22 November 2002
CLERP 9 CORPORATE DISCLOSURE STRENGTHENING THE FINANCIAL REPORTING FRAMEWORK Australian Institute of Company Directors
Australian Institute of Company Directors (AICD) is the peak organisation representing the interests of company directors in Australia. Current membership is over 16,600, drawn from large and small organisations, across all industries, and from private, public and the not-for-profit sectors. Membership is on an individual, as opposed to a corporate basis.
AICD is a federation of seven State divisions, each of which is represented on a National Council. Overall governance of the AICD is in the hands of its National Council which is comprised of the seven division Presidents, plus a National President, two National Vice-Presidents and a National Treasurer. AICD has several national policy committees, focusing on issues such as law, accounting and finance, sustainability, taxation and economics, superannuation, and national education, along with task forces to handle matters such as corporate governance.
The key functions of AICD are:
- to promote excellence in director's performance through education and professional development
- to initiate research and formulate policies that facilitate improved director performance
- to represent the views and interests of directors to Government, regulatory bodies and the community
- to provide timely, relevant and targeted information and support services to members and, where appropriate, Government and the community
- to maintain a member's code of professional and ethical conduct
- to uphold the free enterprise system
- to develop strategic alliances with relevant organisations domestically and internationally to further the objectives of the AICD.
AICD welcomes the opportunity to make a submission on "CLERP 9 Corporate Disclosure – Strengthening the Financial Reporting Framework". AICD notes that Australia's steps towards international harmonisation for accounting and auditing standards will impose significant change on Australian companies and auditing firms, making it important that additional CLERP 9 reform is integrated with the harmonisation process.
As detailed in previous submissions, AICD supports a co-regulatory model, where there is a role for both government legislation/regulation and self-regulation by industry parties. For the purposes of this submission, key self-regulatory components include:
- The Joint Code of Professional Conduct of the ICAA and the CPAA, including the Professional Statement F1 on Professional Independence ("F1");
- ASX Listing Rules;
- ASX Corporate Governance Council;
- Disciplinary proceedings conducted by professional bodies.
Self-regulation provides the following benefits:
- Flexibility (which is particularly important in the current economic environment);
- Involvement of key parties and their resultant "ownership" of the outcomes;
- Quick responses (compared with a legislative approach) to new or emerging needs and the correction of anomalies;
- Ready harmonisation with international standards.
Nevertheless, there is also a need for a regulatory dimension, particularly where an objective cannot be effectively achieved via self-regulation. Legislation is difficult to alter quickly. When written at too detailed a level, legislation can also lead to practices that are inconsistent with the policy underpinning it. Therefore, AICD believes that self-regulation should be supported, except where it is demonstrably inadequate.
Section 1 of the submission contains a summary of our views on some key issues. In section 2, we have provided more detailed comments on individual recommendations.
Section 1 General Comments
AICD supports the CLERP 9 initiative in principle. However, we consider that there are a number of matters that require further consideration including the following:
Section 2 Specific Comment on Reform Proposals
- Oversight of AuASB - AICD is concerned that placing the AuASB under the FRC could put at risk the source of success underlying Australia's auditing standards. The case for this change had not been made out, and AICD would prefer retention of the status quo. If "appearances" of AuASB independence are to be strengthened, AICD believes that the specific proposals need much more careful and thorough justification and development.
- Legal backing of Auditing Standards - AICD considers this proposal unnecessary and potentially counterproductive.
- Joint & several liability for auditors - AICD agrees that auditors should not be jointly and severally liable for negligence. Any proportionate and capped liability system should be applied across participants and across the States and Commonwealth.
- True and fair view - AICD supports the joint application of accounting standards compliance and the true and fair view. AICD supports continuation of the principle that the obligation to conform with accounting standards be combined with an obligation for the board to also state whether they consider the result represents a true and fair view. AICD is concerned that relegating the substance of the board's views to a note to the financial statements, whilst requiring that directors sign off on those accounts as being true and fair, could effectively mislead shareholders as to the true position of the board.
- Civil penalties - AICD agrees that the maximum civil penalty for a contravention of the continuous disclosure provisions by a body corporate should be increased and that changes in the range of penalties should be made to accord with international standards.
- ASIC power to impose financial penalties - AICD strongly opposes the proposal that ASIC be given power to impose financial penalties and issue infringement notices in relation to what it considers to be contraventions of the continuous disclosure regime. The basis for introducing this proposal has not been made out at all in CLERP 9 or in documentation that has been published by ASIC. There are many alternative ways in which ASIC can exercise its powers and should exercise its powers in pursuing breaches of the Corporations Act, including continuous disclosure provisions.
- "100 Member" rule - In including recommendations pertaining to shareholders' meetings in CLERP 9, it is disappointing that "100 Member" rule has not been addressed. The rule has been used at times by special interest groups, comprising a tiny minority of shareholders, to force companies to call meetings to consider issues that do not attract any widespread interest amongst the body of shareholders. AICD and other industry groups continue to support the adoption of a 5% rule, one which is consistent with the approach in international capital markets.
- CFO/CEO sign off - AICD believes that it would have been appropriate for CLERP 9 to include this issue. AICD believes the CFO/ CEO should be required to provide a written report to the board on specific issues in accordance with the Best Practice Notes of the ASX Corporate Governance Council or other prescribed professional body.
Expanded Financial Reporting Council
1. The Government will expand the responsibilities of the Financial Reporting Council (FRC), which currently oversees the accounting standard setting process, to oversee auditor independence requirements in Australia. The FRC will:
- Oversee auditing standard setting arrangements. This will be achieved by reconstituting the existing Auditing and Assurance Standards Board (AuASB) with a Government appointed Chairman under the auspices of the FRC, similar to the Australian Accounting Standards Board (AASB). Auditing standards will have the force of law on the same basis as AASB Standards.
- Advise the accounting professional bodies on issues of auditor independence.
- Monitor and report on the nature and adequacy of the systems and processes used by audit firms to deal with issues of auditor independence.
- Monitor and report on the response of companies in complying with audit-related disclosure requirements.
- Advise on continuing steps to enhance auditor independence.
- Promote and advise on the adequacy of the teaching of professional and business ethics by the professional accounting bodies and tertiary institutions.
- Monitor and assess the adequacy of the disciplinary procedures of the accounting bodies.
- Maintain responsibility for oversight of the accounting standard setting process.
AICD supports the establishment of a supervisory body to implement requirements of auditor independence, and accepts that this could be met by expanding the role of the Financial Reporting Council (FRC). However, the skills and experience required for such new responsibilities are different in many respects from those required of existing FRC members. The proposal would also involve a significant increase in workload for FRC, along with the need for increased staff support. The AICD also considers that it is important that such oversight body be separate from Treasury and should concentrate on accounting and (should the government so decide) auditing issues alone. It is inappropriate for such body to oversee other corporate governance issues. AICD believes that these other issues should be dealt with by the ASX Corporate Governance Council or similar body as endorsed in CLERP 9. In any case a divide should exist between the body setting the standards and the regulator, and such regulation should allow application to extend beyond listed companies.
