Market Integrity Update - Issue 105 - June 2019

Issue 105, June 2019

Latest report on market integrity published

We’ve published our latest report on market integrity, highlighting some of the activities we undertook to safeguard Australia’s financial markets for the period 1 July to 31 December 2018.

Report 619 Market integrity report: July to December 2018 examines our recent focus on high-frequency trading, changes to reporting requirements, and enhanced supervision and onsite reviews. It also highlights some of our key activities in areas such as BBSW surveillance, FX margin practices, and misleading ICOs and crypto-asset funds.

Some of our key enforcement outcomes for the period include:

Criminal Proceedings Criminal actions
  • 2 people charged in criminal proceedings
  • 4 criminal charges laid against 2 people
  • 1 person found guilty of 2 charges
Civil Outcomes Civil outcomes
  • $3.65 million in civil penalties
  • 3 court enforceable undertakings
  • $15.5 million in community benefits paid

 

Bannings Bannings and infringement notices
  • 2 infringement notices issued
  • $153,000 in infringement notices paid
  • 3 people banned from providing financial services
  • 2 Australian financial services licences cancelled

The report also outlines the existing and emerging risks we’ll continue to focus on, including:

  1. Conduct governance
  2. Technology risk and resilience
  3. Effective capital markets.

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On the lookout for EOFY ‘window dressing’

As we near the end of the financial year, we’d like to remind you to be on the lookout for any unusual trading that may affect share price valuations and end of financial year performance figures. This activity is known as 'window dressing'.

Window dressing is a form of market manipulation by parties who have a financial incentive to influence share prices around key reporting dates. These parties include directors, large shareholders and fund managers who periodically report to clients about investment performance.

We encourage you to take active steps to identify possible misconduct through system controls and pre-trade filters, as well as through post-trade reviews of abnormal trading behaviour. You must notify ASIC if you identify or suspect ‘window dressing’. This can be done through Form M57 Suspicious Activity Report (SARs) on the market entity compliance system (MECS) portal, or by emailing SARs at markets@asic.gov.au.

We’ll continue to monitor unusual price movements that may indicate market manipulation. If we identify any trading that we believe should have been reported to ASIC, but wasn’t, we’ll contact you for an explanation.

  • †See Regulatory Guide 265 Guidance on ASIC market integrity rules for participants of securities markets and Regulatory Guide 266 Guidance on ASIC market integrity rules for participants of futures markets for more information about SARs

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Protect your business from share sale fraud

If you’re an Australian financial services (AFS) licensee that deals in securities, you may be vulnerable to share sale fraud.

Share sale fraud occurs when a person who is not who they claim to be, sells shares that do not belong to them. Issuer-sponsored holdings are particularly vulnerable to share sale fraud.

Although it is often hard to detect, robust practices around account opening and customer due diligence can help prevent it. To help mitigate the risks to your clients and business we have released Information Sheet 237, providing guidance on:

  • one-off share sales
  • customer due diligence
  • ongoing customer due diligence
  • intermediary clients
  • anti-money laundering and counter-terrorism financing (AML/CTF) training.

If you suspect that a person is not who they claim to be, you must provide a suspicious matter report to the Australian Transaction Reports and Analysis Centre within three business days after forming the suspicion, and within 24 hours if the suspicion relates to terrorism financing.

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Consulting on proposals to restrict retail offers of ‘stub equity’ in control transactions

We welcome your feedback on our proposals to address concerns about certain offers of ‘stub equity’ to retail investors in control transactions.

Stub equity is sometimes offered when shares in a proprietary, rather than public company, are offered as consideration under a takeover or scheme of arrangement. It can also arise when scrip consideration is required to be held by a custodian.

Proprietary companies are not subject to the same disclosure and governance requirements that apply to public companies. This means that retail investors are not covered by the normal protections available to them under Australian law when participating in a public offer.

We’d like to hear from you about our proposals to restrict the use of these arrangements – if they would deprive investors of the protections they would otherwise have under the takeover and disclosing entity provisions.

We welcome your feedback before 17 July 2019.

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New information to help businesses involved with ICOs and crypto-assets operate lawfully

If your business raises funds through an initial coin offering (ICO), or is involved with crypto-assets, we have released new information to help you make sure you are operating lawfully.

Our recent experiences indicate that both ICOs and crypto-assets will often be financial products or involve financial products regulated by the Corporations Act. We’ve updated Information Sheet 225 Initial coin offerings and crypto-assets (INFO 225) to help you understand how the Corporations Act may apply to your business.

If your business offers crypto-assets, or services in relation to crypto-assets, you need to make sure you are complying with all relevant Australian laws. At a minimum, you need to make sure you do not engage in misleading or deceptive conduct, regardless of whether a financial product is involved in fundraising.

