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What Is Regulated Notes

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What are we regulating?
Regulating Securities and Markets: Evolution of the Current Framework



Due to the constant refinement of legislation in the area, the vast majority of relevant laws were enacted post-1998. However, securities and financial markets regulation (SFMR) has been around since 1901. There are two distinct strands to the development of SFMR in Australia o The first relates to substantive regulation(rules and restrictions applied to different parts/participants of/in the market).
? In this area key milestones included investor protection reforms, takeovers and securities industry laws and the regulation of the futures exchange o The second relates to constitutional arrangements for securities regulation and involves movement from a state-based system of regulation to a wholly national one
? This started with the enactment of uniform companies legislation by each state, the establishment of various bodies, the start of a co-operative scheme, the establishment of ASIC etc.

Early development of substantive regulation

* By 1901 Australian states had limited regulatory regimes around the formation/promotion of public companies and activities of share brokers - taken largely from English Law (for e.g. the Bubble Act which limited capital raising through securities issuing)

* By the middle of the 19th century, mandatory disclosure for new issues of securities for joint stock companies were in place carried forward into the first modern companies states and then adopted in Australian parliaments

* The booms and busts of the later 19th centuries saw important developments in securities legislation and also significant participation in markets - important ones included VIC's stricter regulation of mining companies (e.g. enhanced disclosure requirements) and other investor protection mechanisms such as prohibitions on misleading statements in prospectuses

* On Federation SFM and companies regulation remained a matter for the states, in part owing to Moorehead and over the next 50 years not much happened. WWII stunted the overall process (apart from VIC regulating the offer of non-corporate collective investments like unit trusts)

* The first major wave of reform was in the late 60s early 70s by which time AU capital markets developed significantly. The CLAC was charged with enquiring and reporting on the extent of protection afforded to the public - this culminated in them, the Eggleston Committee, releasing 7 key interim reports (the most enduring of which was their work on takeovers regulation

Securities industry regulation

* The minerals boom and bust of the late 60s and 70s was responded to in NSW by the regulation of stock exchanges and securities industries - other states followed suit - this included registration requirements for stock markets, of companies and their accounts. o The Securities Industry Act 1970 (NSW) provided for, inter alia, approval of stock exchanges by government, licensing for securities dealers and investment advisers, imposition of accounting/audit requirements for dealers, the creation of new market manipulation offences etc.
? However, approaches across states varied and this led to criticisms which in turn resulted in the adoption of a more uniform approach Takeovers regulation

* The Companies (Amendment) Act took the recommendations of the Eggleston committee and the regulation of takeover offers in line with the Eggleston Principles and strengthened the requirements for company accounts and audit etc. Futures industry regulation

* The formation of the SFR in 1972 and its great increases in Scope with the introduction of a gold future market, USD and US T-bond markets led to increased regulation such as the requirement of ministerial approval for futures exchange and more supervisory power on the Corporate Affairs Commission.

* In 1986, after the call for national regulation, a draft bill, the Futures Industry Act was enacted regulating the establishment of futures exchanges, clearing houses and futures associations and provided for a fidelity fund. It also required brokers, advisers and their representatives to be licensed, introduced rules of conduct of futures businesses, prohibited insider trading, market manipulation and front-running. The second wave of reform: FSI, CLERP and FSR

* Reform did not escalate until the late 1990s due in part to stagnation of the constitutional position Financial System Inquiry

* The FSI was required to report on the regulatory framework of the entire AU financial sector - it ended up making significant recommendation. It noted that current arrangements were inefficient, inconsistent and had significant regulatory gaps.

* Significantly, they recommended that a single market conduct and disclosure regulator for the financial sector should be established with a consistent and comprehensive disclosure regime and responsibility for regulation of advice/sales of retail financial products including licensing. o This led to the recommendation of a body with the combined functions of the then ASC and ISC (Insurance and Super Committee).

o These recommendations were acted upon with the establishment of ASIC and further the enactment of provisions concerning consumer protection and unconscionable conduct CLERP

* The establishment of CLERP in April 1997 was with the review of key areas of regulation of investment activity with the objective of consistent business regulation for a strong and vibrant economy.

