The Role of the Australian Securities and Investments Commission (ASIC)

Name: Shannon Frick

Student ID: 11159183

Subject Name: Law of Business Organisations

Subject Code: C05121

Subject Co-ordinator: Helen Sungaila

Due Date: 20th July, 2009

 11159183

Table of Contents

1. Introduction..................................................................................................................... ....................3

2. The Role of ASIC as Prescribed in the ASIC Act...................................................... ..........................3

3. The Role of ASIC as Prescribed in the Corporations Act................................................................. ....5

4. The Role of ASIC as Played Out in the Courts.................................................................. ..................6

4.1 ASIC v Rich (2003)................................................................................................... ....................6

4.2 ASIC v Loiterton (2004).................................................................................................. ..............7

4.3 ASIC v Parker (2003)........................................................................................... .........................7

4.4 ASIC v Vizard (2005)............................................................................................... .....................8

4.5 ASIC v Adler (2002)........................................................................................................... ...........8

5. The Role of ASIC as Assessed by Scholars................................................................ .........................9

5.1 Scholars’ Views on the Role of ASIC.................................................................. ..........................9

5.2 Co-operation with Other Regulatory Agencies................................................. ...........................11

5.3 Public Interests vs Private Interests............................................................................................ ..12

5.4 Globalisation............................................................................................................................. ...12

6. Conclusion: The Role of ASIC in the Future................................................................ .....................13

7. References..................................................................................................................... ....................15

2
 11159183

1. Introduction

The writer will give an account of the role of the Australian Securities and Investments

Commission (“ASIC”). In doing this, the writer will draw on the ASIC Act itself, and on the

Corporations Act. The writer will also consider several cases in which ASIC has been involved

in case law, concentrating on what ASIC is doing, then the writer will consider what several

other scholars have written about the role of ASIC. As a result of this review of scholarly

commentary, the writer will come to his or her own conclusions and consider if ASIC is fulfilling

its duty or not.

2. The Role of ASIC as Prescribed in the ASIC Act

The ASIC Act describes ASIC as being a corporate body that performs its functions and

exercises its powers on behalf of the Commonwealth, and its states and territories. Under the

act, ASIC is defined as a corporate body that possesses all the obligations and liabilities of a

corporation, and has a specific structure of members, along with its own constitution. The

Commonwealth Government is responsible for liabilities incurred by ASIC, which seemingly

acts as the “corporate veil” for the Commonwealth. The ASIC act lists various behaviours and

actions that are enforceable by the ASIC, such as misrepresentation1, fraudulence2, breach of

warranties3, guidelines for acquiring evidence4 and giving or receiving compensation5.

1
ASIC Act (2001) s.12BB
2
ASIC Act (2001) Subdivision D
3
ASIC Act (2001) Subdivision E
4
ASIC Act (2001) s. 58
5
ASIC Act (2001) s. 12
3
 11159183

The ASIC Act, in essence, describes the Australian economy as a financial system that is

to be maintained, facilitated or improved, as well as promoted, by ASIC6. The users of the

financial system are, of course, investors and consumers. There are laws in this financial system

that must be enforced in a procedurally minimalistic way through certain powers or functions

entrusted to ASIC. The financial system, and information gathered by and for it, must be

available to the public, and must be under effect of Commonwealth laws. In issuing such

transparent functions, the ASIC Act states that its intentions are to act to provide commercial

certainty, reduce business costs, and helping to improve the efficiency and development of the

Australian economy. This last point has been debated by scholars, which the writer will discuss

later in this paper.

The ASIC Act and the Corporations Act are two pieces of legislation that provide the

rules for financial services in Australia. The ASIC Act follows the Trade Practices Act, and

echoes some respects of it as well (Middleton, 2008). This is not surprising, as ASIC targets

trading companies. This is a broad target, since the term “trading company” includes those

companies that may not traditionally be considered “trading” companies, such as educational

unions7.

3. The Role of ASIC as Prescribed in the Corporations Act

6
ASIC Act (2001) s. 1(2)
7
Edugang Ltd v QIRC QIEU [2006] QIC 43; 182 QGIG 491 (10 July 2006):
In this case, the definition of “trading company” was questioned, and the education
union Edugang Ltd was found by the courts to fall into the category of “trading
company,” because it was in the business of selling education to its clients, the
students.
4
 11159183

The Corporations Act contains many sections that involve the role of ASIC, its duty to

administrate the act8, and other parts that the agency plays in the act. In particular, the

Corporations Act includes statutes that outline ASIC’s duties involving administration,

exemptions, registration, notification and reports to ASIC and the public, and certain powers

bestowed upon ASIC under the act. As with the ASIC Act, the Corporations Act outlines

statutory law that can be enforced by ASIC as an artificial person for the sake of public interests

in the Australian economy. This artificial person acts to protect those who wish report breaches

of the Corporations Act and remain confidential.