Australian laws will also apply even if the ICO or crypto-asset is promoted or sold to Australians from offshore. Issuers and their advisers should not assume that key consumer protections under Australian laws do not apply or can be ignored.

Earlier this year, Treasury reported that many ICOs have turned out to be scams. Businesses seeking to operate lawfully and legitimately need to distinguish themselves from possible scams and carefully consider the information in INFO 225.

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Federal Court rules against Vocation Limited and its officers

The Federal Court of Australia has ruled in favour of our civil penalty proceedings against Vocation Limited (in Liquidation) and its officers, Mark Hutchinson (former CEO), John Dawkins (former Chairman) and Manvinder Gréwal (former CFO).

The proceedings related to various statements made to the Australian Securities Exchange (ASX) and to UBS AG Australia (UBS) relating to a fully underwritten placement to institutional and sophisticated investors in September 2014, and a review undertaken by the Victorian Department of Education and Early Childhood Development (DEECD) into two of Vocation’s main registered training organisations (RTOs).

The Court found that:

  • Vocation made misleading and deceptive statements to the ASX and UBS in a 25 August ASX announcement and in a due diligence questionnaire (DDQ), and failed to disclose to the market the actions taken by the former DEECD in July and August 2014 when it suspended all payments to Vocation
  • Mr Hutchinson and Mr Dawkins caused or permitted Vocation’s failure to disclose to the market the actions taken by the former DEECD
  • Mr Hutchinson caused or permitted Vocation’s misleading and deceptive statements in the 25 August announcement and the DDQ
  • Mr Gréwal caused or permitted Vocation’s misleading and deceptive statements in the DDQ.

Statements that mislead or withhold material information risk serious damage to the integrity and operation of the Australian market. Our market supervision and enforcement activities will continue to focus on timely and accurate market disclosure.

Pecuniary penalties against the officers, disqualification orders and costs will be sought.

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Macquarie Securities pays penalty for deficiencies in its regulatory data

Macquarie Securities (Australia) Limited (Macquarie) has paid a $300,000 infringement notice penalty for deficiencies in its reporting of regulatory data to ASX and Chi-X.

Over a four-year period, Macquarie transmitted approximately 42 million orders and 377,000 trade reports to ASX and Chi-X that included incorrect regulatory data or omitted required regulatory data.

Accurate regulatory data enhances market transparency and ensures an orderly market. When market operators are provided with data that is incorrect or missing, regulatory decision-making by market operators and ASIC is impeded.

Although the Markets Disciplinary Panel (MDP) found that Macquarie intended to comply with the market integrity rules, it considered Macquarie’s conduct negligent because of the:

  • poor design and implementation of updates to key systems
  • high number of orders and trade reports containing incorrect or missing data
  • multiple categories of incorrect or missing data
  • length of time the problems persisted without detection by Macquarie.

Macquarie’s scale, market share and high market flows means it has greater potential to undermine market integrity. Market participants like Macquarie have a greater responsibility to properly manage the risks that flow from their conduct. If that risk is poorly managed, the financial consequences to the market participant should be greater.

Compliance with the infringement notice is not an admission of guilt or liability, and Macquarie is not taken to have contravened subsection 798H(1) of the Corporations Act.

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Reconciliation: Grounded in truth

Did you know ASIC is one of many organisations committed to reconciliation, through the implementation of a stretch Reconciliation Action Plan (RAP)?

Through our stretch RAP we develop programs, resources and policies to ensure the protection of Indigenous consumers and investors.

Last year our employees participated in the Reconciliation Australia Barometer, a voluntary survey undertaken by organisations with a current RAP, which collects data to identify the attitudes and perceptions that Indigenous and non-Indigenous Australians have about each other, about reconciliation, and about the nation’s progress towards reconciliation.

Our results showed that staff have low knowledge of Indigenous cultures (64%) and Indigenous histories (58%). However, a high number of ASIC participants (79%) believe the relationship between Indigenous Australians and other Australians is very important for Australia as a nation, and a very high number of ASIC participants (94%) consider it fairly or very important for all Australians to know about Indigenous cultures.

To build our staff’s understanding and knowledge of Indigenous cultures we recently held a national event across all ASIC offices in celebration of Reconciliation Week (27 May to 3 June 2019) – with live performances of music and dance from Indigenous performers in Sydney and Brisbane. This years’ theme ‘Grounded in Truth: Walking together with Courage’ focused on the heart of reconciliation, and the relationship between Aboriginal and Torres Strait Islander peoples and the broader Australian community.

For this relationship to be positive, it must be grounded in a foundation of truth – whether that means engaging in challenging conversation or unlearning/relearning what you know, the journey of reconciliation requires all of us to walk together with courage.

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Last updated: 22/07/2020 09:46