For various reasons, including to an extent the aforementioned, AICD would also prefer the establishment of a separate oversight board for auditing, perhaps with some cross-membership with FRC. The combination of these two roles could justify an independent auditing oversight board, with members nominated by the FRC and accounting institutions.
With respect to the AuASB, there has been no significant criticism of Australian Auditing Standards or of the performance of the AuASB which would suggest oversight by FRC was necessary to remedy performance deficits. The AuASB has for some years been aggressively pursuing harmonisation and convergence with international audit standards, as they have emerged. Current AuASB standards are therefore already effectively harmonised with those international standards that have been published; there is no significant backlog of work in this area. In such circumstances, the case for change should be proven, and such a case has certainly not been demonstrated. However, the AICD agrees that "appearances" could be improved if there were independent oversight of the AuASB. For similar reasons, AICD also accepts that the appearance of independence will be buttressed if the AuASB has a Chairman appointed independently of the professional associations. However, appointment by Government may damage perceived independence.
AICD has concerns that oversight of the AuASB could unintentionally jeopardize the processes which have underpinned AuASB's success to date. These concerns include:
- A perceived danger that the AASB and the AuASB could be competing for funds controlled by the FRC and, if the total of such funds were inadequate, the AuASB role could be curtailed (it could be argued that its very success makes lesser support justified). Certainly this is particularly pertinent in relation to the AASB facing the challenge of meeting the 2005 deadline for harmonisation with international accounting standards. If the AuASB's role were so curtailed, its effectiveness (eg. in influencing the development of international standards) could be greatly reduced, and such influence cannot be quickly rebuilt by simply restoring previously reduced support.
- A danger that the current sense of "ownership" by the profession of the work of the AuASB would be diminished, and that this would reduce both the standard of participant available on the AuASB and the commitment of the associated auditing firms. A major ingredient of the AuASB's success to date has been the magnification of resources available through senior practitioners involving other members of their firms in issues under discussion. Another has been their willingness to share knowledge, which could equally have been retained as a source of proprietary advantage. These are subtle but powerful factors, but their emergence could easily result in a reduction in its AuASB performance.
- This concern would be magnified further if suggestions that a majority of the AuASB's board members should be non-practitioners were implemented. This is illustrated by the British experience, where this principle resulted in the formation of a subsidiary committee of practitioners – an extra layer of structure, and a downgrading of the level where the real work of standard setting is done.
In summary, AICD believes that this proposal needs more thought, and that it is critical that the AuASB have independent financial support and operational independence, subject to broad policy guidance such as the support for adoption of international standards.
AICD believes that giving auditing standards the same force of law as accounting standards is unnecessary, and potentially counterproductive. Accounting standards are already enforceable by the CALDB, whose decisions have the force of law (Corporations Act). Further, financial statements must be prepared on the basis of accounting standards which do have the force of law, and the audit must check that this is so. In any event, the purpose of auditing standards are qualitatively different from those of accounting standards, which are necessarily highly prescriptive, whereas auditing standards reflect the more judgemental nature of much of the auditing function.
In addition, formal adoption by law of such standards could have unintended consequences. Currently AuASB standards extend well beyond the application of accounting standards, and give guidance on a whole range of other matters. They are not written with the view that they will be legally enforceable. To do so could result in inhibitions which would reduce the scope and utility of the guidance they offer. The approach could actually hinder the proposal (which AICD supports) to adopt international standards.
Quality of audit
2. The Government will amend the Corporations Act (the law) to include a General Statement of Principle requiring the independence of auditors.
This is a seductive proposal in principle, but its effectiveness will depend on the wording and scope of such an amendment. It also relies on the presumption that it is intended to buttress the principle-based approach through the auditing and ethical standards rather than attempting to prescribe measures of an auditor's independence within the Corporations Act. In this regard, AICD supports recommendation 9 of the Joint Committee of Public Accounts and Audit in "Report 391 Review of Independent Auditing by Registered Company Auditors into the Independence of Auditors". AICD considers that it is more appropriate for professional accounting bodies to determine the measures for independence within their professional code of conduct, consistent with relevant international standards (see below). This provision would also allow for greater flexibility given Australia's steps to harmonise with international standards.
AICD disagrees with giving ASIC powers to issue practice notes or guidelines on this issue. This could result in confusion as to the applicability of F1, and the profession's disengagement from the processes of updating the statement. There is also the question of maintaining consistency with the international standard on which F1 is based. However, AICD agrees that ASIC should contribute to the profession's consultative process of updating F1.
3. The Government will amend the law to require the auditor to make an annual declaration that they have maintained their independence in accordance with the Corporations Act and the rules of the professional accounting bodies.
AICD supports this reform as a measure which may provide management and the market with additional confidence in the integrity of information contained within financial statements.
4. The Government will amend the law to strengthen restrictions on employment relationships between an auditor and the audit client.
- This will include a mandatory period of two years following resignation from an audit firm before a former partner who was directly involved in the audit of a client can become a director of the client or take a position with the client involving responsibility for fundamental management decisions.
Agreed in principle. However, AICD believes that provided the details of candidates including such past relationships with the auditor are fully disclosed to shareholders and shareholders are informed of possible conflicts, shareholders should be able to appoint such candidates without a two year delay if they consider such appointments are in the best interests of the company.
5. The Government will amend the law to impose new restrictions on financial relationships. This will cover investments in audit clients and loans between an audit client, and the auditor or his immediate family.
AICD agrees in principle with this proposal. However, the nature of this proposal is captured within the existing F1 adopted in May 2002. Therefore, similarly to our response to recommendation 2 of this policy paper, AICD recommends that this purpose would be better achieved by a statement within the Corporations Law that refers to measures prescribed within related professional codes of conduct.
The AICD supports the recommendations of the Ramsay Report (Chapter 5 paragraphs 5.35 & 5.59) that there be protection for inadvertent breeches of the independence rules concerning employee or financial relationships.
6. The Government supports the immediate application of Professional Statement F1 on Professional Independence, which forms part of the Joint Code of Professional Conduct of the ICAA and CPAA.
- Statement F1 is based on the independence standard adopted by the International Federation of Accountants. It requires auditors to identify and evaluate threats to independence and apply safeguards to reduce any threats to an acceptable level.
- Where the provision of non-audit services to an audit client poses a threat that cannot be reduced to an acceptable level, statement F1 prohibits the provision of that service.
Agreed, subject only to temporary practical constraints flowing from current agreements.
7. The Government will implement a series of measures to deal with non-audit services. It will:
- Amend the law to require mandatory disclosure in the annual report of fees paid for the categories of non-audit services provided.
AICD fully supports full disclosure and transparency as corporate governance best practice. The full disclosure in the company's annual report of the nature, cost, and reasons why non-audit work is performed by the audit firm engaged by the company is welcomed by AICD. AICD questions, however, whether this needs to be dealt with by changes to Corporations Law. The same outcome could be achieved by a change to Australian Accounting Standard AASB 1034 "Financial Report Presentation and Disclosures".
