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

  • 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

  • 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 19^th 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 19^th 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.

  • 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.

  • This led to the recommendation of a body with the combined functions of the then ASC and ISC (Insurance and Super Committee).

  • 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:

  • Market freedom

  • Investor protection

  • Information transparency

  • Cost effectiveness

  • Regulatory neutrality and flexibility

  • 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...

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