expanding into rural areas;
10. a comprehensive program to improve the financial literacy of indigenous Australians in remote areas of Australia;
11. improved consumer protection measures regarding bank account administration for isolated people;
12. the refinement of APRA’s Points of Presence Database and measures taken to ensure proper analysis; and
13. the adaptation to Australia of overseas measures to encourage banks to be more involved as invigorators of the economic life of communities in rural, regional and remote Australia.

The report is available on the Committee’s website. 

1.4 Andrew S Fastow, former Enron Chief Financial Officer, pleads guilty, settles civil fraud charges and agrees to cooperate with ongoing investigation

On 14 January 2004 the United States Securities and Exchange Commission settled civil fraud charges filed against Andrew S Fastow, Enron's former chief financial officer. The complaint, filed on October 2, 2002 in the US District Court in Houston, alleged that Fastow defrauded Enron's shareholders and enriched himself and others by, among other things, entering into undisclosed side deals, manufacturing earnings for Enron through sham transactions, and inflating the value of Enron's investments.

Without admitting or denying the allegations in the Commission's complaint, Fastow has agreed to be enjoined permanently from violating the antifraud, periodic reporting, books and records, and internal control provisions of the federal securities laws, and to be barred permanently from acting as an officer or director of a public company. The Commission settled its action in coordination with the Justice Department's Enron Task Force, which entered into a guilty plea with Fastow on related criminal charges. In resolving the parallel civil and criminal proceedings, Fastow has agreed to serve a ten-year sentence, to disgorge more than $23 million and to cooperate with the government's continuing investigation.

As alleged in the Commission's complaint, Fastow participated in a series of fraudulent transactions. Three of the transactions — RADR, Chewco, and Southampton — were part of an alleged scheme to hide Fastow's interest in and control of certain entities in order to avoid consolidating those entities in Enron's financial statements. This was done, according to the complaint, for self-enrichment and to mislead analysts, rating agencies, and others about Enron's true financial condition.

Two of the transactions — the Nigerian barges and Cuiaba — are alleged to have been sham sales best described as secret asset-parking arrangements. The Nigerian barges involve Enron's purported sale of an interest in certain Nigerian barges to Merrill Lynch & Co., Inc. ("Merrill"). Fastow is alleged to have personally promised that Merrill would be taken out of its so-called investment and later arranged for an entity he controlled, LJM2 Co-Investment, L.P. ("LJM2"), to buy the financial institution's interest at a pre-arranged rate of return on a pre-arranged time table. In Cuiaba, Enron entered into a transaction with another off-balance-sheet entity controlled by Fastow, LJM Cayman, L.P. ("LJM1"), to sell an interest in a severely troubled power plant in Cuiaba, Brazil, in order to avoid consolidation of project debt and recognize earnings. In connection with this transaction, Fastow allegedly entered into an unwritten side agreement with Enron requiring Enron to buy back the interest it just sold to Fastow at a guaranteed profit.

In the last transaction, Enron and LJM2 created a complex financial structure — Raptor I — that allowed Enron to hedge against potential declines in certain of its mark-to-market investments. LJM2's $30 million investment — representing the purported 3% outside equity required to be at risk in order for Enron to avoid consolidating the Raptor vehicle in its financial statements — however, was not at risk. Fastow allegedly entered into an undisclosed side deal in which Enron agreed that, prior to conducting any hedging activity with Raptor I, Enron would return LJM2's investment ($30 million) plus a guaranteed return ($11 million). As a result, Raptor I should have been consolidated on Enron's financial statements.

To conceal the side deal, Fastow and others allegedly devised a scheme to manufacture a $41 million payment to LJM2. Enron and the Raptor vehicle entered into a "put," a transaction in which Enron essentially bet that its own stock price would decline. Enron purchased that "put" option from the Raptor vehicle for $41 million. The $41 million was then transferred from Raptor I to LJM2. The complaint alleged that there was no true business purpose for the "put" other than to generate funds to pay LJM2 under the undisclosed side deal.

The complaint also alleged that in September 2000, Fastow and others used Raptor I to effectuate a fraudulent hedging transaction and thus avoid a decrease in the value of Enron's investment in the stock of a public company called Avici Systems Inc. Specifically, Fastow and others back-dated documents to make it appear that Enron locked in the value of its investment in Avici in early August 2000, when Avici's stock was trading at its all time high price.

The Commission's Complaint in this matter can be accessed at http://www.sec.gov/litigation/complaints/comp17762.htm 

1.5 SEC proposes new investment company governance requirements, new investment adviser codes of ethics requirements, and new confirmation and point of sale disclosure requirements

On 14 January 2004 the United States Securities and Exchange Commission voted to propose three regulatory initiatives designed to better protect the 95 million investors in mutual funds. These initiatives represent the next in a series of securities law reforms pursued by the Commission to address problems identified with the management and sale of mutual funds.