- Amend the law to require a statement in the annual report of whether the audit committee is satisfied the provision of non-audit services is compatible with auditor independence. This disclosure would include an explanation as to why the following non-audit services referred to in Professional Statement F1, if contracted, do not compromise auditor independence:
: preparing accounting records and financial statements of the audit client;
: valuation services;
: internal audit services;
: IT systems services;
: temporary staff assignments;
: litigation support services;
: legal services;
: recruitment of senior management for the audit client; and
: corporate finance and similar activities.
In relation to the non-audit services listed within this recommendation, AICD comments generally that the definitions in current form are too broad and require further refinement (eg "corporate finance and similar activities").
AICD agrees in principle with the statement in the annual report. However, AICD notes that in CLERP 9, audit committees are not mandated other than for the top 500 listed companies. AICD therefore recommends that language such as "the Board (or its Audit Committee) as appropriate" be used.
8. It will be mandatory for the top 500 listed companies (that is those that compose the All Ordinaries Index) to have audit committees. The ASX has announced it will amend its rules to achieve this.
- The Government supports the role of the ASX Corporate Governance Council in developing best practice standards for audit committees.
Agreed. Within the AICD Audit Committee Best Practice Guide published in 2000, AICD recognised audit committees as providing a key role in corporate governance best practice. AICD supports the concept of bodies like the ASX Corporate Governance Council developing best practice standards for audit committees. Such matters should not be enshrined in the Corporations Act.
Appointment and removal of auditors
9. The Government will make audit partner rotation compulsory after 5 years.
- The new requirement will apply to the lead engagement partner and the review partner. To maintain continuity of knowledge, the appointment of these partners could be staggered.
Agreed in principle. AICD is pleased that the proposal to rotate audit firms
has not been pursued, given the sophisticated nature of the business of some audit clients and the limited number of audit firms capable of handling their work. AICD believes that a 7 year rotation (which is internationally accepted) would be preferable given the size of Australia's marketplace, costs to companies arising from more frequent compulsory rotation, the lesser ability of smaller auditing firms to satisfy the requirement. AICD notes that companies requiring SEC registration will have to conform with 5 year rotation, but that both 5 and 7 year rotation is consistent with F1. Wording such as "not more than 7 years" would allow each of the above needs to be met. AICD also strongly recommends that should a rotation period be implemented, that smaller firms are given an opportunity to apply for relief from the related regulatory body on a case-by-case basis.
Attendance of auditor at AGM
10. The Government will amend the law to require an auditor to attend the AGM of a listed company at which the audit report is tabled and to answer reasonable questions about the audit.
The Government will ensure shareholders are able to submit questions by e-mail to the listed company and that the questions will be posted on the company website.
AICD agrees that it is appropriate to amend the Corporations Act to specifically require an auditor to attend the AGM of listed companies to answer appropriate questions about the audit. However, AICD does not agree with the recommendation requiring the auditor to answer all "reasonable questions about the audit". AICD believes that questions should be limited to "the conduct of the audit and the preparation and content of the auditor's report," as currently specified by section 250Tof the Corporations Act.
AICD also supports the proposal to amend the Corporations Act to ensure shareholders are able to submit questions by email and that the questions are posted on the company website (adopting Ramsay Report recommendations as per paragraph 6.127).
Qualifications for registration as a company auditor
11. Accountants seeking registration as company auditors will be required to meet agreed competency standards, to undertake to abide by an accepted code of professional ethics, and to complete a specialist auditing course prior to registration.
Agreed in principle. However AICD has concerns regarding the manner of establishment and administration of such code of conduct. In particular, AICD believes that the quality of the standards required for an auditor to become registered should be upheld.
12. The Government will amend the law to allow auditors to incorporate.
AICD agrees that auditors should not be jointly and severally liable for the failure of other parties. We support the concept that defendants in actions for negligence causing property damage or economic loss should only be liable to the extent of their proportionate share of the defendant's degree of fault. We note that the support of the States is needed to introduce a scheme of proportionate liability and would gladly support the Government in its endeavours to obtain the agreement of the States.
We also note the work being done in the area of professional liability by the Senate Economics References Committee which is examining whether the professions should be given a national system of capped liability. We support the development of a solution to this problem that ensures that high professional standards are promoted but that professional indemnity insurance is always available to satisfy claims against professionals up to a reasonable ceiling. New South Wales and Western Australia have found a well-balanced legislative solution in the form of Professional Standards Acts. We support legislation by which professional associations commit to compulsory indemnity insurance, risk management programs and complaints and discipline procedures, in return for limitations on their liability. Liability should be limited to amounts that cover virtually all consumer compensation claims but avoid extraordinary payouts by the provider.
To be fully effective, such legislation needs to be enacted in every State and Territory. Commonwealth legislation also needs to be amended particularly to ensure that matters of error in professional judgement, arrived at in good faith, are not treated as misleading and deceptive conduct under the Trade Practices Act.
13. The Government will seek the agreement of the States to introduce proportionate liability.
- The Government believes that the market for audit services will be improved if the arbitrary consequences of the present rules relating to joint and several liability in relation to economic loss and property damage are reformed.
AICD considers that this concept requires further development. AICD's concerns are twofold. Firstly, AICD believes that the concept of proportionate liability and any limits attached to such a concept should be applied across participants, including the board and senior management, as well as across the Commonwealth and the States. Should this not occur, AICD supports the Government concerns stated within CLERP 9 that "To introduce special rules to protect or benefit one group would give rise to the likelihood of unfair, inconsistent and arbitrary results for others -whether as co-defendants or plaintiffs".
14. Australia will adopt accounting standards issued by the International Accounting Standards Board (IASB) for reporting entities under the law for accounting periods beginning on or after 1 January 2005, in line with the European timetable.
- The FRC and the AASB will consult stakeholders on the measures that they regard as necessary between now and 2005 to ensure a smooth transition to IASB standards.
Agreed, provided such adoption does not conflict with Australian's legal and regulatory environment. The adoption of the international standards needs to be properly examined (including the potential costs to companies) and implemented in an orderly manner, with a minimal detrimental impact to Australian companies and the broader community, and integrated with other changes including those arising out of other elements of CLERP 9. However, AICD reserves its full opinion on the matter until the release of the related IASB exposure drafts and subsequent standards. AICD is also concerned that blanket approval of standards yet to be written could damage Australia's negotiating position in seeking provisions in standards, which meet our particular conditions, and suggests that conditions be attached to this policy.
15. The IASB standard requiring expensing of share options will have the force of law on adoption by the AASB, expected to be in the second half of 2003.
As noted above, AICD strongly supports harmonisation with IASB standards in principle, but cannot approve individual standards sight unseen. AICD notes that the IASB ED 2 and parallel AASB exposure draft ED108 have only just been released for comment. AICD understands that these ED's support the "grant date" as the date for initial valuation of the options in a company's financial with an adjustment at the "vesting date". It is also important that the Government amend income tax laws to permit a tax deduction for such an expense. AICD will explore this and other details of the ED, and its possible interaction with existing legislation, before reaching a definitive view.
