House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

Glossary

The following abbreviations and acronyms are used in this explanatory memorandum.

General outline and financial impact

Overview

The Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 and supporting Bills contain a range of measures to simplify and streamline Australia's corporate and financial services laws. The package contains amendments that will:

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implement the Australian Government's response to several recommendations made in the Rethinking Regulation report of the Taskforce on Reducing the Regulatory Burden on Business, relevant to corporate and financial services regulation;

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amend various provisions of the Corporations Act 2001 (Corporations Act) and related Acts to improve the efficiency of corporate and financial services regulation, based on the proposals outlined in the Corporate and Financial Services Regulation Review Proposals Paper of November 2006; and

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make various other minor and technical amendments to the Corporations Act and related Acts.

The main Bill contains nearly all of the amendments. The Corporations (Fees) Amendment Bill 2007 and the Corporations (Review Fees) Amendment Bill 2007 are supporting Bills which contain minor amendments regarding chargeable matters in support of some measures in the main Bill, and a measure to introduce a facility for up-front payment of annual review fees. Those measures are required to be in separate Bills for constitutional reasons.

Unless indicated otherwise, references in this document to a Bill are to the main Bill.

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1. Financial Services Regulation

The Bill will reduce the regulatory burden on providers of financial services, increase access to financial advice and make improvements to other aspects of the financial services regulatory framework. The changes include:

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removing the need for a Statements of Advice to be provided in two circumstances: where there is no recommendation in relation to a particular financial product and no remuneration; and where the amount to which the advice relates is under the prescribed threshold;

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refining the circumstances where a Financial Services Guide is not required to be provided, particularly at seminars;

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introducing changes to the retail/wholesale client distinction regarding sophisticated investors and in relation to investments in pooled superannuation trusts;

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refining the cross-endorsement provisions;

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introducing a new 'in use' notice for Product Disclosure Statements;

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improving the mechanism whereby the Australian Securities and Investments Commission (ASIC) takes a role in overseeing compliance with a financial market's rules where the market operator has a conflict of interest; and

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allowing registered managed investment schemes to invest in unregistered managed investment schemes.

Date of effect: Some amendments commence on Royal Assent. Others commence on a date to be fixed by proclamation or otherwise six months after Royal Assent.

Proposal announced: The proposals were announced in the Corporate and Financial Services Regulation Review Proposals Paper of November 2006 (the Proposals Paper). Their origin is in Proposals 1.2-1.4, 1.6-1.7 and 1.9-1.12 of the Proposals Paper. These proposals have been refined in the light of comments made in response to that paper. The amendments also reflect the Government's response to Recommendation 5.17 of the Rethinking Regulation report of the Taskforce on Reducing the Regulatory Burden on Business, released in August 2006 (the Banks report).

Financial impact: Aside from some consequential changes to ASIC fees that may result in a negligible financial impact, the amendments have no financial impact.

Compliance cost impact: The amendments are expected to reduce cost burdens for a number of financial services licensees, which are expected to result in cost savings for their clients. An example is the potential cost reduction for licensees of providing advice to clients with relatively small amounts to invest, and to sophisticated investors. There are likely to be some initial costs for product issuers in moving to the new 'in use' notice but, once the electronic mechanism is implemented, the cost of using it is likely to be less than the cost of the current arrangements.

Summary of regulation impact statement

Regulation impact on business: Statement of Advice threshold and product activity and data collection

Impact: The Statement of Advice threshold measure will impact financial service providers in the provision of personal advice and consumers of financial advice. The product activity and data collection measure will primarily impact financial product issuers.

Main points:

Statement of advice threshold

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The problem to be addressed in the Statement of Advice threshold measure is that consumers who wish to obtain financial advice in relation to a relatively small investment amount are unable to access or afford financial advice because of the relatively high cost of providing such advice.

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The threshold proposed is linked to the point at which it becomes commercially viable for an adviser to provide advice, based on recovering the cost of preparing a Statement of Advice.

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The result of the measure is expected to be increased consumer access to affordable financial advice, without compromising investor protection.

Product activity and data collection

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The problem which the product activity and data collection measure seeks to address relates to the costs associated with lodging product disclosure in-use notices, compared with the regulatory benefit from ASIC receiving such notices.

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The measure included in the Bill will improve the regulatory usefulness and efficiency of the product disclosure in-use notice system and reduce compliance burdens on business.

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2 Company Reporting Obligations

The Bill will simplify company reporting obligations to reduce compliance costs for companies. The changes include amendments to:

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incorporate in the Corporations Act the accounting standards requirements for executive and director remuneration disclosure;

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increase the thresholds used to define a large proprietary company and allow for future changes to the thresholds to be prescribed by regulations;

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change the notification requirements, payment of annual fees and the company deregistration procedure; and

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allow companies to make annual reports available on the internet and only require hard copies to be sent to members who request them.

Date of effect: The bulk of the changes will commence on Royal Assent. Some provisions, however, have specific application provisions. These are:

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amendments regarding executive remuneration will apply to financial years that begin on or after commencement;

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changes to thresholds for reporting for large proprietary companies will take effect in the financial year that ends on or after commencement;

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changes to requirements for companies to inform ASIC when officeholders change, to provide for a company using a contact address and to provide for regulations allowing a single lump sum payment of annual review fees will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent;

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amendments regarding distribution of annual reports apply to a financial year that ends on or after commencement.