(a) Investment company governance

Mutual fund boards of directors play an important role in protecting fund investors. They have overall responsibility for the fund, oversee the activities of the fund adviser, and negotiate the terms of the advisory contract, including the amount of the advisory fees and other fund expenses.

The Commission voted to propose amendments to its rules to enhance fund boards' independence and effectiveness and to improve their ability to protect the interests of the funds and fund shareholders they serve. The rule amendments are designed to strengthen the hand of independent directors when dealing with fund management.

·         Independent composition of the board. Independent directors would be required to constitute at least 75 percent of the fund's board. This requirement is designed to strengthen the presence of independent directors and improve their ability to negotiate lower advisory fees and other important matters on behalf of the fund. 
·         Independent chairman. The board would be required to appoint a chairman who is an independent director. The board's chairman typically controls the board's agenda and can have a strong influence on the board's deliberations.
·         Annual self-assessment. The board would be required to assess its own effectiveness at least once a year. Its assessment would have to include consideration of the board's committee structure and the number of funds on whose boards the directors serve. 
·         Separate meetings of independent directors. The independent directors would be required to meet in separate sessions at least once a quarter. This requirement could provide independent directors the opportunity for candid discussions about management's performance, and could help improve collegiality. 
·         Independent director staff. The fund would be required to authorize the independent directors to hire their own staff. This requirement is designed to help independent directors deal with matters on which they need outside assistance.

Comments on the proposed rule amendments should be received by the Commission within 45 days of publication in the Federal Register.

(b) Codes of ethics for investment advisers

The Commission voted to propose new rule 204A 1 and related rule amendments under the Investment Advisers Act of 1940. New rule 204A 1 would require registered investment advisers to adopt and enforce codes of ethics applicable to their supervised persons.

Investment advisers are fiduciaries that owe their clients a duty of undivided loyalty. The Commission's recent enforcement proceedings suggest that some advisory personnel may have forgotten or ignored this duty. The new rule is designed to prevent fraud by reinforcing the fiduciary principles that must govern the conduct of advisory firms and their personnel. An adviser's code of ethics would have to include certain minimum provisions.

·         Standards of business conduct. The code would be required to establish standards of conduct that are expected of the adviser's supervised persons and that reflect the adviser's fiduciary duties. Supervised persons would have to acknowledge, in writing, receipt of a copy of the code of ethics.
·         Compliance with federal securities laws. An adviser's code of ethics would have to require the adviser's supervised persons to comply with applicable federal securities laws. 
·         Safeguard nonpublic information. The code would have to contain provisions reasonably designed to prevent disclosure of material nonpublic information about the adviser's securities recommendations and clients' securities holdings and transactions to persons without a "need to know."
·         Personal securities reporting. Advisers' codes of ethics would have to require certain supervised persons ("access persons") to report their personal securities holdings and transactions, including transactions in mutual funds advised by the adviser or an affiliate. Currently, only mutual fund advisers must have a code of ethics requiring their personnel to report their personal securities transactions. 
·         Pre-approval of certain transactions. The code of ethics would have to require access persons to pre-clear any personal investments in initial public offerings and limited (private) offerings.  
·         Reporting of code violations. The code of ethics would have to require supervised persons to report, promptly, any violations of the adviser's code of ethics to the firm's compliance officer or to another designated person.

Comments on the proposed rule and related amendments should be received by the Commission within 45 days of publication in the Federal Register. 

(c) Confirmation requirements and point of sale disclosure requirements for transactions in certain mutual funds and other securities, and other confirmation requirement amendments, and amendments to the registration form for mutual funds

The Commission voted to propose two new rules and rule amendments that are designed to enhance the information that broker-dealers provide to their customers in connection with transactions in certain types of securities. The two new rules would require broker-dealers to provide their customers with targeted information, at the point of sale and in transaction confirmations, regarding the costs and conflicts of interest that arise from the distribution of mutual fund shares, unit investment trust (UIT) interests (including insurance company separate accounts that offer variable annuity contracts and variable life insurance policies), and municipal fund securities used for education savings (commonly called 529 plans).

The rules would require disclosure at two key times - first at the point of sale, and second at the completion of a transaction in the transaction confirmation.  

(i) Proposed Rule 15c2-3 - point of sale requirements

Because confirmation disclosure does not provide information to investors prior to transactions in securities - i.e., at the time they make investment decisions – the commission is proposing new rule 15c2-3 to require brokers, dealers and municipal securities dealers to provide point of sale disclosure to customers prior to effecting transactions in mutual fund shares, UIT interests, and 529 plan shares.

