Market Integrity Update - Issue 93 - May 2018
- ASIC revises market licensing regime
- Consolidated guidance on the market integrity rules released
- Principal trading and facilitation
- ASIC consults on short selling proposals
- IT consultant charged with unauthorised access to data and insider trading
- Former Morgans Financial Limited adviser banned
- ASIC restricts Big Un Limited from issuing a reduced content prospectus
- Misleading or deceptive conduct in ICOs
- Lodging financial statements with ASIC
- Indigenous Outreach Program
We have released updated and modernised guidance on the licensing regime for financial markets.
Regulatory Guide 172 Financial markets: Domestic and overseas operator will introduce a two-tiered market licensing regime. The new approach will create a more tailored regulatory regime, providing flexibility and helping to facilitate the operation of specialised and emerging markets – while ensuring that Australia’s financial markets meet the highest international standards of regulation.
The changes were widely supported during our extensive consultation with industry.
As outlined in RG 172, we will now determine if each market venue should be designated as Tier 1 or Tier 2 using a risk-based assessment.
Tier 1 market venues are, or are expected to become, significant to the Australian economy or the efficiency and integrity of, and investor confidence in, the financial system. Tier 2 licences will be able to facilitate a range of market venues, including specialised and emerging market venues.
We have also updated RG 172 to:
- more closely align our approach with major overseas jurisdictions
- reflect changes to important features of the Australian markets regime, including clarity around our expectations of technology resourcing and risk management.
For more information, read the media release.
Updated Regulatory Guide 172 incorporates and supersedes Regulatory Guide 177 and the guidance for market operators in Regulatory Guide 223.
Our consolidated and updated regulatory guidance for securities and futures market participants is now available.
We have merged and consolidated guidance in our existing regulatory guides – making it easier for you to find what you need. See:
- Regulatory Guide 265 Guidance on ASIC market integrity rules for participants of securities markets
- Regulatory Guide 266 Guidance on ASIC market integrity rules for participants of futures markets
Regulatory Guide 265 for securities market participants consolidates relevant guidance in Regulatory Guides 214, 215, 223, 224, 226 and 238. Regulatory Guide 266 for futures market participants consolidates relevant guidance in Regulatory Guides 214, 223, 226 and 250.
As part of this process we have:
- merged guidance where appropriate and made minimal changes necessary to reflect updated market integrity rule references as contained in the consolidated rulebooks
- removed information that is purely descriptive or no longer relevant
- introduced new guidance on management structures
- tailored some information to make it market neutral or, where necessary, more appropriately relate to relevant markets.
Regulatory Guide 241 Electronic trading will continue to be a stand-alone regulatory guide and has been updated to reflect the consolidated market integrity rule books.
To help prevent the misuse of confidential information regarding client orders or trading intentions, we previously set out our expectations about principal trading and facilitation activities in Report 452.
Follow-up with industry has shown that participants have taken on board our recommendations and made the required changes to their principal trading and facilitation (PTF) activities – but some market participants have continued to allow PTF traders to view unexecuted client orders in their trading systems with the client identifiers removed.
This arrangement runs the risk of exposing client trading intentions and does not meet our expectations around technological segregation. PTF traders should not be able to view any of the market participant’s unexecuted client orders.
If your organisation engages in PTF activities, you need to make sure that:
- technological segregation extends to PTF traders not being able to view any unexecuted client order flow information (even if client identifiers have been removed)
- technological segregation extends to segregation of crossing system order books and internal chat and messaging systems
- physical separation is managed to ensure confidential information cannot be accessed and used inappropriately by PTF traders
- physical separation also extends to restricting PTF traders from attending internal meetings where client orders or trading intentions may be discussed
- dual roles presenting a conflict are avoided (with appropriate conflicts management required for short-term cover arrangements)
- you consider what records are maintained about your rationale for active facilitation.
We are considering a further follow-up review of participants' PTF arrangements in the future. For more details about our expectations, read Report 452.
We’re seeking your feedback on our proposals for naked and covered short selling.
Specifically, we want to know whether you think we should change the relevant time short positions are calculated, and whether we should grant legislative relief to allow:
- market makers of certain exchange traded products to make naked short sales of units in an exchange traded fund or a managed fund in the course of making a market in those products
- naked short sales of unissued products during a deferred settlement trading period
- naked short sales in connection with initial public offering sell-downs made through a special purpose vehicle.
It is important that short selling is regulated appropriately so that our markets are orderly and transparent. Our proposals aim to reduce the burden on businesses by providing efficiency and certainty – while managing the risks of short selling to market integrity.