Proposal announced: The amendments regarding reporting of executive remuneration disclosures, thresholds for reporting of large proprietary companies, changes to officeholders, maintenance of company addresses, review fees associated with voluntary administration, up-front payment of annual review fees and electronic distribution of annual reports are based on proposals outlined in the Proposals Paper of November 2006. The amendments regarding executive remuneration disclosures, electronic distribution of annual reports and thresholds for reporting of large proprietary companies were announced in the Government's response to the Banks Report, released in August 2006.

Financial impact: Nil.

Compliance cost impact: The amendments are expected to reduce costs burdens for a large proportion of Australian companies. In particular, companies affected by the increase in thresholds for reporting by large proprietary companies and those that wish to take advantage of the facility to distribute annual reports electronically are likely to benefit from significant compliance cost savings.

Summary of regulation impact statement

Regulation impact on business: thresholds for reporting by large proprietary companies

Impact: This measure will affect large proprietary companies (that is, large companies that are not public companies).

Main points:

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The increase to the threshold for financial reporting will mean approximately 1,600 fewer large proprietary companies will be required to lodge their annual reports with ASIC.

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The main costs of the measure arise from the increased risk of direct users of accounts losing confidence in the affected companies due to a reduction in publicly available financial information. As the companies concerned are not economically significant, this is not considered to be a major concern.

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3. Auditor Independence

The Bill will make changes to the auditor independence provisions of the Corporations Act. The changes fall into three categories:

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rectification of a number of anomalies and unintended consequences that have been identified during the implementation of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act);

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incorporation into the framework of several improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements; and

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making a number of miscellaneous amendments designed to improve the effectiveness of the auditor independence requirements in the light of operational experience since the requirements were introduced by the CLERP 9 Act.

Date of effect: The provisions commence on Royal Assent. However, some provisions have specific application provisions:

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amendments relating to the time when an auditor's independence declaration must be given apply to a report for a financial year that ends on or after commencement;

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amendments which will give effect to a 'covered person' approach in relation to the auditor independence restrictions on financial relationships will apply to an audit of the financial report for a reporting period beginning on or after commencement;

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the amendments which will modify the way in which the two-year 'cooling-off' period is calculated and the amendment to the multiple former audit partner restriction will apply to any person who ceases to be a member of an audit firm, a director of an audit company or a professional employee of an audit company, whether the person so ceases before or after the day on which those amendments commence; and

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the amendments which will give ASIC the power to extend the period within which an auditor is required to resolve a conflict of interest situation will apply in relation to information given to ASIC on or after the day the amendments commence.

Proposal announced: The rectification of the anomalies identified during the implementation of the CLERP 9 Act is based on proposals appearing in the Proposals Paper of November 2006. The amendments relating to the multiple former audit firm partner restriction, the 'cooling-off' period for retiring audit partners and the introduction of a 'covered person' approach in relation to restrictions on financial relationships are based on submissions received from key stakeholders during the public consultation process on the discussion paper Australian Auditor Independence Requirements: A Comparative Review which the Government released in November 2006. The proposal to review the multiple former audit firm partner restriction was also announced in the Government's response to the Banks Report released in August 2006.

Financial impact: Nil.

Compliance cost impact: The amendments are expected to reduce compliance costs for auditors and their clients by removing some onerous regulatory requirements regarding auditor independence.

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4. Corporate Governance

The Bill will make amendments to the Corporations Act to remove burdensome member approval requirements in relation to small transactions between public companies and related parties. It will also allow delegation to ASIC of certain administrative functions regarding identical or unacceptable company names, and approval of changes to certain corporate constitutions. This will streamline administrative processes for corporations.

Date of effect: The amendments regarding related party transactions apply to financial years commencing on or after 1 July 2007. The amendments allowing delegation of administrative functions to ASIC will commence on 1 July 2007.

Proposal announced: The removal of member approval requirements for certain related party transactions is based on proposals appearing in the Proposals Paper of November 2006.

Financial impact: Nil.

Compliance cost impact: The amendments will reduce compliance costs for the affected corporations by removing member approval requirements and streamlining administrative processes.

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5. Fundraising

This Bill contains six measures to amend a number of provisions in the Corporations Act relating to fundraisings by corporate entities. The amendments are generally intended to facilitate such fundraisings by various means, including: abolishing unnecessary disclosure requirements; removing inconsistencies between different parts of the Corporations Act; or amending the time periods and amounts that can be raised under particular provisions.

Date of effect: The date of effect varies between measures. Generally the amendments will come into force either upon Royal Assent or at the latest six months after Royal Assent.

Proposal announced: The measures were first canvassed in the 'Corporate and Financial Services Regulation Review' Consultation Paper released in April 2006. The measures are based on proposals included in the Proposals Paper released by the Parliamentary Secretary to the Treasurer in November 2006.

Financial impact: Nil.

Compliance cost impact: Compliance costs were estimated for two of the measures. The impact of the measure amending the disclosure provisions applying to rights issues would constitute a significant saving compared to the costs imposed under the current framework due to the abolishment of the prospectus requirement. The measure relating to employee unlisted share schemes would result in a significant saving compared to the costs imposed under the current framework due to reduced disclosure requirements and other regulatory relief granted under the measure.

Summary of regulation impact statement

Regulation impact on business

Impact: The measure to amend the disclosure provisions applying to rights issues for quoted securities and interests in managed investment schemes will affect listed entities raising funds through a rights issue. The measure relating to employee share schemes will affect listed and unlisted entities taking advantage of the relief provided to establish and operate an employee share scheme.