The rule would require the broker, dealer or municipal securities dealer to inform its customer about the distribution-related costs that the customer would be expected to incur in connection with the transaction. This would include separate disclosure (either by reference to the value of the purchase, or, if no amount was specified, by reference to a model investment of $10,000) about:

·         the amount of sales loads that would be incurred at the time of purchase, and the amount of that load that would be paid to the broker-dealer;
·         estimated asset-based sales charges and asset-based service fees paid out of fund assets in the year following the purchase if net asset value remained unchanged; and
·         the maximum amount of any deferred sales load that would be associated with the purchase if those shares are sold within one year, along with a statement about how many years a deferred sales load may be in effect.

In addition, the rule would require disclosure of whether the broker, dealer or municipal securities dealer receives revenue sharing or portfolio brokerage commissions from the fund complex, as well as whether it pays differential compensation in connection with transactions in the covered security, if the covered security is either a class B share or a proprietary security.

(ii) Customers' right to terminate orders made prior to disclosure

Under the rule, an order made prior to the required point of sale disclosure would be treated as an indication of interest.

(iii) Manner of disclosure

The rule would generally require a broker, dealer or municipal securities dealer to give or send the information to the customer in writing using a new standardized form, Schedule 15D. This would be supplemented by oral disclosure if the point of sale occurs at an in-person meeting. If the point of sale occurs through means of an oral communication other than at an in-person meeting, however, then the information would only be disclosed to the customer orally.

(iv) Recordkeeping

Brokers, dealers or municipal securities dealers, at the time they disclose information required by the rule, would have to make records of communications sufficient to demonstrate compliance.

(v) Exceptions

The rule would contain a limited exception for transactions resulting from orders that a customer placed via US mail, messenger delivery or a similar third-party delivery service. It also would contain an exception for certain brokers that did not communicate with the customer, except to accept an order, if they reasonably believe another broker provided point of sale disclosure. The rule also would contain other targeted exceptions.

(vi) Proposed Rule 15c2-2 - confirmation requirement

Proposed rule 15c2-2 would require more quantitative disclosure of the information included in the point of sale document.

(vii) Disclosures for purchases

Proposed rule 15c2-2 would require specific disclosures in purchase transactions that build on the point of sale requirements. These requirements would include:

·         Cost and remuneration disclosure - Disclosure of the amount of any sales load that the customer has incurred (front end load) or will incur (back end load) at the time of purchase, expressed in dollars and as a percentage of the net amount invested, and disclosure of any dealer concession that the broker, dealer or municipal securities dealer earns in connection with the transaction, expressed in dollars and as a percentage of the net amount invested.
·         Revenue sharing and portfolio brokerage disclosure - Disclosure of quantified information about revenue sharing arrangements and portfolio brokerage (i.e., effecting transactions for an issuer's own portfolio). In particular, the rule would require disclosure of (a) revenue sharing payments from persons within the fund complex, and (b) commissions, including riskless principal compensation, associated with portfolio securities transactions on behalf of the issuer of the security, or other securities within the fund complex. This disclosure would be quantified based on the pro rata estimates of the amount of income received by the broker from the fund complex as compared to the assets of the funds. This ratio would then be applied to the assets invested by the particular investor. Disclosure would also be required of any specific revenue sharing arrangement that would be applicable to the transaction.
·         Differential compensation disclosure - Disclosure of whether a broker, dealer or municipal securities dealer pays its salespersons more compensation if they sell securities that carry a deferred sales load, or if they sell "proprietary" securities (that is, securities issued by an affiliate of the broker, dealer or municipal securities dealer).

(viii) Periodic disclosure alternative

The rule would permit brokers, dealers and municipal securities dealers to disclose the required information periodically -- rather than transaction-by-transaction -- in certain limited circumstances involving transactions in a "covered securities plan" or in no-load open-end money market funds, after an initial confirmation has been sent that meets the requirements of the rule.

(ix) Comparison range disclosure

The rule would provide a mechanism to give investors additional context for evaluating the significance of certain information. This context would come from comparison ranges for sales compensation, revenue sharing, and portfolio brokerage commissions, so that investors can see where their particular costs and payments fall in comparison to the median and ranges in the marketplace. The Commission would need to propose additional rules to determine how to obtain and disseminate comparison range information.

(x) General disclosure requirements

For all transactions (sales as well as purchases), the rule would require disclosure of:

·         the date of the transaction, 
·         the issuer and class of the security, 
·         the net asset value of the shares or units and, if different, their public offering price, 
·         the number of shares purchased or sold by the customer, 
·         the total dollar amount paid or received in the transaction, 
·         the net amount of the investment bought or sold in the transaction,
·         any commission, markup or other remuneration the broker, dealer or municipal securities dealer will receive from the customer in connection with the transaction, and
·         when applicable, that a broker, dealer or municipal securities dealer is not a member of the Securities Investor Protection Corporation (SIPC), or that the broker, dealer or municipal securities dealer clearing or carrying the customer account is not a member of SIPC.