16. The legal requirement that financial statements comply with accounting standards and that the financial statements and notes together present a true and fair view of an entity's financial position and performance will be maintained.
- If any deficiencies in accounting standards have a general, unintended result that compliance with the standard would not result in a true and fair view, the appropriate response would be reform of the standard.
AICD considers that it is impossible to eliminate the potential for any set of accounting standards to occasionally yield a result which a board honestly believes is misleading. Accordingly, AICD supports continuation of the principle that the obligation to conform with accounting standards be combined with an obligation for the board to also state whether they consider the result represents a true and fair view. AICD does not seek resurrection of the "true and fair over-ride" which would allow boards to avoid publishing financial statements, which conform to accounting standards.
However, AICD is concerned that relegating the substance of the board's views to a note to the financial statements, whilst requiring that directors sign off on those accounts as being true and fair, could effectively mislead shareholders as to the true position of the board. The pragmatic fact is that few shareholders read the notes, and most published analysis will be grounded in the formal accounts, ignoring the notes. Accordingly, AICD believes that in order for information to be properly disclosed in the financial statements, the existence of any such view in the notes should be highlighted in the accounts themselves and also specifically referred to in either the Directors Statement or Chairman's Address.
AICD notes that Part 9.5 of the Corporations Act provides a potential "safe harbour" where, having regard to all the circumstances, a board has (and its component directors have) acted honestly in presenting the financial statements. Similar provisions should be included in the Trade Practices Act and other appropriate legislation in relation to the publishing of financial statements. Whether or not these protections are adequate, they do not in any event address the concern mentioned above.
AICD also agrees that, if compliance with accounting standards would not result in a true and fair view, that standard should be reformed. However, this does nothing to relieve a board facing the above dilemma, as it must publish its accounts well before any resultant reform could be devised and enacted.
17. There is a general duty on financial services licensees to ensure that financial services are provided 'efficiently, honestly and fairly'. Licensees should disclose any financial interest that they or a related party have in the subject of their advice or recommendation.
AICD agrees in principle.
18. The Australian Securities and Investments Commission (ASIC) will be asked to provide guidance by policy statement on the level and manner of disclosure required under this general duty, following consultations with relevant stakeholders.
AICD agrees in principle, but some form of best practice guidance, perhaps from the Securities Institute of Australia, would be more desirable.
AICD has prepared a detailed discussion paper on various issues regarding continuous disclosure, which is an annexure to this submission.
19. The Government will maintain and enhance the framework of continuous disclosure.
AICD agrees that the existing continuous disclosure regime should be maintained and where shortcomings are identified, the framework enhanced. As described in more detail below, AICD does not agree with some of the proposals put forward as to how the framework can be enhanced. AICD considers that some of the proposals, particularly the proposed infringement notice procedure, are a backward step.
20. Both ASIC and ASX will continue to have the capacity to enforce the continuous disclosure provisions that apply to listed entities.
AICD agrees that both the ASIC and ASX should each have the capacity to enforce continuous disclosure provisions that apply to listed entities. While it is necessary for ASIC to have enforcement responsibilities, AICD also believes it is just as important that the ASX (or the other relevant market operators) maintain their role of monitoring and enforcing compliance with the Listing Rules. As the proposal indicates, the market operators have frontline responsibility for monitoring and enforcing compliance with these Listing Rules and the AICD considers this is appropriate.
21. The maximum civil penalty for a contravention of the continuous disclosure provisions by a body corporate will be increased from $200,000 to $1 million. The maximum penalty for bodies corporate in relation to contraventions of other financial services civil penalty provisions (relating to market manipulation and insider trading) will also be increased to $1 million.
AICD agrees that the maximum civil penalty for a contravention of the continuous disclosure provisions by a body corporate should be increased and that changes in the range of penalties should be made to accord with international standards. The figure of $1 million for contraventions generally, and in particular financial services civil penalty provisions is appropriate, provided this figure is consistent with international standards. The AICD also agrees that the penalty provision should be under periodic review.
22. ASIC will be given the power to impose financial penalties and issue infringement notices in relation to contraventions of the continuous disclosure regime.
AICD strongly opposes this proposal. The basis for introducing this proposal has not been made out at all in CLERP 9 or in other documentation that has been published by ASIC. There are many alternative ways in which ASIC can exercise its powers and should exercise its powers in pursuing breaches of the Corporations Act, including the continuous disclosure provisions. Furthermore, the approach is somewhat premature given that the Australian Law Reform Commission is about to issue its report on this and related issues.
The use of infringement notices may be appropriate in relation to matters such as failure to provide annual reports and other minor breaches of the legislation. However, no case has been made out for the use of these notices in relation to continuous disclosure.
The CLERP 9 paper suggests that giving ASIC the power to issue infringement notices for breaches of the continuous disclosure regime would allow it to enforce the law more effectively. However, as noted earlier, unless ASIC produces evidence to suggest that its current enforcement tools are inadequate, this power should not be introduced. ASIC already has the ability to seek an injunction against a party who it suspects is breaching the continuous disclosure provisions. ASIC is not required to give an undertaking as to damages when seeking an injunction and the courts are very flexible in their use of injunctions, especially when dealing with issues relating to disclosure. Moreover, ASIC should use court enforceable undertakings from parties more effectively in relation to continuous disclosure breaches. An increased use of these undertakings would allow parties who did not wish to fight proceedings in court to negotiate with ASIC by giving enforceable undertakings and would also relieve ASIC of the necessity of proving its case in court. When ASIC has been able to produce an appropriate set of facts to take to court it has been able to achieve speedy and effective results as in the recent prosecution of directors of HIH.
As currently drafted, the use of the infringement notices is likely only to be challenged by larger companies. The cost and publicity involved in legal proceedings is likely to make it commercially impracticable for many entities, in particular smaller companies, to challenge the imposition of an infringement notice. In addition, there is an incentive for entities not to challenge an infringement notice given that the financial penalty may be substantially less than the maximum financial penalty that could be sought through legal proceedings. Furthermore, payment of the fine would not amount to an admission of liability. As a result, many entities may elect to pay the fine instead of challenging it and the exercise of this substantial power by ASIC will go unchecked.
The exercise of this power by ASIC may raise constitutional issues. While it is likely that power will be drafted in such a way as to reduce the possibility of a constitutional challenge, larger corporations will not be shy in using a challenge to the courts as a basis for testing ASIC's power. The chance that a court may set aside these provisions and other aspects of the legislation could result in another administrative nightmare for Australian governments as occurred after Re Wakin.
23. In addition to its power to seek civil penalties in relation to contraventions of the continuous disclosure regime by disclosing entities, ASIC will be empowered to seek such a penalty against any other person involved in a contravention.
AICD agrees in principle with this proposal subject to a requirement that ASIC must separately prove its case in court against the person said to be involved in the contravention. AICD also considers that the liability of persons involved in the contravention should be subject to the discretionary relief provided by section 1317S of the Corporations Act.