Perhaps the largest area that the Corporations Act focuses on with regards to the role of

ASIC is the reporting and notification requirements of companies9. The writer has noticed that

this large piece of legislation demonstrates that ASIC is heavily reliant on company feedback in

order to take legislative action against breaches of company law. This finding alone tells the

writer that ASIC tends to be more reactive than proactive in its strategies for enforcing the law.

The Corporations Act provides rules for companies limited by shares to use in their

formation and every day operations in Part 1.5, “Small Business Guide.” ASIC controls company

registration requirements, such as giving ACNs and maintaining registration information of

companies. Under the act, Companies must inform ASIC of company events such as member

resignations, share issue and cancellation, and the name of trustees, for example. The

replaceable rules that companies may use for their internal management governance are set out in

this section of the act, as are rules for registration activities, control over the formation of

8
Corporations Act (2001) s. 5B
9
Corporations Act (2001), Parts 1-5
5
 11159183

companies, relationships among members and entities within companies, and how company

powers can be exercised legally, and other areas.

4. The Role of ASIC as Played Out in the Courts

Since ASIC is a corporate entity, it can engage in legal action with other corporate

companies that it suspects to be committing criminal or civil offences within the financial

system. There are several famous court cases that ASIC has been involved with in Australian

law, which are included below, and each case has been a good example of part of ASIC’s role.

The sections that defendants commonly breached include ss180, 181, 182, and 183, which

involve failing to act in good faith, failing to provide a duty of care and diligence, and avoiding

the use information gained in their positions for their own benefit.

4.1 ASIC v Rich (2003)

In the case of ASIC v Rich10(2003), ASIC was successful in finding a joint managing

director guilty of breaching his civil obligation of duty of care and diligence under s 180(1) of

the Corporations Act by failing to take reasonable steps to ensure that there were reliable

mechanisms in place for detecting the accuracy of financial information, assessing financial

position and performance, maintaining cash reserve liquidity, assigning an appropriately

qualified finance director, avoiding material adversity, and bringing the attention of the board of

directors to such matters. Another breach of the duty of care and diligence by the joint managing

director was the issue of incorrect public statements in regards to the company’s financial

position and performance.

10
(2003) 44 ACSR 682
6
 11159183

4.2 ASIC v Loiterton (2004)

The case of ASIC v Loiterton11(2004) saw the court hold that the duty of care was

breached in several ways by the defendant directors. The main breaches of the duty of care

involved the directors failing to enquire into the financial position of their company when

approving dividend payments and approving the issue of the company’s accounts. In the former

case, the company did not have profit that could be distributed as profit, and in the latter case, the

profit and loss statement for the relevent accounting period was skewed by the inclusion of

certain amounts that were overlooked.

4.3 ASIC v Parker (2003)

In ASIC v Parker12(2003), the defendant director was found to have breached his duty of

care by approving a loan that was not found to have satisfied fixed loan conditions from the

company’s board of directors, which were delegated to the director for implementation. Another

breach of duty of care by the same defendant involved the failure to enquire into the loan

repayment history of the person for whom the loan was taken out for before the loan was

approved.

4.4 ASIC v Vizard (2005)

11
(2004) 50 ACSR 693
12
(2003) 21 ACLS 888
7
 11159183

The case of ASIC v Vizard13(2005) saw the defendant director improperly using

information gained through his position as a director of his company to sell and buy shares for

his own business, breaching s. 183 of the Corporations Act in several instances. The court fined

Vizard for each instance, and ordered that Vizard be disqualified from managing companies for

10 years. This case demonstrated how difficult white collar crimes are in particular to discover

within legitimate transactions, as ASIC investigations ran for 2 years (AllBusiness, 2005).

4.5 ASIC v Adler (2002)

Perhaps one of the most famous and slightly more complex legal cases involving ASIC

was that of ASIC v Adler14(No 3) (2002). The case involved the defendant directors obtaining

highly confidential information due to their positions, and using this information to base

decisions upon which to buy or sell shares. The main defendant, Adler, was found guilty of

breaching ss 180, 181, 182 and 183 of the Corporations Act. The court held that Alder benefited

both himself and his family in the transactions.

5. The Role of ASIC as Assessed by Scholars

The greater role of ASIC, as viewed by the writers in various scholarly commentaries

below, is one that includes many responsibilities. Not only does the ASIC follow those

regulatory and powers and statutes of enforcement outlined in the ASIC act and Corporations

Act, but the agency also manages other tasks related to financial activity, such as cooperating

13
(2005) 54 ACSR 394
14
(2002) (No 3) 20 ACLC 576; 41 ACSR 72

8
 11159183

with other regulatory agencies, balancing public interests with private interests, moving towards

the globalisation of financial regulation, and many more responsibilities outside the scope of this

paper.