(d) Proposed amendments to the Commission's general confirmation requirements and Form N-1A

The Commission also voted to propose conforming amendments to its general confirmation rule, as well as amendments to that rule to provide investors with additional information about call features of debt securities and preferred stock. Finally, the Commission voted to propose amendments to Form N-1A, the registration form for mutual funds, to improve disclosure of sales loads and revenue sharing.

(e) Special Request for comments from investors

Finally, these initiatives are intended to give investors "news they can use." In addition to including a special section in the proposal soliciting comments from investors, the Commission intends to reach out to the investor community through a variety of methods, including investor focus groups. This process is intended to design requirements - including standardized disclosure forms - that average investors will find useful and informative.

Comments on these proposals should be received by the Commission within 60 days of publication in the Federal Register.

1.6 OECD Invites Comment on Draft Revision of its Corporate Governance Principle

On 12 January 2004, the OECD invited public comment on a draft of the revision of its Principles of Corporate Governance that were adopted by OECD governments in 1999. This followed a request from OECD governments for reinforcement of the Principles in response to recent corporate scandals. 
 
Since they were adopted in 1999, the OECD Principles have been a reference for corporate governance initiatives around the world. The Financial Stability Forum named them as one of the Twelve Key Standards for Sound Financial Systems, and they underpin the corporate governance component of the World Bank/IMF Reports on Standards and Codes (ROSC).

The OECD Principles are the result of a consensus between participating governments on minimum requirements for best practice. Although they are non-binding, they provide a reference for national legislation and regulation, as well as guidance for stock exchanges, investors, corporations and other parties.

The draft text now made public for comment is the result of consultations over the past year with governments and representatives of business, professional groups, labour and civil society in both OECD and non-OECD countries. The draft, issued under the responsibility of the OECD Secretariat, represents work in progress. 

Subsequent versions will take into account comments received during this consultation as well as additional comments by members of the OECD Steering Group on Corporate Governance. 

The OECD Principles already cover many of the issues that have been at the centre of recent corporate scandals. They include recommendations on high quality standards of accounting and audit, the independence of board members and the need for boards to act in the interest of the company and the shareholders.

The new draft text, in addition, sets more demanding standards in a number of areas. It specifies that investors should have both the right to nominate company directors and a more forceful role in electing them. It states that shareholders should be able to express their views about compensation policy for board members and executives and submit questions to auditors. It calls on institutional investors to disclose their overall voting policies and how they manage material conflicts of interest that may affect the way they exercise key ownership functions, such as voting.

The text also identifies the need for effective protection of creditor rights and an efficient system for dealing with corporate insolvency. It calls on rating agencies, brokers and other providers of information that could influence investor decisions to disclose conflicts of interest and how they are being managed. It also calls on boards to be more rigorous in disclosing related party transactions and to protect so-called "whistle blowers" by allowing them confidential access to a contact at board level.

It is anticipated that a final revised version of the Principles will be submitted to OECD governments for approval at the annual meeting of the OECD Council at Ministerial Level on 13-14 May 2004.

The draft Principles are on the OECD website.

1.7 Treasury releases position paper on compensation in the services sector

On 24 December 2003, the Parliamentary Secretary to the Australian Treasurer, the Hon Ross Cameron MP released the Government’s position paper on compensation for loss in the financial services sector.

It should be noted that the area covered by this paper is limited to losses incurred in connection with the provision of financial services. It is not about losses suffered as a result of changes in the value of financial products through, for example, market fluctuations or loss of insurance cover caused by the insolvency of the issuer.

The paper is the second in the Government’s review of this area. The first was an issues and options paper in response to which Treasury received 29 submissions, indicating a wide range of views.

The position put in the paper envisages professional indemnity insurance (or a substitute), with the possibility of exemption for some APRA-regulated entities. It was framed in the light of current difficulties in the professional indemnity insurance market.

As well as putting a position, the paper seeks the views of the public on a number of more specific issues.

The consultation period starts 24 December 2003 and will finish on 31 January 2004. The Government welcomes input from stakeholders and the community in developing policy in this area. The government’s final position will only be finalised after this consultation process has concluded.

In the light of the consultation period required to determine acceptable compensation arrangements, it is envisaged that the transitional arrangements relating to section 912B of the Corporations Act 2001 will be extended for a further 12 months, to 11 March 2005. That is, they will operate from one year after the full commencement of the Financial Services Reform Act 2001 on 11 March 2004.

The paper is available on the Treasury website under "Publications."

1.8 FSA finalises rules on past performance in advertising

Standardised data must be included in advertisements referring to past performance, under new rules published on 22 December 2003 by the United Kingdom Financial Services Authority. The rules, which will come into force on 1 June 2004, will prevent firms 'cherry-picking' data to present their past performance in a flattering light.