* CLERP identified six key principles underlying its review which were to be applied to various areas identified for reform: o Market freedom o Investor protection o Information transparency o Cost effectiveness o Regulatory neutrality and flexibility o Business ethics and compliance

* This led to the release of a number of proposal papers and eventually the CLERP Act which commenced in 2000, substantially amending the existing law of fundraising by issue and sale, and takeovers (through the introduction of Ch 6D and repealing of the securities and defective prospectus provisions) aimed at increasing the efficiency and enhancing freedoms for fundraising (see 36t). Significant changes were also made to Takeovers regulation Financial Services reform

* The decision in SFE v ASX which held that share futures and options were outside the definition of 'futures contract'. The CASAC report examined the definitions and recommended a 'core regulatory approach' to all financial markets and instruments traded thereon, including securities and derivatives.

* The CLERP 6 proposal paper also put forward nine core proposals for discussion including o Uniform regulation of financial instruments by an integrated regulatory framework, o New licensing arrangements for entities operating a licensing market facilities, o Rules cover the conduct of financial intermediaries' business (e.g. risk disclosure, account keeping) o Consistent and comparable disclosure regime for all financial instruments o Market misconduct provisions on insider trading and market manipulation to be harmonised for all markets where financial instruments are traded o Institutional arrangements for administration of the new regime

* This was followed by a consultation which proposed a broad definition of 'financial product' and definitions around 'managing a financial risk'. It also proposed the new regulatory framework apply to all financial products
- retail or wholesale (to remove any restrictions on retail customers accessing wholesale markets)



These above changes were generally implemented by the FSR Bill with the object of promoting: confident and informed decision making by customers and facilitating efficiency, fairness, honesty and professionalism by those providing financial services, fair, orderly and transparent markets for financial products, and reduction of systemic risk (s 760A) Certain refinements followed around the area of financial products disclosure which was seen as costly and difficult

The thirdwave of reform: PostGFC

* The resilience of regulatory arrangements established during the second wave was tested during the GFC, which led to a range of legislative and regulatory responses at the domestic level intended to stabilise financial markets during the crisis and address proximate causes of the crisis itself (such as changes to rules relating to short-selling).

* Specific recommendations were made, following the substantial losses made to retail investors (clients of Opes Prime, Storm Financial etc.) including the explicit inclusion of a fiduciary duty for financial advisers operating under an AFSL

* Many of these were adopted by the government as part of its Future of Financial Advice (FoFA reforms) which make significant changes to the regulation of financial advice given to retail clients like banning various forms of commission-based, volume-based and asset-based remuneration arrangements, extending and reinforcing existing suitability requirements by introducing a statutory duty requiring financial advisers to take reasonable steps to act in client's best interests and etc.

* Two other significant developments occurred in RFSM: o Re-allocation of responsibility for regulating certain aspects of market participants' conduct from market operators to ASIC - e.g. the introduction of ASIC Market Integrity Rules iro particular markets, the wider ASIC Market Integrity Rules (competition in Exchange Markets) and the grant of a market license to Chi-X o Changes to laws relating to unconscionable conduct, consumer protection and unfair contracts in the financial sector

Other Financial Products




The key definition relevant to Ch6-6D of the CA (rel. fundraising, takeovers, information about ownership of listed entities, continuous disclosure) Is that of securities found in ss 92(3)-(4), 700 because it is fundamental in deciding whether or not a law applies IN Ch 7 (dealing with financial services, markets and mandatory disclosure for products other than securities) and Pt 2 Div 2 of the ASICA (dealing with unconscionable conduct and consumer protection in the financial sector) the key definition is that of financial products since this determines whether the conduct irt the instrument is regulated by that legislation The different definitions of financial products are in the CA Pt 7.1 Div 3 and ASICA s 12BAA o The definition is quite broad and includes securities o Further, when an arrangement that is a financial product is a component of a facility that also has other components - Ch 7 only applies irt the component that is a financial product (s 762B)

The functional definition

* Section 763A(1) provides that something is a financial product "if it is a facility through which, or through the acquisition of which, a person does one or more of the following: o Makes a financial investment; o Manages a financial risk; or o Makes non-cash payments"
? "facility" is defined as including intangible property, an (/term of an) arrangement(s) or a combination of the above o This definition is subject to s 763E which excludes from the definition arrangements that are financial products only incidentally (other than those expressly included in s 764A)

* In looking at the purpose/use of a facility to see whether it is within this definition, the use/purpose to which it is commonly put, rather than the use/purpose of the person using/acquiring it is relevant (s 763A(2))