5.1 Scholars’ Views on the Role of ASIC

Australia has adopted a “two agency” model for regulation, namely that which consists of

prudential regulation, which the APRA regulate, and corporate regulation, which the ASIC

regulate (Pearson, 2006). Prudential regulation pertains to entities that provide services such as

deposit taking, general insurance, life insurance, and superannuation. The domain of regulation

that ASIC oversees, which is much larger than the domain of prudential regulation, includes

capital markets, corporate fund raising, mergers and acquisitions, products and services, financial

advisers and dealers, clearing and settlement facility operators, and auditors and liquidators

(Tomasic, 2006).

ASIC issues warning letters to companies that it suspects commit minor breaches of

disclosure obligations. Such sanctions include enforceable undertakings, where the company

must make a legally binding promise not to perform an unlawful act, and infringement notices,

where instantaneous fines can be given to companies that breach s 674(2) of the CLERP 9 Act

2004. Enforceable undertakings and infringement notices are cheaper methods for the ASIC to

take action with, and they allow ASIC to avoid unwanted publicity and associated court costs

(Zandstra, Harris and Hargovan, 2006).

9
 11159183

If the forms of persuasion above do not work to stop a company from breaching the law,

then administrative sanctions will be initiated by ASIC against the company (Zandstra, Harris

and Hargovan, 2006). Regulatory powers of ASIC include issuing notices requiring a person to

attend an oral examination, or even issuing search warrants in relation to civil contraventions of

the regulatory laws15 (Middleton, 2008).

The writer has noted that scholars have different opinions over the ideal application of

power of ASIC. Middleton (2008) suggests that regulators’ investigative and enforcement

powers and privileges should model those of the Unites States, where a report from the Clinton

administration stated that:

“... where Governmental involvement is needed, its aim should be to support and enforce

a predictable, minimalist, consistent and simple legal environment for commerce.”

(Middleton, 2008, p.97).

O’Brien (2008) argues that, in applying regulatory enforcement, ASIC and other regulatory

bodies should attend to the interaction between law, norms and ethics.

5.2 Co-operation with Other Regulatory Agencies

Middleton (2008) mentions that there exist arguments that ASIC holds too much power at

present in regards to its ability to regulate all aspects of the Australian financial system. The

argument continues that ASIC, the Australian Prudential Regulation Authority (“APRA”), the

Australian Consumer Competition Committee (“ACCC”), and the Australian Taxation Office
15
ASIC Act (2001) ss 35, 36.
10
 11159183

(“ATO”) all share common regulatory problems, and share overlapping responsibilities of

investigation and enforcement of the law with respect to the financial system (Middleton 2008).

Middleton (2008) makes the valid point that these agencies have an interdependent relationship

of mutual cooperation, where their individual regulatory activities facilitate regulatory activities

in every other regulator.

This relationship between the ASIC, APRA, ACCC and ATO, includes the exchange of

important investigative information: For example, the activities of ASIC and APRA which

involve promoting proper financial disclosure in corporate transactions and financial accounts in

turn helps the ATO to more efficiently and effectively collect revenue; in turn, ATO’s regulatory

activities ensure that taxpayers provide accurate information regarding taxation, which agencies

such as ASIC and APRA rely on for their functions (Middleton, 2008). It is obvious to the writer

that this cooperation also helps to provide more accurate financial information for the general

public, including investors and creditors.

5.3 Public Interests vs Private Interests

The Commonwealth Treasury has placed great emphasis on how important it is to keep

public interests and private interests balanced when developing regulatory regimes, since there is

not always a clear answer between the two competing interests (Middleton, 2008). This balance

will always be controversial, depending on whose interest is favoured. However, the Treasury

has emphasised that such a balanced approach is one that should be applicable evenly to all

regulatory regimes that ASIC, APRA, ACCC and ATO are governed by (Middleton, 2008).

11
 11159183

Pearson (2006) mentions ASIC has a positive obligation to manage conflicts of interest

within financial institutions. Such conflicts have been proven to occur in the past notably where

financial planners are faced with a conflict of interest between providing quality service through

knowledge of the client and how the products would suit different types of clients, and their

incentive to sell more units of their own company’s product for higher remuneration through

commission sales (Pearson 2006).