Main points:

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With respect to the measure to amend the disclosure requirements applying to rights issues, listed entities wishing to raise funds will be able to do so through a rights issue without providing a prospectus. The amended provisions require the listed entity to instead provide a notice to the market disclosing any price-sensitive information withheld from the market (as permitted under the Listing Rules) at the time the rights issue offers are made. The compliance costs relating to the provision of such a notice are much lower than those for providing a full prospectus as currently required.

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As a result, listed entities wishing to raise funds may have an incentive to do so through a rights issue rather than some other means, such as a direct sale of securities or other financial products to institutional investors. The amendment is therefore intended to benefit mainly small shareholders, who can participate in rights issues but not in certain other forms of fundraisings such as institutional placements which are currently widely used.

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With respect to the measure relating to employee share schemes, unlisted companies offering shares to their employees through an employee share scheme are currently subject to a range of disclosure, licensing and other restrictions imposed under the Corporations Act. The measure will remove a number of such restrictions, while still maintaining an appropriate level of investor protection for employees considering participation in such a scheme.

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As a result, there may be more unlisted companies establishing an employee share scheme. This outcome is in accord with the Australian Government's policy of encouraging the wider use of employee share schemes, which are generally considered to provide substantial benefits to the wider economy.

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6. Takeovers

The Bill will repeal the provisions in the Corporations Act which relate to telephone monitoring during takeover bids and the requirements to provide section 665D and 665E notices (85 per cent notices). The repeal of those requirements will remove onerous compliance burdens for bidders and targets involved in company takeovers which are not justified by increased levels of shareholder protection.

Date of effect: The day of Royal Assent.

Proposal announced: The removal of telephone monitoring and 85 per cent notice requirements is based on proposals outlined in the Proposals Paper of November 2006. A review of the telephone monitoring requirement was announced in the Government's response to the Banks Report, released in August 2006.

Financial impact: Nil.

Compliance cost impact: The compliance cost burden for bidders and targets will be reduced by eliminating the costs associated with the telephone monitoring and 85 per cent notice requirements.

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7. Compliance

The Bill will amend the Corporations Act to streamline compliance procedures and ensure companies can access newer technologies. The measures include simplifying returns of company particulars and permitting electronic registration of charges.

Date of effect: The amendments permitting the electronic registration of company charges will commence on 1 July 2007. The amendments regarding returns of particulars will commence on a date to be fixed by proclamation or otherwise six months after Royal Assent.

Proposal announced: The amendments are based on proposals outlined in the Proposals Paper of November 2006.

Financial impact: Nil.

Compliance cost impact: The amendments will reduce compliance costs for the affected corporations by limiting the circumstances in which corporations must fill in and lodge a return of particulars, and by reducing paperwork connected with the registration of company charges.

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Chapter 1 Financial Services Regulation

Outline of chapter

1.1 The Bill amends the Corporations Act to reduce the regulatory burden on those providing financial services to facilitate consumer access, while maintaining investor protection.

1.2 The amendments primarily apply to those providing financial advice. They also assist in: reducing the exposure of licensees in cases of cross-endorsement of authorised representatives; improving the mechanism for reporting the use of Product Disclosure Statements to ASIC; ensuring that trustees of superannuation trusts are treated as wholesale in their deALIGNs with pooled superannuation trusts; and allowing registered managed investment schemes to invest in unregistered managed investment schemes.

1.3 In addition, they assist in maintaining the integrity of a financial market where, for example, a company which is related to the market operator is a participant on the market.

Context of amendments

Exemption from providing a Statement of Advice - no product recommendation and no remuneration

1.4 Many financial advisers provide a free initial consultation at which general investment options may be discussed but no specific products are recommended.

1.5 Such discussions would generally constitute the provision of personal advice under the Corporations Act, where the exemption from financial advice for asset allocation advice (regulation 7.1.33A of the Corporations Regulations) cannot be relied upon.

1.6 In these situations, it is argued that the requirement to prepare a written Statement of Advice is onerous for the adviser and of little benefit for the client.

1.7 It has been submitted that the requirement to produce a Statement of Advice under these circumstances potentially distorts the provision of client focussed advice. For example, advisers may consider that the cost of producing a Statement of Advice is not economic in relation to a free initial consultation where a client has a relatively small amount of money to invest. This may result in these consumers being unable to access general strategic financial advice.

1.8 Where a financial adviser recommends that a person continue to hold an existing product, such advice may also constitute personal advice even if the client is recommended to take no action and the adviser receives no additional remuneration.

Threshold for requiring a Statement of Advice

1.9 The Corporations Act defines the circumstances in which personal financial advice is provided to a client. The personal financial advice definition is triggered if a financial service provider knows a client's objectives, financial situation or needs and considers that information in recommending a decision in relation to a financial product or class of products.

1.10 The definition of personal advice captures situations where a financial services provider uses personal information and product information to make a recommendation to a retail client. In those circumstances, a Statement of Advice is required to be provided to the client.

1.11 In certain situations, it may not be economic for an adviser to produce a Statement of Advice if a client is seeking a minor piece of advice and/or has a relatively small amount to invest. Many advisers are choosing not to provide personal advice to such clients, with the result that, in these circumstances, small-scale consumers may not be able to access advice that may benefit them.