24. The Government will amend the civil recovery provisions relating to contraventions of the continuous disclosure provisions of the law to clarify that a person may seek compensation regardless of whether ASIC has sought a declaration of contravention. It will also allow persons to recover loss or damages from either the relevant entity or any other person involved in a contravention.
AICD agrees in principle with the proposal. However, the AICD is concerned that the discretionary relief provided by section 1317S of the Corporations Act would not provide adequate protection to non-executive directors (NEDs). AICD considers that there should be a specific defence for NEDs who honestly and reasonably rely on the expert advice or information provided by others in dealing with the continuous disclosure provisions.
25. All investors should have equal access to materially price sensitive information disclosed by listed entities.
For the continuous disclosure regime to operate effectively it is necessary that access to material price sensitive information be given on an equal basis. AICD favours the proposal that market operators be required to make price sensitive information immediately available to all investors (without a 20-minute delay) rather than the more frequent use of trading halts.
26. Market operators will be encouraged to ensure that they provide listed entities with education and guidance to promote compliance with the continuous disclosure provisions of their respective listing rules.
AICD encourages this approach and considers that in the area of continuous disclosure the ASX can play an important role in providing clear guidance, by way of guidance notes and education in relation to the practical application of the regime.
27. Market operators should require listed entities to respond to externally generated speculation in circumstances where the operator determines that this is having a significant impact on the market for their securities.
AICD strongly disagrees that the ASX should have an enhanced power such as that proposed in the recent exposure draft for amendments to the ASX Listing Rule to enable the market operator to require companies to respond to externally generated media speculation. AICD believes that the ASX is administering the continuous disclosure Listing Rule 3.1 effectively in this area. The current Listing Rule gives the ASX the flexibility to approach the issue on a case by case basis and require comment from a company where there is reasonably specific media comment. The proposed amendments to the ASX listing rules have the potential to be administered in a far more expansive manner than the present approach of the ASX. This is of great concern given that the Listing Rules have statutory force and are the basis upon which the ASIC can take enforcement action. AICD recommends that a more practical approach be adopted through guidance and education where the ASX considers that companies are not meeting the required disclosure standards.
28. Issuers of managed investment products that are continuously quoted securities will be permitted to issue transaction specific Product Disclosure Statements. The Government will amend the law to ensure that ASIC is empowered to deny access to these arrangements in relation to issuers that have contravened relevant provisions of the law in the past 12 months.
AICD agrees with extending the transaction specific prospectus rules to issuers of managed investment products.
Disclosure requirements for shares and debentures
29. The Government will improve the effectiveness of disclosure in prospectuses through extending the requirement for 'clear, concise and effective wording and presentation' in Chapter 7 for product disclosure statements to Chapter 6D for prospectuses.
AICD agrees with this proposal.
30. The Government will more closely align the exemptions from the disclosure regimes that apply to sophisticated investors and wholesale clients.
AICD agrees that the exemptions from issuing a prospectus or product disclosure document should be similar and that the various tests for 'sophisticated investor' and 'wholesale client' should be harmonised.
31. The Government proposes that the disclosure requirements for secondary sales reflect the principle that where a person:
Following the commencement of Financial Services Reform Act and the introduction of ASIC class orders, this has added another regulatory layer for companies wishing to take advantage of the placement market for which there is no justification. If a company is a complying continuous discloser then no further regulation should apply in relation to placements. AICD considers that the exemption which operated for many years in the Corporations Act enabling shares to be sold on market in the ordinary course of trading should be reinstated.
32. ASIC will monitor the adequacy of civil and criminal penalties and make such recommendations as are required to ensure consistency and adequacy of penalties under the law.
AICD agrees with this proposal.
33. The Government will amend the law to expand matters which auditors must report to ASIC to include any attempt to influence, coerce, manipulate or mislead the auditor.
AICD does not support this proposal and considers that it is unlikely to be a useful discipline in practice. It is unlikely that auditors will start reporting 'any attempt to influence, coerce, manipulate or mislead the auditor'. Alternatively, AICD supports a Sarbanes Oxley Act type provision (see section 303) that provides that it is unlawful for an officer or a director to 'fraudulently influence, coerce, manipulate to mislead' an auditor. Where 'fraud' is an element of the offence in an action against a director or officer there would need to be a high standard of proof. This would be appropriate to demonstrate that the relevant officer was engaged in fraudulent activity of this nature.
34. The institutional arrangements for taking disciplinary action against registered company auditors will be strengthened to:
- provide a majority of members of the CALDB, with appropriate skills, who are non-accountants;
AICD disagrees with this proposal and considers it important that the CALDB members each have professional skills relevant to its role.
- allow the CALDB to sit in more than one Division simultaneously and provide for the appointment of a deputy chairman of the CALDB; and
- enable the CALDB to provide information obtained in the course of a disciplinary proceeding to the investigation and disciplinary committees of the ICAA, CPAA and NIA to facilitate the disciplinary procedures of those bodies.
Agreed subject to above qualification regarding CALDB.
35. The Government will amend the law to provide qualified privilege and protection against retaliation in employment for any company employee reporting to ASIC, in good faith on reasonable grounds, a suspected breach of the law.
AICD agrees. However we believe that the protection should be broadened beyond the scope of the company's employees to all whistleblowers.
Shareholder participation and information
36. The Government will establish a Shareholders and Investors Advisory Council, to be chaired by the Parliamentary Secretary to the Treasurer, which it will consult on all disclosure-related reforms to ensure they meet the needs of retail investors.
While AICD supports the need for law reform in the area of public company securities to have due regard to the needs of retail investors, we consider that there is no strong argument in favour of allocating what are in practice scarce resources toward such a body. Such moneys would be better devoted to an ongoing accounting surveillance program rather than an advisory body.
37. To encourage shorter, more comprehensible notices of meetings:
- the Government will amend the law to introduce a 'comfort provision' to protect disclosures made in good faith in a short-form notice of meeting; and
- best practice guidelines concerning notices of meetings should be developed by the ASX Corporate Governance Council in consultation with ASIC.
While shareholders may be daunted by the complexity of notices of meeting, to some degree the content is governed by the ASX Listing Rules and Corporations Law. The combination of compliance with these regulatory requirements mean that the notices are often lengthy and difficult to read. Nevertheless, AICD believe that there could be room for improvement in this area and that the introduction of a 'comfort provision' to protect disclosures made in good faith in the short form notice of meeting would encourage more comprehensible notices. This will need to be dovetailed into existing disclosure requirements.
38. The proposed best practice guidelines on notices of meetings will include a section dealing with the explanatory material for 'bundled resolutions'. The guidelines will include material on best practice for:
- explaining 'bundled resolutions', including the primary purpose, impact and material implications;
- providing access to fuller information on the component resolutions for those shareholders who seek it (for example, through company websites);
- describing categories of resolution that should not be bundled but always dealt with as a separate item, with a separate explanation provided (for example, transactions affecting executive remuneration).
