Market Integrity Update - Issue 100 - December 2018

Issue 100, December 2018

Review of allocation practices in equity raising transactions

Our review of allocations in equity raising transactions underscores the potential impact of conflicts of interest in allocation decisions, and highlights areas of improvement for both financial services licensees (licensees) and issuers when raising equity on our listed markets.

Report 605 Allocations in equity raising transactions details the findings from our review and highlights areas of concern requiring greater focus and care.

We reviewed a range of large and mid-sized Australian-based licensees and found they consider many discretionary factors when making allocation recommendations, including the objectives of the transaction, investor types and investor bidding into the bookbuild. The issuer’s objectives should be the primary driver of decision-making.

The report makes recommendations on improvements to licensee practices in the conduct of allocations. These include:

  • improving the documentation, accuracy, timing and delivery of messages (including updates) to investors during equity raising transactions to ensure they are not misleading and deceptive. This includes reviewing whether information previously provided, particularly about the level of demand for a capital raising, is correct
  • engaging with issuers at various stages during a transaction (issuers are also encouraged to take an active interest in the allocation process)
  • reviewing the adequacy of their allocation policies and procedures, compliance arrangements and record keeping for allocations
  • avoiding allocations to connected persons as they can present a significant conflict of interest
  • identifying and managing potential conflicts of interest when making allocation recommendations, for example disclosing the conflict to the issuer with an explanation of how it is being managed.

To increase accessibility, we’ve also published a summary version of the report: see Report 606 Allocations in equity raising transactions (summary version).

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Corporate governance taskforce underway

We’ve established a taskforce to undertake targeted reviews of corporate governance practices in large listed entities, allowing us to shine light on both good and bad practices.

Poor corporate governance practices can adversely impact investor value, market integrity and the efficiency of capital markets. We’re working jointly with corporate Australia to prevent harm suffered by investors and consumers because of poor corporate governance.

Our taskforce is focusing on:

  • the role of the board and officers in the oversight (and in the case of officers, the management) of risk
  • executive remuneration practices
  • the adequacy of periodic corporate governance disclosures.

We’re likely to publish a report at the end of the project, where we’ll highlight practices that require improvement as well as those which represent good practice.

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Increasing our focus on FICC market operators

We’ve made recommendations for Yieldbroker Pty Ltd (Yieldbroker) to improve the market it operates following our recent assessment of its compliance with its obligations as an Australian market licensee. The assessment was part of our increased strategic focus on the wholesale over-the-counter (OTC) sector and enhanced use of onsite surveillance and inspections.

We encourage other specialised market operators that we regulate to review the findings and recommendations to determine what’s applicable to their market operation.

While we found that Yieldbroker met its obligations under the Corporations Act 2001, Report 601 Market assessment report: Yieldbroker Pty Limited makes several recommendations to improve its arrangements for conflicts and governance, supervision and enforcements, and systems and controls.

We’ll undertake further assessments of market platforms in 2019 to promote fair and effective fixed income, currencies and commodities (FICC) markets.

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Retail OTC derivative issuer’s AFS licence cancelled and former director banned

Australian financial services (AFS) licensees are reminded to comply with the law or risk losing your licence. We have cancelled Berndale Capital Securities Pty Ltd’s (Berndale) licence – a retail over-the-counter (OTC) derivative issuer.

We also banned Berndale’s former director, Stavro D’Amore, from providing financial services for a period of six years. Mr D’Amore was the sole responsible manager and key person on the AFS licence and was found to be involved in contraventions by Berndale, including failing to take reasonable steps to comply with the law.

To minimise the impact on former and current clients of Berndale, their AFS licence will continue until 20 December 2018 to finalise existing client trading accounts, and until 23 May 2019 to put in place a dispute resolution scheme to resolve any disputes with the Australian Financial Complaints Authority and to make arrangements for compensation of retail clients, including professional indemnity insurance.

Berndale and Mr D’Amore each has the right of review to the Administrative Appeals Tribunal regarding our decision.

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New MDP members announced and feedback sought

We’re pleased to announce the appointment of four new members of the Markets Disciplinary Panel (MDP).

The MDP is a peer review panel that makes decisions about whether infringement notices should be given for alleged contraventions of the market integrity rules.

The new appointees are:

  • Mr Dan Ritchie (Macquarie Securities)
  • Ms Lisa Shand (Morgans)
  • Mr John Manchee (Credit Suisse)
  • Mr Ian Jones (Goldman Sachs).

Their appointments will ensure the MDP continues to have an appropriate mix of expertise, experience and diversity in Australia’s exchange traded markets.

We’re also seeking feedback about proposals to streamline and simplify the MDP’s policies and procedures to enable it to continue to deliver efficient and fair regulatory outcomes. These proposed changes are reflected in a single, shorter regulatory guide which will replace RG 216 and RG 225.

We encourage your feedback by 15 January 2019.

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Entity identifier requirement under OTC derivative transactions reporting rules

Financial entities that are required to report trades in over-the-counter (OTC) derivative transactions (under the ASIC Derivative Transaction Rules (Reporting) 2013) are reminded that from 1 April 2019 they must report using a standard identifier for any company or other entity (excluding individuals) that is a counterparty to a transaction in an (OTC) derivative (including contracts for difference and margin FX).

The identifiers to meet this requirement are:

  • Legal Entity Identifier (LEI)
  • if no LEI or interim entity identifier is available for the entity, an international business entity identifier issued by Avox Limited (AVID)
  • if no AVID is available, a Business Identifier Code (BIC).

LEIs are easy to acquire and may be obtained either from a domestic or an overseas entity that is accredited or endorsed to issue LEIs, or the local registration agent of such a firm.

Although the process to register for an LEI is relatively simple, we encourage counterparties to obtain an LEI as soon as possible before 1 April 2019.

Further information on LEIs can be obtained by visiting the Global LEI Foundation’s website.

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Stories from the beat

We identified several issues with a product disclosure statement (PDS) offering units in a fund to be listed on the ASX. Usually we resolve issues we may have with a PDS for a listing during the exposure period (the period 7–14 days after lodging the PDS with us). However, we can also raise concerns after the exposure period and will do so if we think it’s important for investors.

In this case, after the exposure period ended but before the offer closed, we identified that the PDS omitted material information for investors on a range of governance and conflicts issues relating to the responsible entity and investment manager. It also included potentially misleading statements relating to the fund’s investment strategy, the reliability of expected returns and the relevance of prior returns achieved by related parties of the manager. After discussion, the issuer agreed to issue a supplementary PDS addressing our concerns and gave investors that had already accepted the offer, the opportunity to reconsider their application.

We’ll continue to act on defective disclosure documents even if the PDS exposure period has expired. Our objective is always to ensure that investors can make properly informed investment decisions.

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Last updated: 30/03/2021 09:22