Financial Services Guide exemption - general advice to the public

1.12 Where a licensee or authorised person provides general advice to a client, usually that person must give the client a Financial Services Guide (which describes the services the licensee provides, information about remuneration and certain other matters). However, subsection 941C(4) exempts the entity providing the general advice from supplying a Financial Services Guide if the general advice is provided in a public forum.

1.13 While the regulations may define what constitutes a public forum for the purposes of subsection 941C(4), the regulation requires that it needs to be open to the public.

1.14 This means that seminars for a subset of the public, such as the employees of a particular business, would not be a public forum and therefore would not be eligible for the public forum exemption.

Sophisticated investors

1.15 Subsection 761G(1) of the Corporations Act provides that a financial product or service is provided to a client in a retail capacity except in certain circumstances. The Corporations Act contains a number of tests to determine whether a client is considered retail or wholesale.

1.16 For example, when deALIGN in financial products (other than general insurance, superannuation and retirement savings account products), if the individual provides evidence that they have net assets of at least $2.5 million or gross income in the last two financial years of at least $250,000 a year, then they may be considered wholesale investors (paragraph 761G(7)(c) and Corporations Regulation 7.1.28).

1.17 Additional disclosure protections apply to retail clients only.

1.18 Although the existing tests adequately address the circumstances of many investors, there are some investors who are defined in the legislation as retail investors and are unable to access wholesale status. For reasons such as experience or professional training, these investors may wish to be treated as wholesale investors. Such investors may consider retail disclosure an unnecessary hindrance to activities they well understand and would prefer to access wholesale investor status. They may also wish to access wholesale-only products.

1.19 Subsection 708(10) of Chapter 6D of the Corporations Act already includes a mechanism which allows a financial services licensee to be satisfied that the investor is sufficiently experienced not to need the disclosure provided to other (retail) persons. This status extends only to Chapter 6D which addresses disclosure in relation to securities.

1.20 Chapter 7, which addresses financial product advice and disclosure in relation to other financial products, does not include such a provision.

Cross-endorsement of authorised representatives of licensees

1.21 Authorised representatives may act for a number of financial services licensees. However, each licensee must consent to the agent being the authorised representative of each of the other licensees. This is commonly referred to as cross-endorsement.

1.22 The cross-endorsement arrangements expose the endorsing licensees to joint and several responsibility for the activities of cross-endorsed authorised representatives that are authorised to provide the same class of financial service (section 917C). One class of financial service is advice in relation to general insurance.

1.23 Accordingly, two licensees may be jointly and severally responsible for advice provided by an agent, even if the advice relates to a type of general insurance that the agent only handles on behalf of one of the two issuers. This means that, for example, an authorised representative of Licensee A who only handles motor vehicle insurance could expose Licensee A to liability in respect of, say, conduct in relation to advice on travel insurance products offered by the authorised representative on behalf of Licensee B.

Product activity and data collection

1.24 A Product Disclosure Statement contains key information regarding a financial product sold to investors. For most classes of financial product, section 1015D of the Corporations Act requires the product issuer to lodge an 'in use' notice with ASIC within five business days of the first use of the Product Disclosure Statement. This requirement ensures ASIC is aware of all products being promoted in the market.

1.25 ASIC received approximately 12,000 in use notices in 2004. However, due to the current manual lodgment mechanism, the notice does not fully serve its regulatory purpose as it does not provide adequate means for ASIC to determine when a Product Disclosure Statement is no longer current, for example when it is out of date and/or when a product is withdrawn from the market.

Licensed market operators and related participants and listed bodies

1.26 Section 798C of the Corporations Act anticipates circumstances where a market licensee may be included in the market's official list. This would mean the market would be self-listed.

1.27 Under subsection 798C(2) the financial products of the market licensee can be traded on the market if the licensee enters into an arrangement with ASIC for deALIGN with possible conflicts of interest and ensuring the integrity of the trading of the licensee's financial products.

1.28 The market's listing rules must provide for ASIC instead of the licensee to make decisions and to take action in relation to the admission of the licensee to the market's official list, the removal of the licensee from that list and the allowing, stopping, or suspending of the trading on the market of the licensee's financial products.

1.29 In providing for ASIC to make decisions in relation to these matters the law addresses possible conflicts of interest which could arise in the market licensee's oversight of itself.

1.30 The current law does not address a number of other possible conflict situations.

1.31 At present the legislation does not address situations where a related body corporate to the market licensee, a managed investment scheme whose responsible entity is a related body corporate of the market licensee or a trust whose trustee is a related body corporate of the market licensee wishes to be listed on the market.

1.32 Further, the current legislation does not address the potential conflicts which arise because the market licensee, a related body corporate or a related partnership is a participant in the market. The issue of a market licensee supervising competitor participants is also not dealt with.

Pooled superannuation trusts and product disclosure

1.33 A pooled superannuation trust is one in which the assets of a number of superannuation funds, approved deposit funds or other pooled superannuation trusts are invested and managed by a professional manager. Pooled superannuation trusts can accept deposits only from complying superannuation funds, complying approved deposit funds, and other pooled superannuation trusts. These are regulated entities typically of significant substance and experience.

1.34 Under section 761G of the Corporations Act, the product disclosure and associated retail client protections in Part 7.9 apply to all investors in pooled superannuation trusts regardless of their nature and scale. This means, for example, that investors in pooled superannuation trusts must be given a Product Disclosure Statement, have the benefit of a cooling off period and receive periodic statements even if the investor is itself a large superannuation fund.