Best practice guidelines may be useful in relation to bundled resolutions. However, AICD considers that there is a potential danger in encouraging 'bundled' resolutions, which simply refer back to the appropriate explanatory memorandum, rather than providing more detail in the resolutions. As foreshadowed, this could have the impact of 'hiding', deliberately or otherwise, important details about individual resolutions that should be specifically drawn to the attention of shareholders.
39. The Government will facilitate improved shareholder participation by electronic means (including electronic proxy voting, internet broadcasting and related technologies) by:
- removing unnecessary legislative hurdles to the use of the technologies, subject to the need to maintain the rights of shareholders who are not internet users; and
- requesting the ASX's Corporate Governance Council, in consultation with ASIC, to prepare guidelines for their use.
AICD endorses methods to facilitate improved shareholder participation by electronic means.
40. The Government will amend the law to require the annual directors' report for listed companies to disclose, with respect to each director holding office during the reporting period, details of all other directorship positions held currently and held over the past two years.
AICD supports this recommendation in principle, although only directorships that are relevant to the director's position on the company board in question should be disclosed. For example, directorships of family companies may not be relevant. Where a director is a director of another listed company and a number of that company's subsidiaries it should be sufficient to disclose that he or she is a director of that listed company and other groups companies with setting out the specific names of those other subsidiaries.
The inference behind the recommendation would appear to be the more directorships a director holds the less time that director may be able to devote to the affairs of the particular company concerned. Whether or not this is the case will depend on a number of factors. For example, the disclosure of the number of directors' meetings attended may also a relevant factor. Such information is indicative only and not conclusive about the capacity of a director to properly discharge his or her duties.
41. The Government will:
- amend the law to permit members to elect to receive annual reports and notices electronically; and
- support best practice guidelines concerning electronic distribution of annual reports being developed by the ASX's Corporate Governance Council in consultation with ASIC.
In principle, AICD endorses the proposal to facilitate dispatching of annual reports and notices of meeting electronically.
There is little doubt that investors in companies should be as fully informed as possible and, that the information should be timely so that their investment decisions, whether initial or ongoing, can be made in an informed climate. This effects some of the basic Eggleston principles which in turn are seen as the fundamental features of an informed market. But, whilst disclosure of information is regarded as one of the fundamental elements of any program for law reform, it should never be forgotten that information is not costless. Law reformers should be cautious in requiring the provision of additional information that will not be in the public domain or which adds little if anything to the principles enunciated above.
It is not always possible to provide information, especially if the information has to be provided on an ongoing basis, freely and without reference to the impact that this will have on the organisation. This does not only relate to direct costs of producing the information, it also raises concerns because of the indirect impact that the disclosure that information will have on those providing it. This is particularly relevant in the context of the disclosure of confidential information (or quasi confidential information) at a time when there are very significant negotiations being pursued on behalf of an organisation. This is so whether it is in the context of a takeover, management buy-out, change in the board of directors or whatever. Disclosure of sensitive information too soon may have a disastrous effect on the particular transactions. It is vital that any law reform exercise undertaken in this area should not assume that companies are able to provide information on an ongoing basis without worrying about the cost or the impact that this may have on their performance.
In this context it is extremely important that law reformers recognise that there are fundamental rules in our company law (whether under the Corporations Act and/or under the general law) which may have to be revised and in some cases, considerably altered to protect those who might otherwise be at risk if changes are made to the law along lines which embrace the role of directors, servants of the community rather than servants of the company.
Duties of directors
The type of concern is perhaps best illustrated by two recent decisions in the New South Wales Supreme Court involving the NRMA organisation. In two judgments it has been suggested that directors of a company like NRMA may have a public duty to disclose information about the company to their members, not through the normal processes of providing that information at general meeting, but through the press. Such an approach, usually linked to issues of social responsibility and the obligations of directors to a wider range of stakeholders, needs to be dealt with quickly for otherwise we may find that the law will develop along the same lines as the unfortunate development in the 1980s and the 1990s concerning the alleged duties of directors to creditors. It is interesting to note that similar issues have also arisen in the UK/European markets. Perhaps a little bit of history will assist in better understanding this particular issue.
When MasonJ suggested in the High Court of Australia in WalkervWimborne ((1975–1976) 137CLR at pps6-7)) that directors who failed to take into account the interests of creditors when a company was facing financial difficulty did so at their peril, he spawned a quite remarkable flood of cases in which judges debated and sometimes held that directors did in fact owe a duty to creditors. Without trying to be comprehensive in listing the relevant cases that further generated the debate, the most important of these were: KinselavRussell Kinsela Pty Ltd (1986) 4ACLC215; (1986) 4NSWLR722; JeffreevNational Companies and Securities Commission (1989) 7ACLC556;  WAR183; GrovevFlavel (1986) 4ACLC654; (1986) 43SASR410, together with English authorities including WinkworthvEdward Baron Development Co Ltd  1WLR1512 at1516 and West Mercia Safetywear LtdvDodd  4BCC250 at252.
The suggestion that directors owe their duties to creditors was given what many would regard as a death blow by dicta of the High Court in Spies v The Queen (2000) 201 CLR 602. In that case, Gaudron, McHugh, Gummow and HayneJJ at pages 635-637 discussed the relevant duties of directors and made this important comment on the cases:
It is true that there are statements in the authorities, beginning with that of MasonJ in Walker v Wimborne … which would suggest that because of the insolvency of Stirling Nicholas, the applicant, as one of its directors owed a duty to that company to consider the interests of the creditors and potential creditors of the company in entering into transactions on behalf of the company, the members of the High Court rejected that as a proposition that had any merit and indicated that there was no duty owed by directors to creditors.
In dealing with the critical issue the members of the High Court embraced, without any relevant commentary, the comments of Gummow J in Re New World Alliance
(1994) 51FCR425 where that judge, as a member of the Federal Court (he is now of course sitting in the High Court) noted:
Where a company is insolvent or nearing insolvency the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders. This restriction does not, in the absence of conferral of such a right by statute, confer upon creditors any general law right against former directors of a company to recover losses suffered by its creditors… The result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion through a liquidator (at para 444-445).
The extent to which creditors have a right under the statute to seek an independent remedy, through section 1324, was not considered by the High Court in Spies
but that is an issue for another day.
The significance of the NRMA cases
In the judgment at first instance in NRMA v Geeson ((2001) 39 ACSR 401), Bryson J made several comments in relation to the NRMA and its stature as a "public interest" company. These comments about the membership of the NRMA and the duties of directors in that context may apply to other companies which have a public profile.
[NRMA's] activities are so pervasive that it does not seem too much to say that the NRMA is part of the general organisation of the Society of New South Wales. In my view the interests of the NRMA as a whole would be positively served by making public, for the information of members and others, events and circumstances at a board meeting … The readiness of the media to report such things is a reflection of real, well based and widespread interest and concern in the community" (at para 35) (emphasis added).'