Under the new rules:

·         Where past performance information is used in advertisements, it must be accompanied by standardised data, set out in a table, showing discrete annual returns for the previous five years. These figures must be expressed as a percentage and will give consumers a better understanding of the volatility of the investment and how it has performed over a period of time.
·         Where less than five years performance is available, then a firm should give information for as many 12-month periods as possible, updated to the previous quarter. Firms should indicate (using dashes or an explanation) where there is no information available for the 'missing years.'
·         Where data is available for less than one twelve month period, past performance information may not be included. This is because a period of less than a year will not give a 'clear, fair and not misleading' impression of longer term performance. However, this information will still be available to intermediaries and professionals because only advertisements aimed at retail investors are covered by the FSA's advertising rules.

The standardisation measures form part of an overall package aimed at cleaning up the way in which past performance information is used in advertising. Other elements of the package include:
·         improving the balance in advertisements by reducing the emphasis on past performance;
·         strengthening the warning so that it appears in the main body of the advertisement, not buried in the small print; and
·         preventing firms from making a link between past performance and the future.

Final rules and guidance are published in Policy Statement 183 Standardising Past Performance: feedback on CP183 and come into force on 1 June 2004.

1.9 SEC Releases Guidance Regarding MD&A

On 19 December 2003 the United States Securities and Exchange Commissions issued an interpretive release providing guidance regarding Management's Discussion & Analysis of Financial Condition and Results of Operations, commonly called MD&A, included in reporting companies disclosure documents.

The guidance reminds companies of existing disclosure requirements and provides additional guidance, designed to elicit more informative and transparent MD&A that satisfies the principal objectives of MD&A: (1) to provide a narrative explanation of a company's financial statements that enables investors to see the company through the eyes of management; (2) to enhance the overall financial disclosure and provide the context within which financial information should be analysed; and (3) to provide information about the quality of, and potential variability of, a company's earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.

Specifically, the guidance emphasizes that MD&A should not be merely a recitation of financial statements in narrative form or an otherwise uninformative series of technical responses to MD&A requirements, neither of which provides the important management perspective called for by MD&A.

Instead, the release encourages top-level management involvement in the drafting of MD&A, and provides guidance regarding:

·         the overall presentation and focus of MD&A (including through executive-level overviews, a focus on the most important information and a reduction of duplicative information); 
·         emphasis on analysis of financial information; 
·         known material trends and uncertainties; 
·         key performance indicators, including non-financial indicators;
·         liquidity and capital resources; and
·         critical accounting estimates.          

The release does not create new legal requirements, nor does it modify existing legal requirements.

A copy of the release can be found on the Commission's Web site at http://www.sec.gov/rules/interp/33-8350.htm under "Regulatory Actions / Interpretive Releases."

1.10 2003 US Proxy Season Roundup

SocialFunds.com, a website focusing on corporate social responsibility, has reported on the 2003 US proxy season in an article dated 17 December 2003. A record number of resolutions, more than 1,080, were filed. Some resolutions received very high votes. For example, a resolution calling for annual elections of directors filed at 38 companies averaged 62.7 percent of the vote, according to the Investor Responsibility Research Center, an independent corporate governance and social responsibility research firm. The resolution received  92.89 percent vote at Avon, according to the Interfaith Center on Corporate Responsibility (ICCR), an association of 275 faith-based institutional investors who collectively manage over $110 billion in assets.

ICCR uses the Principles of Global Corporate Responsibility--Bench Marks for Measuring Business Success to work with corporate boards and management to develop human rights codes and business principles. For example, an ICCR dialogue group inspired Ford to adopt a human rights code and a set of business principles focused on corporate social responsibility, labour rights, and environmental issues such as climate change.

The full article is available at www.socialfunds.com under "News".

1.11 SEC approves NYSE governance structure changes; proposes mutual fund disclosure rules; solicits comment on fund transaction cost issues

On 17 December 2003 the United States Securities and Exchange Commission voted to approve changes to the governance structure of the New York Stock Exchange; to publish for comment a rule proposal that would amend mutual fund disclosure requirements regarding breakpoint discounts and front end loads; and to publish a concept release to solicit public comment on mutual fund transaction cost issues.

(a) New York Stock Exchange corporate governance proposal

On 7 November 2003, the New York Stock Exchange filed a proposal with the Commission to amend and restate its Constitution to implement a series of governance changes (SR-NYSE-2003-34). The proposal was published for public comment in the Federal Register on 13 November 2003. The Commission voted to approve the proposal.