1.35 Other financial services provided by trustees of pooled superannuation trusts are treated differently.

Registered managed investment schemes investing in unregistered managed investment schemes

1.36 The responsible entity of a registered managed investment scheme may only invest scheme property or keep scheme property invested in another managed investment scheme if that other scheme is registered under Chapter 5C of the Corporations Act (subsection 601FC(4)).

1.37 This restriction is intended to prevent a responsible entity from establishing or investing in an unregistered managed investment scheme to avoid the scheme property protections that apply to registered managed investment schemes.

1.38 A managed investment scheme which operates predominantly outside Australia, such as real estate investment trusts in the United States, will generally not be a registered managed investment scheme. Increasingly registered managed investment schemes seek to diversify their investments among a range of foreign collective investment structures or focus on overseas investments. Generally such investment is not for the purpose of avoiding regulation and is directed to the best interests of members. No such restriction applies to trustees of superannuation funds.

1.39 There is already ASIC Class Order relief for some kinds of investment in Australian-based unregistered managed investment schemes.

Summary of new law and comparison of key features of new law and current law

Exemption from providing a Statement of Advice - no product recommendation and no remuneration

1.40 The Bill will exempt financial services licensees from providing a Statement of Advice in the circumstance where they provide personal advice where that advice does not recommend a product and the adviser does not receive any remuneration for providing that advice. Personal advice that satisfies these requirements will be required to be documented in a Record of Advice and provided to the client upon their request. The measure does not alter the need for the advice to be appropriate or for the adviser to be appropriately trained to provide personal advice.

Threshold for requiring a Statement of Advice

1.1 The Bill will introduce a threshold into the Statement of Advice requirements, so that a full Statement of Advice would only be required if the advice given is in relation to an investment amount that is above a certain monetary threshold. An initial threshold of $15,000 is proposed.

1.2 A Statement of Advice will be required to be prepared and provided to a client if the amount to which the advice relates is $15,000 or more. For advice relating to amounts less than $15,000, the adviser will be required to provide a Record of Advice to the client.

1.3 The Bill will limit the application of this relief in relation to superannuation advice. Where advice is to consolidate into, or supplement, a superannuation fund of which the person is an existing member, the Statement of Advice exemption may be relied on. Similar arrangements will apply to advice regarding retirement savings accounts. Where this occurs, the Record of Advice must disclose the matters listed in section 947D of the Corporations Act. These disclosures relate primarily to charges and pecuniary interests relevant to the client. Where the advice relates to the consolidation or supplementation of superannuation in relation to an investment amount of $15,000 or less, the proposal will extend to the consideration of life risk insurance associated with the superannuation interest only.

1.4 The existing Statement of Advice arrangements that apply to general insurance products (including in relation to sickness and accident and consumer credit insurance) would not be altered by this proposal. General insurance products (other than sickness and accident and consumer credit insurance) have previously been granted an exemption from the provision of a Statement of Advice. It is not proposed that the threshold apply to advice in relation to life risk insurance products (except those related to superannuation, as mentioned above).

1.5 The measure does not alter the need for the advice to be appropriate or for the adviser to be appropriately trained to provide personal advice.

Financial Services Guide exemption - general advice to the public

1.1 The amendments permit an entity which is providing general advice not to give the client a Financial Services Guide where the general advice is provided to the public, or a section of the public, in the manner prescribed in the regulations.

1.2 This means that regulations can be made which do not require that any person is permitted to attend the event at which the general advice is given.

Sophisticated investors

1.1 The amendments provide for the adoption in Chapter 7 of a mechanism which will allow an investor to be treated as a wholesale client if they satisfy a financial services licensee that the investor is adequately experienced to be determined a wholesale investor. The licensee would have to document the reasons for his conclusion. The investor would need to acknowledge the effect of being treated as a wholesale client.

1.2 The mechanism is based on subsection 708(10) which provides such a mechanism in Chapter 6D.

Cross-endorsement of authorised representatives by licensees

1.1 The amendments refine the cross-endorsement provisions so that the joint and several responsibility of financial services licensees for the conduct of their authorised representatives will not apply where the authorised representative provides services in relation to different kinds or sub-classes of financial product on behalf of each licensee (for example in relation to motor vehicle insurance and travel insurance).

Product activity and data collection

1.1 The Bill includes a revised approach for lodging 'in use' notices with ASIC. The approach is an on-line reporting mechanism for product issuers to advise ASIC of matters relating to Product Disclosure Statement distribution.

1.2 The measure will apply the following triggers for lodgement of the Statement (as set out in subsection 1015D(2) of the Corporations Act): when a Product Disclosure Statement (as defined for subsection 1015D(2)) is first given to someone in a recommendation, issue or sale situation; when a Product Disclosure Statement is no longer available to be given in a recommendation, issue or sale situation; and when changes are made to the fees and charges contained in the enhanced fee disclosure table (details of the enhanced fee disclosure requirements are in regulations 7.9.16K, 7.9.16M and 7.9.16N as well as in Schedule 10 of the Corporations Regulations).

1.3 The regulations will be amended to provide that the lodgement fee for the 'in use' notice is payable only once when the original notice is lodged. Any subsequent lodgements of a notice about the same Product Disclosure Statement caused by changes to the fees and charges or due to the product no longer being available will not require the payment of additional fees.

1.4 The requirement commences on 1 July 2008, when ASIC has established the on-line report and electronic lodgement mechanism. From 1 July 2008 to 1 January 2009, both hard copy and electronic lodgement will be available. From 1 January 2009, the notices will have to be lodged electronically.