The NRMA's appeal in this case was dismissed by the Court of Appeal and Justice David Ipp (then an acting Justice of the Full Court) made certain comments in the context of the attempt by the NRMA to limit the view of the renegade directors to provide information to the press. He relied in part on the constitutional freedom of communication to reject the application for an injunction and added "in light of the extent to which the affairs of the applicant are a direct and immediate concern to the members of the public, it is arguable that considerations analogous to those involving freedom of communication
in relation to public affairs apply" ((2001) 40 ACSR 1 at para 48).
The information in this case was held by the court not to be confidential but is arguable that the relevant directors were not swayed by that fact as can be seen by the rather different views expressed by Master Macready in NRMA v John Fairfax Publications Pty Ltd  NSWSC 563. His Honour where he suggested that the directors who had disclosed information to the media may have exposed those gentlemen in the media to very serious difficulties if they did not themselves identify the source of the information that had come to them because of the confidentiality of the information.
This issue of wider obligations of directors has been canvassed in a number of very important papers and discussions involving corporate law. The Australian Democrats attempted to widen the scope of directors' duties in a direct sense by introducing into parliament the Corporate Code of Conduct Bill in 2000. But this Bill was rejected by the parliament. Professor Bryan Horrigan has been an informed critic in dealing with these issues. He has analysed the interaction between the concepts such as the triple bottom line, the social responsibilities of directors, and the general duties of directors. Some of his views, which may well become relevant in expanding the laws of disclosure in the manner suggested, are quite relevant in my view (see Horrigan, "Fault Lines in the Intersection between Corporate Governance and Social Responsibility" (2002) UNSW Law Journal 515).
It is AICD's view that the legislation should not create another problem for directors by establishing broader obligations of a wider nature on directors (in the context of disclosure or elsewhere) that cut across the primary duties of directors without clear guidelines being provided by the rules to apply.
Accordingly, a great deal of work will need to be done to ensure that any new duties that are developed in the context of disclosure are enunciated with reference to the primary duties of directors. Having provided this brief overview, it is now appropriate to turn to the whole issue of infringement notices and the civil liability provisions.
Catching the "breach"
The continuous disclosure provisions of the Corporations Act contain quite modest penalties at this time (the proposal to increase them to $1million is long overdue – perhaps the penalty should be even higher). The Australian Securities and Investments Commission (ASIC) has argued that enforcing these disclosure provisions is 'overly burdensome' in all but the most serious of cases. As a result, ASIC is apparently of the view that many breaches have not been prosecuted when perhaps they should have been. ASIC has also indicated that the powers of the Australian Stock Exchange (ASX) to suspend a company's securities from trading, etc, are probably disproportionate to the penalties that are warranted in these circumstances.
Flowing from these apparently insurmountable difficulties ASIC has argued that it needs greater regulatory powers. David Knott, the current chairman of ASIC, has continued to call for infringement notices to be available to ASIC in line with the power that ASIC already has in a number of other areas.
The basis put forward by ASIC for being given the power to issue an infringement notice is similar to the arguments put forward by the Australian Competition and Consumer Commission (ACCC) in relation to section 46 of the Trade Practices Act (the misuse of market power) and its wish to have the right to issue what are known as cease and desist orders. Such developments are extraordinary and should not be countenanced in this country. They involve a complete reversal of basic and fundamental rules of our law – that persons are innocent unless proven guilty, and that where there is a breach of the statute, the appropriate way for these matters to be dealt with is through the issue of court proceedings.
If the matter is of such minor consequence (egwhere there has been a failure to lodge an annual return) then perhaps a different procedure may be introduced as an alternative).
This approach to law reform is a very dangerous one. It smacks of an autocratic attitude and one that can not be justified unless there are very sound reasons for proceeding down that road.
Putting to one side the question of the constitutional validity of the use of any infringement notices which is certain to be raised by a high profile company in the event of the issue of such a notice, there is the critical question of whether such an approach to regulation is justified on other grounds. The argument is made from time to time by regulators, and ASIC has not been shy in making such arguments, that our court system is too slow, expensive and cumbersome to enable regulators to seek to have certain laws enforced. In other words, the regulators argue that the regime they are asked to administer is often seriously flawed because they cannot obtain an appropriate result in cases where, in their view, breaches of the law have occurred.
This is a shocking admission and one that the community should not allow to go unchecked or untested. If the laws that we have in place are inadequate (eg the penalties are too low) then they should be changed or other explanations should be required of the regulator to show why the laws cannot be enforced. This will involve a cost benefit analysis of the changes that are being proposed. It is always necessary to establish that a clear change of the law is essential.
A further bit of history
During the 1970s Australia went through a period of rigorous, some would say aggressive, tax planning. It was increasingly obvious that parliament could not cope with the growth in tax planning in light of very conservative cost decisions on section 260 of the Income Tax Assessment Act. Rather than tackle the problem head on by amending section 260 – it is now Part IVA – the government of the day embarked on a policy of legislation by press release. The relevant Minister (actually the current Prime Minister who was then the Treasurer) would make a press release about the particular tax plan and then legislation would be introduced some years later embracing the thrust of that press release. For years the profession and business was left in the dark as to how the particular area of the law would operate. Unfortunately, this particular practice of releasing broad details of legislation in a press release etc still exists today. The Institute objects strongly to it and to different manifestations of it as currently being suggested through the use of infringement notices.
AICD is happy to be persuaded, on a case by case basis, that if our laws are shown not to have worked – that is by court cases which clearly identify gaps in the legislation – there may be a need for reform. It will be a sad day indeed, however, if our laws are to be changed simply because regulators have concerns (not proven by any experience in detailed litigation or by research) that particular laws do not work. Unfortunately, as a result of this rather lazy or inadequate form of regulation that has been growing like topsy in this country, governments amend legislation, on many occasions retrospectively, to permit regulators to enforce laws on the basis of broad statements of principle. It is hoped the changes based on this approach will frighten the community into complying with the law.
In AICD's view this approach to regulation is unacceptable unless there are such strong public interest criteria that demand the introduction of emergency rules (for example if there was a state of war or if terrorism became something that could not be controlled without some form of extra powers being given to the police – even in those circumstances one must always guard against over-reaction). This approach to regulation in the commercial area should not be allowed to continue; where there are clear gaps in the law the government will almost always have to put in place effective laws to deal with the issues that they feel illustrate gaps in the laws but only after a proper cost benefit analysis.
So, to take a good example of law reform at work, there are concerns that it is less difficult to establish the relevant offence. In cases where the law does not work as has been recently suggested in relation to insider trading (see the Business Review Weekly of 24 October), and provided that those laws are proved inadequate an appropriate enquiry and a report is produced including a cost benefit analysis, the Government might well change the law. In accordance with this approach CAMAC is undertaking a review of the laws in relation to insider trading and will no doubt come forward with certain proposals Similarly, if it is difficult to establish whether directors have breached statutory duties because of the way in which the law is drafted (for example, the duty to disclose information in relation to current events) the law should be reviewed (again perhaps by CAMAC) to make it clear what the government wants to have achieved. For regulators to turn around and say that it is too difficult to establish guilt in cases of this kind, and to vest in them the ability simply to issue notices which, in effect, suggest that persons are guilty but that guilt can be 'expunged' by the payment of a fine. This looks very much like an admission of inadequacies, not only of the legislative regime but of the performance of the relevant regulator. We must not surrender to this kind of approach in our law reform processes.