Submissions are due by 20 June 2018.
New South Wales IT consultant, Steven Oakes, has been charged with 115 offences for unauthorised access to data held in a computer, insider trading, and destroying or concealing books required by ASIC.
Between January 2012 and February 2016, Mr Oakes gained unauthorised access to inside information from the private computer network of a Melbourne-based financial publisher with the intention of using the information to engage in insider trading. The information contained recommendations to buy shares that were about to be published in stock recommendation reports.
We allege this information was used by Mr Oakes on 70 occasions to buy shares in 52 ASX-listed companies before the ‘buy’ recommendations for the shares in those companies were published. He made profits from selling the shares a short time later, following the reports’ publication.
Mr Oakes was not required to enter a plea on this occasion and the matter was adjourned to 25 June 2018 for committal mention.
We have permanently banned former Morgans Financial Limited financial adviser, Mr Michael Gordon McIlwraith Taylor, from providing financial services.
Between 2007 and 2015, Mr Taylor borrowed approximately $1.2 million from 16 clients, which he used to fund his own investments in options.
Borrowing from clients involved a conflict of interest which should have been apparent to Mr Taylor. He borrowed these funds at a time when they had not obtained independent professional advice and took advantage of his professional relationship with those clients. In doing so, he exposed them to high financial risks.
Mr Taylor also failed to consider the personal circumstances of five clients when entering into an options trade on their behalf.
As a result of this conduct, ASIC determined that Mr Taylor was not competent, and was inadequately trained and not of good fame and character.
We also found that Mr Taylor failed to comply with financial services laws by:
- engaging in misleading and deceptive conduct by not informing five clients about proposed options trading which was contrary to a statement of advice or contrary to what the client had stated to him
- failing to act in the best interests of three of those five clients by providing personal advice in relation to options that was contrary to the clients' relevant circumstances.
We have restricted Big Un Limited from eligibility to issue a reduced content prospectus until 2 May 2019.
Our decision follows Big Un’s failure to lodge certain reports within the timeframe required by the Corporations Act 2001.
The decision means Big Un will not be able to rely on reduced disclosure rules and must issue a full prospectus to raise funds from retail investors.
The ability to use a reduced disclosure prospectus is a privilege that is dependent on compliance with other aspects of the law, including companies meeting their ongoing disclosure obligations.
Where a company fails to comply with its periodic disclosure obligations in a full, accurate and timely manner, we will intervene to make sure that retail investors are protected. Any subsequent fundraisings should provide a full prospectus to make sure there is adequate disclosure of a company’s prospects and financial position.
Our inquiries into Big Un are continuing. Big Un remains suspended from trading on the ASX.
We are cracking down on misleading or deceptive conduct in the marketing and selling of digital or virtual tokens via initial coin offerings (ICOs). These offers can involve significant risks for investors that are often not disclosed or well understood.
Misleading or deceptive conduct is prohibited under both the Australian Consumer Law and the ASIC Act.
We are issuing inquiries to ICO issuers and their advisers where we identify conduct or statements that may be misleading or deceptive following a delegation from the Australian Competition and Consumer Commission. This is in addition to any inquiries where we identify potentially unlicensed conduct. As a result of our inquiries, some issuers have halted their ICO or have indicated the ICO structure will be modified.
ASIC Commissioner John Price said, ‘If you are acting with someone else’s money, or selling something to someone, you have obligations. Regardless of the structure of the ICO, there is one law that will always apply: you cannot make misleading or deceptive statements about the product. This is going to be a key focus for us as this sector develops.’
We recently took action to protect investors after identifying concerns with the structure of an ICO, the status of the offeror and the disclosure in its white paper. In addition to potentially misleading statements in the white paper, the offer was an unregulated managed investment scheme. This means the offeror would have been in breach of the Corporations Act had the offer proceeded, potentially leading to serious penalties.
The way you lodge financial statements with ASIC has changed. ASIC no longer accepts paper lodgement of forms FS70 and FS71 – these forms must now be lodged online through our AFS licensee portal or using standard business reporting (SBR)-enabled accounting software.
You should make sure that you have appropriate access to these lodgement methods well before lodgements are due.
For more information on lodging annual accounts and audit reports using forms FS70 and FS71, visit our website.
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ASIC’s Indigenous Outreach Program (IOP) supports Indigenous people to be confident and informed consumers when making decisions about financial services like banking, credit, insurance and superannuation.
We do this by meeting with Indigenous consumers and relevant organisations, promoting financial literacy, looking into complaints about financial service providers and raising awareness about issues affecting Indigenous consumers.