In Brief - ASIC seeks timely outcomes to investigations
Negotiating an enforceable undertaking given by the person or company whose conduct is being investigated is one enforcement tool available to ASIC and is likely to be used more frequently across the broad range of entities regulated by ASIC.
ASIC adopting a new approach under new chairman
Under new chairman Greg Medcraft, who took the reins of the Australian Securities & Investments Commission (ASIC) in May 2011, timely outcomes to investigations are sought by the regulator.
ASIC is adopting a new approach to breaches of laws involved in its regulation of corporations, managed investment schemes, participants in the financial services industry and people engaged in credit activities under a number of Commonwealth laws.1
ASIC as regulator of securities and markets
ASIC is the securities and markets regulator, also regulating financial products and services in general, corporations, credit, auditors and insolvency practitioners2.
One of ASIC's three strategic priorities is ensuring fair and efficient financial markets in Australia. It splits this priority into three parts: Market Supervision, Market Competition and Corporate Governance.
ASIC is aiming to maximise market efficiency and opportunities for innovation, while mitigating risks to price formation and delivering the best outcome for investors3.
What ASIC considers in assessing potential misconduct
If potential misconduct falls within ASIC's regulatory responsibility, in assessing the matter it considers the following questions:
- What is the extent of harm or loss?
- What are benefits of pursuing the misconduct, relative to the expense?
- How do other issues, like the type and seriousness of the misconduct and the evidence available, affect the matter?
- Is there an alternative course of action?4
What ASIC considers in assessing the appropriate remedy
If ASIC holds a formal investigation and finds suspected misconduct, it then proceeds to assess the appropriate remedy having regard to the following factors:
- What is the nature and seriousness of the misconduct?
- What was the post-misconduct behaviour of the offender?
- What is the strength of the case?
- What impact will the remedy have on the person or entity, the regulated population and the public?
- Are there any mitigating factors?5
Enforcement tools available to ASIC
ASIC has a variety of enforcement tools available to it. What it decides to pursue in that regard depends on the seriousness and consequences of the misconduct. ASIC states that it will pursue the enforcement remedies best suited to the circumstances of the case and what it wants and is able to achieve.6
ASIC states that its enforcement action is designed to punish wrongdoers, protect investors, preserve assets, correct disclosures or compensate people.
For regulatory transparency and effective deterrence, unless the law requires otherwise, ASIC will always assert the right to make an enforcement outcome public. It states it will not agree to keep enforcement outcomes secret.7
As ASIC seeks to avoid protracted legal battles with well resourced companies, it appears to be making more use of negotiated alternatives, including the option of accepting an enforceable undertaking either as an alternative to or complementary to other remedies it seeks.
When is an enforceable undertaking appropriate?
ASIC may accept a written undertaking given by:
- a person in connection with a matter in relation to which ASIC has a functional power under the Australian Securities and Investments Commission Act 2001 (Cth) - section 93AA or
- the responsible entity of a registered scheme in connection with the matter concerning the registered scheme and in relation to which ASIC has a power or function within the ASIC Act and the Corporations Act 2001 (Cth) - section 93A of the ASIC Act.
ASIC cannot require a person to enter into an enforceable undertaking. The giving of such an undertaking is a negotiated position.
ASIC first needs to have commenced an investigation into conduct it believes gives rise to a suspected breach of relevant legislation before it will consider an enforceable undertaking.
Whilst the undertaking is negotiated, ASIC considers a number of factors as set out at paragraph 26 in Regulatory Guide 100 (RG100) before deciding whether the enforceable undertaking is appropriate in the circumstances of the case.
Factors considered include the co-operation of the person being investigated and whether the undertaking achieves an effective outcome for those who have been adversely affected by the conduct or compliance failure.
Acceptable and unacceptable terms of an enforceable undertaking
Acceptable and standard terms for an enforceable undertaking are set out in RG100 which also sets out unacceptable terms.
For example, the undertaking must set out ASIC's views; give a commitment to stop the particular conduct or alleged breach that concerns ASIC and to not recommence that conduct; and must not deny liability (although ASIC appears to accept in the undertaking that nothing contained within it constitutes an admission by the person or corporation giving the undertaking).