There may be some justification for the use of infringement notices in minor areas of regulatory failure. So, if companies fail to file annual returns on time, if meetings are not held, if substantial notice details are not lodged with ASIC, etc, it may be quite appropriate for ASIC to be given the power to issue infringement notices in relation to these pure matters of fact. Where the reputation of individuals is at stake, as they will be in the context of certain allegations – eg that companies have not disclosed certain information about the way in which a company is being run, or details of payments that are being made to directors are not disclosed – and an offence has to be established, it is not enough for the regulator to simply issue an infringement notice. It should pursue such a matter through the courts.
In most cases, smaller companies will simply not have the resources or the willingness to fight some of these matters; they will in many of these cases either pay the amounts involved or perhaps go out of business. Far too often, however, we have seen investigations undertaken by regulators (and ASIC is no stranger to this exercise either) with the provision of a good deal of publicity about the fact that the investigations are taking place, only for the investigations to be dropped later. Whilst the persons under investigation has never been held liable for a breach of the law, the assumption that something was wrong will stick. In many of these cases, when an investigation takes place, the regulator does not issue a notice or press release withdrawing the allegations and giving the relevant person a clean bill of health. Rather, the community is often left wondering whether there was quite a lot of dirt involved and that somehow, because of the complexities of the law, the regulator has been unable to establish the case. The verdict of "not proven", so well known in the Scotland, is a most unhappy precedent to be introduced into the Australian environment.
The infringement notice procedure
Although the CLERP 9 discussion paper is not very specific on the detail (which is of course not surprising in a discussion paper) it seems that ASIC will have to prepare a significant amount of information before it can issue an infringement notice. CLERP 9 suggests that a hearing would be held (and no doubt the relevant persons/company would be given an opportunity to be heard etc), and that the relevant matters to be pursued will be matters which are "relatively minor contraventions of the continuous disclosure provisions", but also that adequate procedural safeguards would be observed.
But, unfortunately, once ASIC has issued the infringement notice, the parties will have one of two choices – either pay up the penalty that is involved (and hope that there is no negative publicity flowing from that result – and can we be confident that that will happen in all cases; there have been some instances in the United States where cease and desist powers are available where publicity has flowed from the issue of those notices – or fight the case in court. If the party decides to fight the case in court, will ASIC actually put up a fight? In many instances, it is suggested that ASIC will not. But, the party wishing to challenge the infringement notice then suffers the possibility that, even though ASIC may withdraw the particular notice, or not seriously pursue the particular matter, the public will assume that the reason that ASIC has discontinued the matter is because the relevant company (or individuals) have been able to obtain the benefit of expensive legal counsel or other advice and that guilt is present in any event. Some recent ASIC investigations involving company directors in Melbourne (see The Age Business Section 19October 2002) highlight the significant dangers that flow from the creation of any publicity about the possible 'guilt' of individuals when investigations have been started and then discontinued because of the difficulties that the regulator has had in pursuing the particular matter.
The assurances that no conviction will be shown against the person making the payment will not be enough. ASIC will be likely to use publicity concerning this matter in some form or other. We can have no guarantee that anonymity will be the rule of the day.
Even assuming that no publicity is generated by this process until a court case is brought, why do we allow the law to continue to be so difficult to enforce. If there are breaches of the law we need to stop, why cannot the law be amended to make it easier to comply with or to be enforced? Furthermore there is no evidence in CLERP 9 that this area of the law has been the subject of such breaches to warrant this kind of regulatory innovation.
One easy way for ASIC to overcome some of the so-called 'difficulties' which it says it faces in pursing breaches of the continuous disclosure provisions of the Corporations Act is in fact to use statutorily enforceable undertakings (currently used very rarely by ASIC when compared to the ACCC – it uses section 87B undertakings of the Trade Practices Act quite vigorously and effectively). Such an approach would focus ASIC's mind on pursuing the matter in the courts; parties which did not wish to fight the proceedings could negotiate with ASIC by giving enforceable undertakings which would overcome the particular problems that ASIC may face in pursuing these more difficult cases. The Australian Law Reform Commission in its Discussion Paper Securing Compliance highlighted the importance of the use of undertakings (see in particular paras 7.170 – 7.182 inclusive).
For some reason, regulators also seem to be rather shy in going to the courts to seek injunctions in appropriate cases. In fact, neither ASIC nor the ACCC have to give an undertaking as to damages when they seek an injunction in the courts so that they do not face that added discipline of potential huge damages being awarded against them, should the injunction fail. Indeed, the courts are very flexible in their use of injunctions, especially when they are dealing with issues relating to disclosure. A classic set of examples can be provided by looking at what happens in relation to section 52 (and similar provisions) cases under the Trade Practices Act where the regulator is seeking to restrain misleading or deceptive conduct. Indeed, on the 28October the ACCC was able to obtain an injunction in ACCC v Wizard Mortgage Corporation Limited  FCA 1317. Even though the injunction was for less than the relevant time sought by the ACCC, the fact that it was able to get an injunction to stop the particular behaviour is a clear example of the courts responding very positively and quickly to a complaint made by the regulator that something that is being done in the marketplace is inappropriate or misleading.
The case concerned an advertisement which was withdrawn by the defendant (Wizard) before proceedings were brought. The defendant acknowledged that the advertisement was misleading and deceptive. The case is an example of the use of an injunction to prevent the repetition of certain conduct rather than to restrain or cease the continuation of certain conduct.
Whilst the ACCC did not get all that it asked for (the court did not grant a three year injunction) the effect of the court order was to correct the possibility that the market would be misinformed. In the same way, ASIC could obtain appropriate injunctions to deal with the failure to provide information where continuous disclosure is required. The courts can grant injunctions which require persons to do something rather than stopping them from doing something in appropriate cases.
The fact that some courts decide to treat civil penalty cases as though they are criminal penalty cases can be easily dealt with. A direction in the statute to the judge that a civil standard is the relevant approach to be adopted by the court and that civil procedure rules are to be applied should be enough. If the relevant judge continues to ignore that direction, then that judge should not be permitted by the Chief Justice of the relevant court to hear further cases. ASIC will quickly get its message across if the right judges are given the opportunity to decide relevant cases dealing with these issues.
CLERP9, in particular in relation to this aspect of continuous disclosure, provides an example of lazy and dangerous regulation at work. We must not allow our regulators to be able to take the soft option of being given greater powers to intimidate and punish people simply because they cannot get the evidence together to institute a case. It would be a tragedy if that type of approach were to permeate other areas of our law (with perhaps some exceptions to be made in areas of security, although even there, as we note above, the need for balance is essential).