The NYSE will make a number of revisions to its governance structure, including, most significantly, the following changes:

·         Independent Board of Directors. The Board of Directors will be reduced from 24-27 members to between 6-12 members, plus the Chairman of the Board and CEO (if different than the Chairman). Board members (except the CEO) will be required to be independent of management, the members, and issuers.
·         Constituent Board of Executives. The Board of Executives will be created as an advisory board, consisting of the Chairman and the CEO (if different than the Chairman), and at least 20 but no more than 25 members who will serve for one-year terms. The members of the Board of Executives will include representatives of the Exchange's various stakeholders, including member firms, institutional investors, and listed companies.  
·         Autonomous Regulatory Office. The position of Chief Regulatory Officer will be created to oversee the NYSE's regulatory function. The Board will appoint the Chief Regulatory Officer, who will report directly to the Regulatory Oversight & Regulatory Budget Committee. That independent Board committee will exercise control over the NYSE's regulatory plan, budget and staffing, and recommend the compensation of senior regulatory employees.
·         Independent Key Board Committees. Four Standing Committees, consisting only of independent directors, will be created to oversee certain critical functions. These are the Nominating & Governance Committee, the Human Resources & Compensation Committee, the Audit Committee, and the Regulatory Oversight & Regulatory Budget Committee.  

(b) Enhanced disclosure of mutual fund breakpoint discounts

The Commission decided to propose amendments that would require a mutual fund to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads. This enhanced disclosure would assist investors in understanding the breakpoint opportunities available to them.

Some mutual funds with a front-end sales load provide discounts for larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as "breakpoints." In determining whether an investor meets a "breakpoint," funds often allow the investor to use a "right of accumulation" to aggregate shares purchased at different times, in different funds within a fund family, and by family members of the investor.

An examination sweep of broker-dealers initiated by the Commission, NASD, and the New York Stock Exchange late last year revealed that in 32% of the transactions that appeared to be eligible for a reduced sales charge, investors did not receive the full reduction to which they were entitled. The most frequent causes for not providing a breakpoint discount involved problems with rights of accumulation, including not linking an investor's ownership of different funds in the same mutual fund family, shares owned by the investor in different accounts, or shares owned by persons related to the investor. Following the joint examination sweep, NASD formed a Joint NASD/Industry Task Force on Breakpoints, which issued its recommendations in July of this year.

As a result of the examination sweep and the Task Force report, the Commission is aggressively attacking industry failures to deliver breakpoint discounts through both enforcement investigations and regulatory initiatives. The proposals would require enhanced disclosure by mutual funds regarding breakpoints, as recommended by the Task Force. The proposals would:

·         require a mutual fund to provide a brief description in its prospectus of arrangements that result in sales load breakpoints, including a summary of eligibility requirements, with more detailed information permitted to be in the statement of additional information (SAI); 
·         require a mutual fund to describe in its prospectus the methods used to value accounts in order to determine whether a shareholder has met sales load breakpoints; 
·         require a mutual fund to state in its prospectus, if applicable, that in order to obtain a breakpoint, it may be necessary for a shareholder to provide information and records, such as account statements, to a mutual fund or financial intermediary; and 
·         require a mutual fund to state in its prospectus whether it makes available on its website information regarding its breakpoints.

Comments on the proposed rule amendments should be sent to the Commission within 45 days of their publication in the Federal Register.

Investors can learn more about reduced front-end sales loads by going to http://www.sec.gov/answers/breakpt.htm and http://www.nasdr.com/alert_breakpoint.htm. Investors can access fund expense calculators at http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm and http://www.nasdr.com/fundcalc/expense_analyzers.asp.

The examination sweep report "Joint SEC/NASD/NYSE Report of Examinations of Broker Dealers Regarding Discounts on Front-End Sales Charges on Mutual Funds" is available at http://www.sec.gov/news/studies/breakpointrep.htm. A copy of the Joint NASD/Industry Task Force on Breakpoints report can be found at http://www.nasdr.com/breakpoints_report.asp. 

(c) Request for comments on ways to improve mutual fund transaction cost disclosure

The Commission decided to issue a concept release on mutual fund transaction costs. The release will seek public comment on whether mutual funds should be required to quantify and disclose to investors the amount of transaction costs they incur; include transaction costs in their expense ratios and fee tables; provide other measures or additional disclosure that would indicate the level of a fund's transaction costs; or some combination of the above. In addition, the release will seek comment on whether mutual funds should be required to record transaction costs or the portion of those costs that represent soft dollar benefits as an expense in their financial statements. The release also will ask for comment on the adequacy of existing requirements for board review of transaction costs.

Comments in response to the concept release should be sent to the Commission within 60 days of its publication in the Federal Register.

1.12 EU Takeover Directive adopted

On 16 December 2003, the European Parliament adopted its draft opinion on the European Commission's proposal for a Takeover Directive, backing the compromise text that the Council had informally adopted in November.

The Takeover Directive aims to provide a framework of common principles for cross-border takeover bids, create a level playing field for shareholders and establish disclosure obligations throughout the EU. Several proposals had been discussed over a 14-year period. In 2001, the European Parliament had rejected the last proposal in a historic vote (273:273 votes).

