Review of regulatory design improves market integrity outcomes
Published by the Stockbrockers Association of Australia in the Stockbrokers Monthly, September 2015.
Last year ASIC undertook a review of the way we approach market supervision and enforcement to determine whether we could enhance efficiencies and capabilities across these functions. In response to this review we created two new teams – the Market Enquiry Team (MET) and the Participant Enquiry Team (PET). Already, MET and PET have proven their worth, increasing the number of market integrity matters reviewed, and recording a large number of outcomes and high levels of participant engagement.
MET and PET provide a filter between ASIC's Market & Participant Supervision (MPS) and Market Integrity Enforcement teams. They are comprised of staff with a mix of supervision and enforcement backgrounds and have a full range of enforcement powers. MET and PET conduct preliminary enquiries and investigate matters where misconduct is indicated. Of these, they determine whether a formal referral to Enforcement is required or, if not, may consider alternative regulatory responses. Previously, these matters would be received by MPS and investigated, then referred (in appropriate cases) to Enforcement, who would separately investigate the matter before determining ASIC's response.
MET's focus is misconduct involving equities and derivatives trading. In its first year, MET reviewed 60 matters, the majority of which involved allegations of insider trading (MET also considered matters involving market manipulation, continuous disclosure and the failure to lodge director's interests notices or substantial holder notices). Outcomes completed by MET include referrals to Enforcement and enforcement actions such as issuing infringement notices. MET also departs from the use of traditional enforcement tools in certain circumstances, for example, by issuing written and verbal warnings or providing feedback to market participants and companies about their processes and procedures.
Recently, ASIC surveillance identified an individual who traded ahead of a material price sensitive announcement by a company for whom he had consulted. Within two weeks, MET team members interviewed the consultant and obtained his phone and computer records under notice. MET also interviewed eight company staff who had dealt with the consultant and sought documents from the company. Although ultimately MET was satisfied there was no evidence of insider trading, it provided the company with feedback on its staff trading policy and recommended that the policy be extended to consultants to avoid the potential for suspicious trading.
PET's focus is on misconduct involving participants. Over the past 12 months, PET has been involved in more than 20 matters. These have resulted in a number of referrals to Enforcement and six submissions to the Markets Disciplinary Panel (MDP). Regulatory response times for matters reviewed by PET are impressive. On average, submissions to the MDP have been made within five months of being accepted by PET (one submission was made within a month). Warning letters were issued (on average) within 47 days of matters being accepted.
Significant advantages of the new structure outlined above are the flexibility and efficiency it provides ASIC in undertaking its market supervision and enforcement functions. By combining this expertise with the ability to make enquiries at an early stage, we have been able to minimise duplication of effort between teams and ensure that a decision is made on the appropriate regulatory response at the earliest possible stage. It has also given MET and PET the freedom to consider alternative responses for achieving positive behavioural change. Ultimately, this benefits all market stakeholders by ensuring that market regulation is timely and effective.
 Verbal warnings are only given if there is insufficient evidence or the offence has not reached a level of seriousness to take enforcement action, however, we feel that some kind of contact from the regulator may be beneficial.