Government back down on tough new penalties for market manipulation and insider trading; ASIC set to take over reins from ASX

Back Down on New Penalties

In a reprieve for individuals and corporations found to have contravened the market misconduct provisions under the Corporations Act 2001, the government has shied away from its proposed dramatic increases for these offences.

• On 28 January 2010 the Federal Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen outlined the proposed new penalties including:
• Increased fines to $500,000 (or three times the profit made or loss avoided) for individuals committing market manipulation offences and insider trading offences.
• Term of imprisonment to be doubled from maximum of 5 years to 10 years for individuals.
• Increased fines for corporations from $1 million to $5 million, three times the profit made or loss avoided, or 10 per cent of the corporation’s annual turnover during the period the breach occurred (whichever is the greater) for market manipulation and insider trading offences.

However, the Corporations Amendment (Financial Market Supervision) Bill 2010 (the Market Supervision Bill) introduced to Parliament on 10 February 2010 is silent on the tough new penalties.

ASIC as market supervisor

If passed by Parliament, the Market Supervision Bill will transfer the supervision of Australian financial markets from the Australian Stock Exchange, to ASIC.

Importantly, ASIC will be able to set its own “market integrity rules” which will operate in tandem with the existing operating rules. Where there is an inconsistency with an operating rule, the ASIC market integrity rule will prevail.

A breach of a market integrity rule will attract maximum fine of $1,000,000.

The Market Supervision Bill also provides for ASIC to enter into arrangements with individuals to avoid court proceedings for breach of a market integrity rule. Under the alternatives to civil proceedings provisions, the proposed penalty for a breach of a market integrity rule, will not exceed three-fifths ($600,000) of the maximum penalty ($1,000,000).

New powers to ASIC

At the time of the announcement of the new market misconduct penalties on 28 January 2010, Minister Bowen also foreshadowed an expansion of ASIC’s investigative powers.

The Minister outlined proposed changes which would enable ASIC to:

• “tap” telephone conversations, emails and text messages, potentially catching confidential or legally privileged discussions between clients and advisors; and
• execute a search warrant for production of documents, dispensing with the requirement to provide documents under a Notice to Produce to the individual or corporation concerned so that evidence is not destroyed.

Whilst the Market Supervision Bill transfers the market supervisory responsibility to ASIC, it does not contain any of the broader investigative powers outlined above.

It is possible these amendments will follow at a later time and we will continue to keep the ASIC Act 2001 and Telecommunications (Interception and Access) Act 1979 under review for any such amendments which will be communicated to clients through future updates.

Practical steps for compliance

Notwithstanding that the increased penalties have not been introduced by the government, it is timely to revisit the practical steps that can be taken to ensure compliance with the law when handling confidential or material capable of affecting the share price of a listed entity:

• Implementing a “need to know” principle to limit communication of price sensitive material.
• Implementing physical barriers to the distribution of information (ie IT systems and document management).
• Maintaining “insider lists” to keep a record of those who are in possession of confidential information on sensitive transactions.
• Requesting third party advisers to maintain up to date lists of people within their firm who have been given access to confidential information.
• Considering requiring personal confidentiality obligations for those in possession of confidential information, perhaps by individual transaction specific confidentiality agreements.
• Requesting staff in sensitive roles to disclose all security holdings in listed entities and maintain a register of these.
• Implementing processes to investigate leaks to the market of price sensitive material.
• Ensuring that when advisors are communicating views or opinions on listed entities, they are bona fide held and can be sufficiently justified, as opposed to being mere rumours with no rational basis.
• Training staff about recognising and verifying rumours, including establishing a process for verifying rumours with the company concerned.
• Retaining a record of attempts made to verify information received which could be classified as a rumour.
• Most importantly, in the event of being served with a Notice or warrant, do not discuss the matter in any way with investigators, and seek legal advice immediately.