Licensed market operators and related participants and listed bodies

1.1 The Bill will extend the application of the current section 798C to the licensee and various entities which are related to the market licensee.

1.2 The Bill will also enact a new provision which will provide for ASIC to take over from the licensee in making decisions and taking action in relation to various participants who are related to the market licensee or in competition with it.

Pooled superannuation trusts and product disclosure

1.1 When an interest in a pooled superannuation trust is provided to the trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme that has net assets of at least $10 million, the latter will no longer be treated as retail clients for the purpose of the product disclosure provisions. The protections provided by Part 7.9 of the Corporations Act, such as a Product Disclosure Statement, will not apply.

Registered managed investment schemes investing in unregistered managed investment schemes

1.1 The amendments omit the prohibition on registered managed investment schemes investing in unregistered managed investment schemes.

1.2 It is not confined to schemes operating predominantly outside Australia. It is considered appropriate to extend it to Australian unregistered schemes in the light of the existing ASIC Class Order relief, the duties on responsible entities of registered managed investment schemes and ASIC's existing powers in relation to bodies which operate such schemes.

Detailed explanation of new law

Exemption from providing a Statement of Advice - no product recommendation and no remuneration

1.1 The providing entity does not have to provide a Statement of Advice to the client, when providing personal advice that meets the two following requirements (subsection 946B(7)).

1.2 The personal advice does not recommend or state an opinion in respect of the acquisition or disposal of a specific financial product; and the following persons do not receive any remuneration directly or any other benefit for providing the advice:

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the providing entity;

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an employer of the providing entity;

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the authorising licensee, or any of the authorising licensees;

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an employee or director of the authorising licensee;

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an associate of any of the above.

1.3 The providing entity must record the advice in a Record of Advice and comply with requirements regarding Records of Advice, including the requirement to include information about remuneration or other benefits and other interests and associations (subsections 946B(8) and (9)). [Schedule 1, Part 1, item 118]

Threshold for requiring a Statement of Advice

1.4 A providing entity does not have to provide the client with a Statement of Advice, when providing personal advice in relation to financial investments of a threshold amount that does not exceed an amount prescribed by regulations (section 946AA).

1.5 The exemption does not apply to advice in relation to a derivative, a general insurance product or a life risk insurance product (except where the advice about a superannuation product relates to a life risk insurance product). In addition, it does not apply to a superannuation product or a retirement savings account product unless the client already has an interest in the product.

1.6 The amendment provides the principles for determining the total value of the investments to which the advice relates and provides a mechanism for determining the value in relation to particular kinds of financial products.

1.7 Instead of providing the client with a Statement of Advice, the providing entity must keep a record of the personal advice and comply with all requirements that currently apply in regard to the content of Records of Advice, including the requirement to include information about remuneration or other benefits and other interests and associations (as required in paragraphs 947B(2)(d) and (e) or 947C(2)(e) and (f)).

1.8 The providing entity must give the client a copy of the Record of Advice as soon as practicable and prior to the provision of any further financial service to the client. [Schedule 1, Part 1, item 117]

Financial Services Guide exemption - general advice to the public

1.9 An entity which provides general advice to clients does not have to give a Financial Services Guide to those clients if the general advice is provided to the public, or a section of the public in the manner prescribed in the regulations [Schedule 1, Part 3, item 219] .

1.10 Currently, this exemption only applies to public forums.

1.11 By virtue of the regulations, the exemption is expected to apply to sections of the public such as seminars to groups of employees, as well as broadcasts and promotional material available to the public (to which the current exemption applies).

Sophisticated investors

1.12 The amendment inserts a mechanism whereby a financial services licensee can certify that a client has sufficient experience to be treated as wholesale. [Schedule 1, Part 1, item 100, section 761GA]

1.13 The licensee needs to be satisfied on reasonable grounds that the previous experience allows the client to assess such matters as the merits and value of the financial product or service, and the risks associated with holding the product. [Schedule 1, Part 1, item 100, paragraphs 761GA(a) and (d )]

1.14 The licensee must provide the client with a written statement of the reasons for being satisfied about these matters and the client needs to sign an acknowledgement of the consequences of being treated as wholesale. [Schedule 1, Part 1, item 100, paragraphs 761GA(e) and (f )]

1.15 The mechanism does not apply to general insurance products, superannuation products or retirement savings account products, or where the product is provided for use in connection with a business. [Schedule 1, Part 1, item 100, paragraphs 761GA(b) and (c )]

Cross-endorsement of authorised representatives

1.16 The effect of section 917C on two or more financial services licensees cross-endorsing a particular authorised representative is refined where the licensees have authorised the representative in relation to different kinds or sub-classes of financial products.

1.17 The kinds of financial product to which this amendment applies will be prescribed by regulations. [Schedule 1, Part 3, item 218]

1.18 The regulations are expected to specify the kinds or sub-classes of general insurance to which this provision applies. If appropriate, the regulations could extend this cross-endorsement provision beyond general insurance.