* A financial product, once it has that character, doesn't lose it merely because it is on-sold and the person acquiring it wasn't making a financial investment or managing a financial risk (s 763A(3)) Managing a financial investment

* A person (investor) makes a financial investment if they give money or money's worth (a contribution) to another person and the other person uses that to generate a financial return or other benefit for the investor or either party intends that this will occur. o The investment is only caught by the definition of a financial product if the investor has no day-to-day control over the use of the contribution to generate this return. o The difference between this arrangement and that of an MIS is that for MIS there must be pooling or a common enterprise. Thus financial product is sort of a residual from MIS.


o Acquiring shares/debentures o Acquiring interests in an MIS o Superannuation trusts o Investment linked policy of life insurance o Depositing money with an DI o [But not]
? A person purchasing real property or bullion
? Investments involving the person taking active day-to-day control of the contribution

Managing a financial risk

* A person manages a financial risk if they manage the financial consequences to them of particular circumstances happening, or avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices or interest rates)

* [Examples]
o Taking out insurance o Hedging by acquiring futures o Currency swaps o [But not] Employing a security firm (for thefts)

* Though it is clear that this definition was intended to catch insurance in its various forms and derivatives used for hedging, the extent to which it goes beyond this is unclear. o Pre-paid service contracts and extended warranty arrangements could fall in (but this may also be excluded in the incidental products exemption; Barclay MIS v ASIC) o Concern over the possible breadth of the definition led to the express exclusion from the definition of surety bonds (reg 7.1.07) and loss limiting arrangements in goods leases like collision damage waivers (reg 7.1.07A)

* Certain structured investment and credit products may have elements of risk embedded in them - this raises the possibility that they may be subject to dual regulation with risk management parts subject to disclosure requirements in Pt 7.9 and the other parts subject to different ones (under the CCC or prospectus reqs. In Ch 6D) o International Litigation Partners v Chameleon Mining all members of the NSWCA found that a litigation funding agreement was within the scope of s 763C
? Giles JA held that by entering into the agreement, the respondent managed the financial consequences to it (e.g. adverse costs order) of litigation passing them, initially and perhaps forever, to the funder.

* This was a 'facility' within the definition of the Act

* It was the operation of the agreement rather than the parties' purpose in entering into it that was decisive


Hodgson JA took the view that "plainly the funding agreement was a facility through which the respondent managed financial risk (within s 763A(1)(b)) in that it managed the financial consequences to itself of certain things happening (namely adverse costs orders and loss of litigation, and possible also the incurring of its own costs through the pursuit of litigation"

Making noncash payments

* Ftpo Ch 7 a person makes non-cash payments if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins.

* [Examples]
o Making payments by means of a facility for direct debit of a deposit account; o Making payments by means of a facility for the use of cheques; o Making payments by means of a purchased payment facility (Payment Systems (Reg) Act) e.g. smart card o Making payments by means of travellers' cheques

* [Express Exclusion] Those non-cash payment arrangements involving the provision of credit by the supplier/TP aren't caught by s 763A because of the express exclusion of credit, including "an article known as a credit card or charge card" (s 765A(1)(h), reg 7.1.06) o Further exclusions are money orders issued by AU post, telegraphic transfers, intl. money transfers offered by banks and remittance dealers (s 765(1)(y), regs 7.1.07F-G)

* [The non-cash facility] The EM suggests that the technology through which the payment facility is offered isn't itself a non-cash payment facility o S 761E dictates who is the issuer of a financial product - it is the person who is responsible to the client or for the obligations owed under the terms of the product (s 761E(4))
? Thus for direct debit facilities it will be the issuer of the facility, for ATMs it would be the financial institution with which the account is being credited/debited through use of it

* [Express exclusion - facility]
o s 763D(2)(a)(i) excludes from the definition, a facility under which payment can be made only to one person (e.g. a retail gift voucher). (ii) also has scope for facilities for payment by a limited number of payers or to a limited number of payees to be exempted o s 763D(2)(b), reg 7.1.08 exclude from the definition of facility, a facility that is a letter of credit from a financial institution, a cheque drawn by a financial institution on itself or another financial institution (FI) or a guarantee from an FI o RG 185 and a number of Cos have further exemptions for licensing relief, low value facilities, loyalty schemes, gift facilities, road roll facilities and pre-paid mobile facilities

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