This article by me was first published in Complinet.

In its 2007-2008 Annual Report the Australian Securities and Investments Commission (ASIC) has reported extensively on its enforcement activities.

Enforcement is an important measure of ASIC exercising its functions and meeting its goals of market integrity in the capital markets, protection of retail investors and financial consumers and facilitating global capital flows.

But a comprehensive survey of stakeholders’ current and future expectations and attitudes towards ASIC conducted in January and February 2008 by the Allen Consulting Group on behalf of ASIC found that business, in particular, wanted to see improvements in how ASIC administers the law and the way it deals with people and entities that breach the law. While positive about many of ASIC’s administrative systems and information services, business said ASIC should prioritise the prosecution of market abuses, focus on cutting red tape and become more accessible. The survey ‘boiled down’ to a mark for ASIC of only 5.5 out of 10.

The survey results were a key input into ASIC’s Strategic Review which recently resulted in announcements to changes to ASIC’s future enforcement direction and its structure.

ASIC’s Annual Report 2007-2008

ASIC’s Annual Report 2007-2008 identifies actively prosecuted cases of insider trading and market manipulation and its pursuit of significant enforcement matters as some of its key achievements.

The impact of the global financial crisis since February 2008 which affected Australian companies, stockbrokers and margin lenders such as MFS, Centro, Allco, Rubicon Funds, Tricom and Opes Prime, put the spotlight on the effectiveness of ASIC’s activities.

A large part of ASIC’s budget is used for staffing of compliance and enforcement matters.

Amongst other criteria, ASIC’s report provides data in respect of:

• The number of criminal proceedings that it completed and their results.
• The number of civil proceedings that it completed and their results.
• The percentage of investigations resourced that led to a conclusion within six months of commencement.
• The percentage of complaints that it received and resolved in 28 days.
• The number of investigations commenced.
• The number of jailings and bannings.
• The number of officers who were disqualified/banned from managing corporations.
• The number of illegal investment schemes wound up.
• The amount of funds frozen and recovered for investors from illegal investment schemes.
• The number of complaints analysed and assessed.
• Number of liquidators', administrators' and receivers' reports that ASIC processed.

Current major actions

Perhaps because ASIC has been criticised for investing too many resources in major complex matters, the report discusses these in detail:

• AWB: ASIC commenced civil proceedings which alleged breaches of directors' and officers' duties against six defendants who are all former AWB officers, including the former managing director, chairman and chief financial officer.
• HIH Insurance Limited: to date, nine people have been convicted and sentenced in relation to charges that ASIC brought.
• Westpoint Group: liquidators made distributions in excess of $30m to investors from assets that ASIC action secured. ASIC commenced proceedings against five financial services licensees and a trustee company.
• James Hardie: The civil penalty proceedings trial is currently being heard. It is seeking declarations of breaches against James Hardie Industries Limited, declarations of breaches and fines against James Hardie Industries NV, and declarations of breaches, fines and disqualifications against a number of former and current directors and former executives.
• There are ongoing investigations into the issues that arose from the collapse of Opes Prime Stockbroking Limited, Fincorp Group and Australian Capital Reserve.

Main issues affecting financial service providers

The principal enforcement areas for ASIC in relation to financial services were:

• Insolvency-related matters, including dishonesty, making false representations, fraud and managing companies while disqualified.
• Illegal fundraising.
• Misconduct involving superannuation funds.

It also investigated consumer credit debt collection practices, in particular, in relation to members of the GE Money group.

ASIC has also increased its investigations in respect of "rumourtrage" or potential insider trading and market manipulation.

The tools that ASIC used include:

• Banning individuals or companies from the financial services industry.
• Criminal prosecution.
• Declaration of breaches of directors' duties.
• Surveillance exercises after receiving public complaints.
• Interim, injunctive orders that relate to funds invested in illegal investment schemes.
• Freezing assets and preserving money for investors in those schemes.
• Investigating schemes.
• Winding up illegal schemes.

Criticisms of ASIC

In the past, ASIC has been criticised for concentrating on lengthy complex matters at great cost which have no obvious results (e.g., its failed action against Citigroup for conflict of interest) in preference of more active investor protection measures.

There have also been criticisms about ASIC's role as a litigant, its use of its powers, its decisions about whether to prosecute criminally or by civil action and whether it appreciates the significant financial and personal consequences of its prosecutions of professionals.

ASIC's future enforcement approach

Following its strategic review, ASIC's chair, Tony D'Aloisio, stated that ASIC's future approach to insider trading and market manipulation will be to emphasise the deterrence aspect by looking primarily at criminal proceedings above civil penalties. It will keep its options open in using civil penalties in appropriate cases, however.

According to D'Aloisio, the main differences between the old and new ASIC are:

"Clearer vision against which we test and explain why we may intervene or commence proceedings. For example, recently we commenced proceedings in the James Hardie case. We made it clear that the action was in the public interest as it would involve the responsibility of executives and non-executives when boards of public companies make important or 'betting the farm' type decisions."

"Clearer priorities which are framed more narrowly around what matters — what we say matters are capital markets and market integrity, retail investors, financial consumers and global capital flows. For example, we have made it clear that we consider that it is in the public interest to commence compensation proceedings for retail investors (for example, as in Westpoint) who have suffered loss and have limited means or access to relief."

ASIC will maintain its strong approach to enforcement. Since September 2008, it has set up eight enforcement or deterrence teams, instead of one large directorate. Each team has been given specific responsibilities, such as insider trading, major fraud or significant misconduct.

ASIC's priorities following the strategic review will be:

• Promoting the interests of consumers and retail investors.
• Building confidence in, and the integrity of, Australia's capital markets.
• Facilitating capital flows.
• Helping small and medium business.
• Lifting operational effectiveness.

These priorities will be enhanced by an additional focus on:

• international enforcement and internet fraud, as part of ASIC's facilitating capital flows priority; and
• managing the domestic and international implications of global financial turbulence.

Compliance tips and next steps

The government has given ASIC increased resources to protect Australia's financial services consumers and investors. ASIC has restructured itself to focus on specific areas.

Regardless of the size of the business, a person will need to ensure their compliance with their disclosure obligations and their breach reporting obligations. Liaising with ASIC will be an important regulatory activity for senior executives.

ASIC will be taking over jurisdiction for consumer credit under the national consumer credit reform programme in the near future, therefore, an expansion of its surveillance and enforcement activities is expected.