Transparency and disclosure of enforcement actions
ASIC is required under the ASIC Act when dealing with the undertaking given by the responsible entity of a registered scheme to keep a record of the full text of the undertaking and make it available to a person who asks for a copy of it (subject to certain aspects of the information which may be redacted such as a person's address).
ASIC's publication policy highlights that transparency and disclosure are important factors in market integrity and consumer confidence. Hence as a general principle, ASIC believes there is a significant public interest in ensuring that consumers, industry and the broader community are aware of and informed about enforcement action it takes.
For that reason, ASIC will not accept enforceable undertakings accepted under either sections 93AA or 93A of the ASIC Act, in confidence. It will not enter into an enforceable undertaking on the basis that the terms of the undertaking or parties will be confidential.8
For this reason, enforceable undertakings are made public through ASIC's company database and can be downloaded from ASIC's website.
Non-compliance with an enforceable undertaking
If ASIC considers that the person or company who gave the undertaking has breached any of its terms, ASIC can apply to the Court for orders including:
- an order directing compliance with the term of the undertaking
- an order directing the person or company to pay to the Commonwealth an amount up to the amount of any financial benefit they have obtained directly or indirectly and that is reasonably attributable to the breach
- an order that the Court considers appropriate directing a person or company to compensate any other person who has suffered loss or damage as a result of the breach
- any other order that the Court considers appropriate9
Recent examples of enforceable undertakings
As at 5 April 2012, the ASIC Register listed nine enforceable undertakings accepted by ASIC in 2012. This compares to 26 undertakings in 2011, 7 in 2010 and 11 in 2009.
The five most recent enforceable undertakings accepted by ASIC and published on its website to 5 April 2012 are undertakings from:
- Leighton Holdings Limited arising from an investigation following Leighton's downgrade of profit forecast for 2010/2011 issued on 11 April 2011, revising the guidance given in previous financial reporting to the market on 14 February 2011. This undertaking, as widely reported in the financial press, involved a procedure for Leighton to engage an external consultant to review and recommend amendments to policies and procedures for dealing with Leighton's continuous disclosure obligations under ASX Listing Rule 3.1 and Section 674 of the Corporations Act, to produce two implementation reports and to carry out annual reviews for a period of three years from the date of the enforceable undertaking.
- Commonwealth Bank of Australia (CBA) in relation to electronic messages it transmitted to its credit card customers to obtain consents from those customers to receive credit limit increase invitations for the purposes of new provisions of the National Consumer Credit Protection Act 2009 which were to come into effect on 1 July 2012. ASIC's view was that the messages were misleading. CBA undertook not to rely in any way on credit limit increase invitation consents it obtained from customers who opted in, in response to the December 2011 electronic messages and to send a notice to each recipient to the electronic messages in a form annexed to the undertaking.
- Two individuals - both of whom were authorised representatives of Australian Financial Services Licensees and who in ASIC's view, each contravened the provisions of the Corporations Act by their failures when advising clients. One undertook not to provide any financial services in the future and to take other actions in relation to the notification to clients and transfer of records. The other agreed not to provide any financial service on his own behalf or on behalf of any other person for a period of five years, to complete a continuing professional education programme, to work under supervision and to be the subject of reviews when the five year cessation period completed.
- An auditor in relation to breaches of sections 324DA and 324DB of the Corporations Act by playing a significant role in the auditing of a listed company for more than five successive financial years. The auditor undertook not to practise as an auditor for a company or a registered scheme under the Corporations Act.
ASIC acceptance of enforceable undertaking not a binding precedent
Enforceable undertakings are just one of many remedies available to ASIC for breaches of the legislation it is responsible for enforcing.
ASIC states it will not accept an enforceable undertaking in cases of deliberate misconduct, fraud or conduct involving a high level of recklessness unless it best serves an urgent protective purpose.10
But note - ASIC warns that its acceptance of an enforceable undertaking in a particular set of circumstances should not be regarded as a binding precedent for future action.Footnotes
1 Financial Review, 19 March 2012 and ASIC Information Sheet 151 (IS151), published February 2012.
2 Speech by Greg Medcraft, ASIC Chairman, 29 March 2012 - the 30th AOSEF General Assembly and Working Committee Meeting.
3 Ibid .
4 IS151 page 2.
6 IS151page 4.
9 Those powers are conferred by subsections 4 of each of sections 93AA and 93A of the ASIC Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.