The Competitiveness Council had on 27 November 2003 agreed on a compromise text, which considerably waters down the Commission's initial proposal by adopting an optional approach to the two contested parts of the proposed directive: shareholder participation on defensive measures and neutralising these measures after a takeover. However, there is room for a further development in the Directive, as the Commission is required to review it after five years.

The Parliament voted by 321 votes in favour, 219 against with 9 abstentions to approve the new takeover directive but with a number of strategic amendments that make key provisions of the legislation optional. Opposition came from members who felt the clauses on information and consultation of workers were inadequate.

A key point of the new directive is that minority shareholders will be better protected. The Commission's text already proposed forcing any company launching a takeover bid to offer to buy all the target company's shares at an "equitable price", defined as "the highest price paid for the same securities by the offeror" over a period of 6-12 months prior to the bid. Under the Council compromise now endorsed by Parliament, the definition of an equitable price becomes more generous to minority shareholders. If, after the bid is made public and before it closes for acceptance, the bidder buys any shares at above his offer price, he will have to increase his offer price to at least match the highest price he has paid.

The other main amendments adopted concern the use of defensive measures, restrictions on votes and multiple voting rights, and especially the introduction of optional arrangements.

Under the Commission's text, boards of companies which are the target of a hostile takeover bid must consult their shareholders before taking any defensive measures, such as share issues, to frustrate the bid. However, as part of the compromise, Parliament voted to allow any Member State to "opt out" (i.e. not to require firms to apply the provisions on defensive measures) although individual companies in such a Member State would be able to "opt in", i.e. to choose to observe the rule of not taking defensive measures without shareholder approval. In yet another twist, however, a company can be exempted from this rule if it has "opted in" but has subsequently become the target of a hostile bid by a firm that does not itself observe the rule.

"Multiple voting rights" create another form of "defensive position". In certain firms, particularly in Scandinavian countries, some shares carry more voting rights than others, enabling their holders to block takeover bids that might be acceptable to the majority of shareholders. There is no "level playing field" throughout the EU as long as these special rights exist in some countries, yet they were omitted from the Commission proposal, which only says, more generally, that restrictions on voting rights will not apply during votes on defensive measures. Therefore, in line with the compromise reached in Council, Parliament voted to ensure that multiple voting rights will be treated in the same way as restrictions on voting rights. However, opt-outs for Member States, as well as opt-ins for companies, will be available as in the case of defensive measures. Another amendment states that where such rights are being removed, "equitable compensation" must be provided for any loss the holders incur. The precise terms of this compensation are to be decided by each Member State.

It should be noted that the new directive does not cover the "golden shares" held in major companies by many EU governments and sometimes used to block takeover bids. These are to be the subject of a separate directive.

1.13 Macroeconomics and Governance - New Research Report

The Australian Treasury published in December 2003 a research report titled "Macroeconomics and Governance". In recent years there has been a resurgence of interest in the impact of institutions on economic growth and development. Governance, both at the economy-wide and firm-specific level, has emerged as one of the central aspects of institutional structure and design.

The report argues that the quality of governance matters to macroeconomic performance because it provides a key foundation for the equitable and efficient allocation of resources, including capital. Better governance tends to be associated with deeper economic and financial development, with the causation running from better governance to higher income rather than the other way round. Better governance also reduces the risk of macroeconomic instability, by containing the types of shocks to which an economy is exposed and by making it easier for private and official decision-makers to deal with negative shocks when they occur. This matters for all economies, be they developing, emerging, transition, or industrialised.

The report sets out some definitions of governance, at both the economy-wide and firm-specific level, and explores what is meant by "good governance" . It sets out some indicators of governance for selected Asia-Pacific economies. It explores some of the ways that governance can matter for macroeconomic growth, development and stability.

The report is available on the Treasury website under "What's new".

1.14 Canadian Committee calls for single securities regulator built on joint federal provincial model

In December 2003 the Committee to Review the Structure of Securities Regulation in Canada published its report calling for the creation of a single regulator built on a joint federal-provincial model. The Committee's report, titled "It's Time", is a response to a high level of frustration among market participants with the inadequate enforcement, undue complexity, excessive cost and weak international profile of Canada's current regulatory system of 13 provincial and territorial regulators.

“There was a time when Canada was well served by a provincially-based system of securities regulation, but those days are gone,” said Michael Phelps, Committee Chair. “It is time for Canada to have a single regulator administering a single code nationwide. With less than 3% of the global capital market and a population roughly equal to the state of California, Canada can no longer afford to be the world's only major industrialized country without a national regulator. It is argued in the report that the recommendation are about staying competitive with the rest of the world. It is about implementing the system that best protects investors, that best provides access to capital for companies, and that best enables capital markets to contribute effectively to Canada's long-term economic growth.”