5.4 Globalisation

Middleton (2008) observes that there has been a move towards globalisation and the

formation of international networks among regulatory agencies around the world. The

International Competition Network, for instance, has been focusing on the areas of cartel

detection and enforcement through international cooperation and coordination of the ACCC and

other international regulators (Middleton, 2008). The ASIC has also worked in the past with the

Department of Trade and Industry (“DTI”) in the United Kingdom to interview witnesses

overseas, and the EU harmonisation project in consumer law has also been helpful in forging

consumer protection models in numerous areas, such as product safety and unfair contractual

arrangements (Middleton, 2008).

O’Brien (2008) notes that ASIC is adopting a more aggressive model of enforcement

lately, similar to regulatory bodies in the United States, in an effort to narrow the gap between

Australian regulatory priorities and those of global markets . This is because ASIC is attempting

to synchronise its enforcement agenda with that of the Organization of Securities Commissions

(IOSCO), and move towards a greater state of international harmonisation and co-operation

(O’Brien, 2008).
12
 11159183

6. Conclusion: The Role of ASIC in the Future

From the given discussion above on the ASIC Act, the Corporations Act, several legal

cases involving ASIC, and scholarly commentary, the writer has drawn several conclusions as

the role of ASIC and its future:

Due to the wide scope of its tasks, It seems as though ASIC may be realising the

difficulties of regulating the entire financial system, and that it needs to take on a more

specialised role in a large web of interdependent national and international regulatory agencies in

order to be more successful. It is moving farther away from its earlier attempts to play God with

the financial universe and be everything to everyone, and is increasing its interdependence and

co-operation between national and international regulatory bodies, based on the earlier scholarly

commentary. We may see ASIC in future being better equipped to perform its role more

efficiently and effectively as a result of such co-operation.

The writer has observed that ASIC is facing the classic trade-off between security and

speed where corporate law is concerned at present. As more rules and governance is added to the

financial system, the overhead of time, energy and costs involved with compliance ultimately

bog down transactions within it and make it run less efficiently. The need for a balance between

ease of compliance with efficient and minimal interference is perhaps one of ASIC’s biggest

challengesthat it faces in future.

13
 11159183

Balancing corporate and public interests also seems to be at the core of the role that ASIC

plays. Profit-driven companies will be the ones that ultimately pay for such protection, through

time and money spent complying with such measures. If ASIC pushes too hard with regulatory

measures, then the cost of compliance with ASIC’s demands may force companies out of

business, which would be very detrimental to the Australian economy. On the other hand, if

ASIC doesn’t regulate aggressively enough, then surely the Australian financial system will

become more open for manipulation from shrewd and deceptive business practices.

14
 11159183

7. References

AllBusiness: Vizard to Front Court Over Share Trading (2005). Retrieved July 18th 2009 from

the AllBusiness website at: http://www.allbusiness.com/legal/intellectual-

property-law-copyright/9875911-1.html

ASIC v Rich (2003) 44 ACSR 682

ASIC v Loiterton (2004) 50 ACSR 693

ASIC v Parker (2003) 21 ACLC 888

ASIC v Vizard (2005) 54 ACSR 394

ASIC v Adler (No 3) (2002) 20 ACLC 576; (2002) 41 ACSR 72

Australian Securities and Investments Commission Act 2001, Act No. 51, Parts 1-17 (2008).

Australian Securities and Investments Commission: ASIC Welcomes Insolvency Reforms

Package (2005). Retrieved July 18th 2009 from the Australian Securities and Investments

Commission website at: http://www.asic.gov.au/asic/asic.nsf/byheadline/05-

312+ASIC+welcomes+insolvency+reforms+package?openDocument

15
 11159183

Corporations Act 2001, Act No. 5, Volumes 1-5 (2009).

Hanrahan, P., Ramsay, I. and Stapledon G. (2009). “Commercial Applications of Company

Law.” Sydney, NSW: CCH.

O’Brien, J. (2007). “Managing Conflicts: The Sisyphean Tragedy (and Absurdity) of Corporate

Governance and Financial Regulation Reform.” Australian Journal of Corporate Law,

20,

pNA.

Middleton, T. (2008). “The privilege Against Self-Incrimination, the Penalty Privilege and Legal

Professional Privilege Under the Laws Governing ASIC, APRA, the ACCC and the ATO

– Suggested Reforms.” Australian Bar Review, 30, pNA.

Pearson, G. (2006). “Risk and the Consumer in Australian Financial Services Reform.” The

Sydney Law Review. 99, pNA.

Tomasic, R. (2006). “The Modernisation of Corporations Law: Corporate Law Reform in

Australia and Beyond.” Australian Journal of Corporate Law, 19, pNA.

Zandstra A., Harris J. and Hargovan A. (2008). “Widening the Net: Accessorial Liability for

Continuous Disclosure Contraventions.” Australian Journal of Corporate Law, 22, p.

16