Product activity and data collection

1.19 The person responsible for the Product Disclosure Statement must lodge a notice with ASIC, as soon as possible or at least within 5 business days of any of the following events:

•

The Product Disclosure Statement is first given to someone in a recommendation, issue or sale situation;

•

A change is made to the fees and charges in the Product Disclosure Statement;

•

The financial product to which the Product Disclosure Statement relates is no longer recommended or offered to new clients in a recommendation, issue or sale situation. [Schedule 1, Part 4, item 223]

1.20 The notice will be able to be lodged electronically with ASIC from 1 July 2008 and will be required to be lodged electronically from 1 January 2009. [Schedule 1, Part 5, items 224, 225 and 226]

Licensed market operators and related listed bodies

1.21 Section 798C pertaining to self-listing markets is replaced with a new section extending its application to a wider variety of potential conflict situations. [Schedule 1, Part 1, item 101]

1.22 The current law addresses conflicts of interest where a market licensee is self-listed.

1.23 To ensure that adequate supervisory functions are also in place for listed bodies which are related to the market licensee, subsection 798C(1) provides for the market licensee, a related body corporate of the market licensee, a managed investment scheme whose responsible entity is a related body corporate of the market licensee or a trust whose trustee is a related body corporate of the market licensee to be included in the market's official list only if certain arrangements are entered into with ASIC. [Schedule 1, Part 1, item 101]

1.24 The arrangements which either the market licensee or the listed entity or both are required to enter into will address the potential conflict of interest which could arise and matters required for the purpose of ensuring the integrity of trading in the listed entity's financial products. [Schedule 1, Part 1, item 101, subsection 798C(2 )]

1.25 In addition, while the listed entity is included in the market's official list, the listing rules of the market must provide for ASIC to make decisions and to take action in relation to the admission to the official list, the removal from the official list and the allowing, stopping or suspending of trading on the market of the listed entity's financial products. [Schedule 1, Part 1, item 101, subsection 798C(4 )]

1.26 It is an offence for the listed entity or the market licensee, whichever ASIC entered into an arrangement with, to fail to comply with an arrangement. [Schedule 1, Part 1, item 101, subsection 798C(3 )]

1.27 To ensure that the market is supervised in an adequate manner it is necessary for ASIC to be able to exempt or modify the provisions of the corporations legislation. The current law allows for ASIC to exempt or modify the application of the law to a self-listing market. Items 102, 103 and 104 will allow ASIC to exempt or modify the application of the corporations legislation with respect to the market licensee or the listed body. [Schedule 1, Part 1 , items 102, 103 and 104, paragraphs 798D(1 )( a) and (b ), subsections 798D(4) and (5 )]

Licensed market operators and related participants

1.28 At present the law does not address situations where a market licensee or a body related to a market licensee may be a participant on its own market.

1.29 In addition the current law does not address the situation where a participant in the market is a competitor of, or a participant in a business that is in competition with, a business conducted by the market licensee or a body corporate related to the market licensee.

1.30 To address this issue the Bill enacts a provision to regulate who is to supervise certain participants in the market. [Schedule 1, Part 1, item 105, subsection 798DA]

1.31 Section 798DA will require the market licensee to amend their market operating rules to provide for ASIC instead of the market licensee to make decisions and take action in relation to certain participants with regard to the admission, expulsion, suspending, disciplining of participants and the supervision of their compliance with the market's operating rules, the Corporations Act and the regulations. [Schedule 1, Part 1, item 105, subsection 798DA(2 )]

1.32 The section applies to the following participants in a market:

•

the market licensee;

•

a related body corporate of the market licensee;

•

a partnership where a partner is a related entity of the market licensee; and

•

a competitor or a participant in a business which is in competition with the market licensee or a related body corporate of the market licensee, but only where the participant chooses that ASIC will act in place of the market licensee. [Schedule 1, Part 1, item 105, subsection 798DA(1 )]

1.33 It is an offence for a participant to participate in the market except in accordance with the section. [Schedule 1, Part 1, item 105, subsection 798DA(4] , [Schedule 1, Part 1, item 173]

Pooled superannuation trusts and product disclosure

1.34 A pooled superannuation trust, approved deposit fund, a pooled superannuation trust or a public sector superannuation scheme that has net assets of at least $10 million and which is provided with an interest in a pooled superannuation trust by a trustee of the trust will be treated as wholesale. It will no longer be treated as retail in this transaction. [Schedule 1, Part 1, item 98, paragraph 761G(6 )( aa )]

1.35 The opportunity has been taken to correct the left hand margin of paragraph 761G(6)(c). [Schedule 1, Part 1, item 99]

Registered managed investment schemes investing in unregistered managed investment schemes

1.36 The amendment repeals subsection 601FC(4) which imposes the duty on the responsible entity of a registered managed investment scheme not to invest scheme property in unregistered managed investment schemes. [Schedule 1, Part 1, item 66]

1.37 Other duties on the responsible entity (for example, to act in the best interests of the members) are unchanged.

Application and transitional provisions

Exemption from providing a Statement of Advice - no product recommendation and no remuneration

1.38 The amendments will commence on Royal Assent. [Clause 2]

Threshold for requiring a Statement of Advice

1.39 The amendments will commence on Royal Assent. [Clause 2]

Financial Services Guide exemption - general advice to the public

1.40 The amendments commence from a day to be fixed by Proclamation. If no date is fixed within 6 months from the date on which the Act receives Royal Assent, then the amendment will commence on the first day after that period. [Clause 2]

Sophisticated investors

1.41 The amendments will commence on Royal Assent. [Clause 2]

1.42 The amendments apply to financial products and financial services provided on and after the day the amendments commence. [Schedule 1, Part 6, item 238]

Cross-endorsement of authorised representatives

1.43 The amendments commence from a day to be fixed by Proclamation. If no date is fixed within 6 months from the date on which the Act receives Royal Assent, then the amendment will commence on the first day after that period. [Clause 2]