(a) The recommended model

The recommended model ensures strong participation by the provinces. The Canadian Securities Commission (CSC) would consist of nine full-time, regionally representative Commissioners appointed by the Minister of Finance. Nominees would be proposed by a 13-person Nominating Committee with 10 members designated by the provinces. A Securities Policy Ministerial Committee consisting of the provincial ministers responsible for securities regulation and the Minister of Finance would provide a framework for provincial input to securities policy and the system's administration.

The Commission would administer a comprehensive code of capital markets regulation to be enacted by the Federal Government. This legislation should take into account the Uniform Securities Legislation Project that has been undertaken by the Canadian Securities Administrators and other provincial legislative reform proposals.

The Committee's single regulator proposal would significantly strengthen enforcement, facilitate better policy innovation and development, and enhance Canada's brand of securities regulation internationally. Moreover, it would establish clear lines of accountability, ensure responsiveness to regional needs, provide for uniform investor protection across Canada and facilitate the reallocation of substantial funds towards better enforcement and other pressing regulatory issues.

(b) A call for change

It was made abundantly clear to the Committee in 92 written submissions and through nine days of public consultations with issuers, investors and other market participants across the country that there is a new and unprecedented demand for change. Canadians want and need a simpler, more efficient regulatory system geared to the distinctive characteristics of the Canadian economy, including a significant component of emerging companies.

The Committee gave serious consideration to the proposed passport system throughout its deliberations. The passport represents an incremental improvement over the status quo, but as a number of market participants pointed out, it falls far short of the kind of system Canada needs to be successful.

“The Committee believes there are no meaningful impediments, constitutional or otherwise, to the prompt implementation of its recommended model,” said Mr. Phelps. The Committee urges capital market participants to continue speaking out on this issue. That is the only way to ensure reform. Likewise, the Committee urges the federal and provincial governments to work together to promptly implement the Committee's recommended model.

(c) About the Committee

Established by former Minister of Finance John Manley in March 2003, the mandate of the Committee was to undertake an independent objective review of the current securities regulatory framework and identify an appropriate model for securities regulation in Canada.

The Committee's recommendation is based on extensive input from market participants, independent research studies, and the Committee members' collective experience and judgment. Many of the independent research studies conducted for the committee represent the first independent examination of this complex and important subject. Copies of the Committee's report, independent research papers, submissions from market participants and related documents are available on the Committee's website at www.wise-averties.ca.

1.15 Managed Investments: An Industry Report - Centre for Corporate Law Research Report

In December 2003, the Centre for Corporate Law and Securities Regulation at The University of Melbourne released its research report, “Managed Investments: An Industry Report”.

The research report is divided into three parts:

·         Part 1: Structure and operation of the Australian managed investments industry;
·         Part 2: The Australian regulatory regime in the context of international principles; and
·         Part 3: Observations and conclusions.

Part 1 of the report sets out the size and scope of the managed investments industry in Australia, measured by both data from the Australian Securities and Investments Commission (‘ASIC’), the Australian Bureau of Statistics (‘ABS’), the Australian Stock Exchange (‘ASX’), Axiss Australia and ASSIRT. The practical operation of the industry is assessed through an analysis of surveys completed by and interviews conducted with industry participants.

Part 2 of the report examines the operation of the Australian legislation, including the associated licensing regime, in light of international principles for the governance of collective investment schemes.

Part 3 contains concluding observations on the adequacy of the governance structures under Australian law.

The managed investments industry is regulated primarily by chapter 5C of the Corporations Act 2001 (Cth). This chapter was introduced into the law by the Managed Investments Act 1998 (Cth) (‘MIA’), which commenced operation on 1 July 1998.

The MIA marked a radical shift in the policy of regulating collective investment schemes. Under the pre-MIA approach, schemes were operated by a management company and monitored by an external independent trustee. The trustee was under a statutory covenant to protect the interests of investors. The MIA abandoned this two-party system, principally on the basis that it created uncertainty as to which party was ultimately accountable to scheme investors. The MIA installed a regime under which there is a single responsible entity (‘RE’). The legislative intention behind the ‘single responsible entity’ was to have one entity accountable to scheme investors.

In brief, the regulatory regime installed by the MIA includes the following features:

·         All schemes which offer interests in themselves must be registered with ASIC (unless they fall within one of a limited number of exceptions).
·         All registered schemes must be operated by a licensed public company (the ‘single responsible entity’), which is subject to statutory duties of care and diligence and to act in the best interests of investors.
·         Each scheme must have a constitution, a compliance plan (which must deal adequately with conflict of interest scenarios and be audited by an independent auditor) and an external compliance committee (or, alternatively, a board at least half of which must be external directors), who must monitor the RE’s compliance with the law.

The principle focus of the report is an examination of the managed investments industry in Australia and the means by which it is regulated. The report examines in particular:

·         the different size and types of schemes in Australia;
·         the extent to which the Australian regulatory regime conforms with international principles for the regulation of collective schemes;