1.44 The amendments apply in relation to the conduct of a representative on or after the day on which the amendments commence. [Schedule 1, Part 6, item 243]

Product activity and data collection

1.45 Amendments providing for the optional use of electronic lodgement of in use notices will commence on 1 July 2008. Electronic lodgement will become mandatory on 1 January 2009. [Clause 2 and Schedule 1, Part 6, items 245 and 246]

Licensed market operators and related participants and listed bodies

1.46 The amendments commence on Royal Assent. [Clause 2]

1.47 Item 239 ensures that arrangements already in place under section 798C retain their validity. [Schedule 1, Part 6, item 239]

Pooled superannuation trusts and product disclosure

1.48 The amendments will commence on Royal Assent. [Clause 2]

1.49 The amendments apply to financial products and financial services provided on and after the day the amendments commence. [Schedule 1, Part 6, item 238]

Registered managed investment schemes investing in unregistered managed investment schemes

1.50 The amendments will commence on Royal Assent. [Clause 2]

Consequential amendments

Exemption from providing a Statement of Advice - no product recommendation and no remuneration

1.51 Consequential amendments are made to subsection 940C(3) which sets out how documents, information and statements are to be given. [Schedule 1, Part 1, item 107]

1.52 A Record of Advice is currently used to document further market advice. This measure extends the use of the Record of Advice to initial advice in a particular situation. Consequential amendments omit 'further market related advice' and substitutes various terms and references to describe the initial advice covered by the new provision as well as the further market related advice. [Schedule 1, Part 1, items 108-115]

1.53 A consequential amendment is made to subsection 946A(3) to acknowledge the additional situation in which a Statement of Advice is not required. [Schedule 1, Part 1, item 116]

1.54 As a consequence of the use of a Record of Advice, amendments are made clarifying the definition of defective disclosure statements in relation to offence penalties and civil liability is expanded to include the record. [Schedule 1, Part 1, items 119-126]

1.55 The maximum penalty is specified for the offence of breaching the requirement to keep and provide a Record of Advice under the new provisions. This new provision carries the default rate of 50 penalty units. [Schedule 1, Part 1, item 175]

Threshold for requiring a Statement of Advice

1.56 As a consequence of the use of a Record of Advice when section 946AA is relied on, amendments are made to subsection 940C(3) which sets out how documents, information and statements are to be given. [Schedule 1, Part 1, item 107]

1.57 A consequential amendment is made to subsection 946A(3) to acknowledge the additional situation in which a Statement of Advice is not required. [Schedule 1, Part 1, item 116]

1.58 As a consequence of the use of a Record of Advice, amendments are made clarifying the definition of defective disclosure statements in relation to offence penalties and civil liability is expanded to include the record. [Schedule 1, Part 1, items 119-126]

1.59 The maximum penalty is specified for the offence of breaching the requirement to keep and provide a Record of Advice under the new provisions. This new provision carries the default penalty of 50 penalty units. [Schedule 1, Part 1, item 175]

Financial Services Guide exemption - general advice to the public

1.60 As a consequence of the amendment to the circumstances in which a provider need not provide a Financial Services Guide, subsection 941C(4A) which provides that the regulations may define what constitutes a public forum for the purposes of subsection 941C(4) is repealed. [Schedule 1, Part 3, items 219 and 220]

Sophisticated investors

1.61 References to the new section which provides a mechanism by which experienced investors can be certified as wholesale clients are included in the definition of retail client in section 761A and in subsection 761G(1). [Schedule 1, Part 1, items 95 and 97]

Cross-endorsement of authorised representatives

1.62 A consequential amendment is made to section 917A which describes the application of Division 6 of Part 7.6 of the Corporations Act. [Schedule 1, Part 3, item 216]

1.63 Consequential amendments to the references to 'product' in paragraphs 917A(3)(c), (d) and (e) are also made. [Schedule 1, Part 3, item 217]

Supporting bill

Licensed market operators and related participants

1.64 This Bill requires a market operator's operating rules to provide for ASIC to supervise certain participants. This will impose additional responsibilities on ASIC, resulting in additional expenditure.

1.65 The Corporations (Fees) Act 2001 will be consequentially amended so ASIC can impose a fee for the functions conferred on it by the operating rules of a market as required by subsection 798DA(2). [Schedule 1, item 1, Corporations (Fees) Amendment Bill 2007]

Chapter 2 Company Reporting Obligations

Outline of chapter

2.1 This Bill contains seven refinements to the existing company reporting obligations in the Corporations Act that are aimed at reducing compliance costs for companies in relation to their reporting obligations:

•

amendments to incorporate in the Corporations Act the accounting standards requirements for executive and director remuneration disclosure;

•

increases in the thresholds used to define a large proprietary company and allow for future changes to the thresholds to be prescribed by regulations;

•

amendments to the notification requirements for changes in office holders and company addresses, payment of annual fees and to the company deregistration procedure; and

•

amendments to allow companies to make annual reports available on the internet and only require hard copies to be sent to members who request them.

2.2 The amendments simplify company reporting obligations to reduce the regulatory burden on business, maintain investor protections and reduce compliance costs.

Context of amendments

2.3 The measures in this Bill are aimed at reducing the burden of red tape to allow Australian corporations to do business more efficiently.

2.4 Accurate and prompt information is fundamental to the operation of an efficient market. The disclosure obligations in the Corporations Act are an important regulatory tool providing the market with relevant information on which interested parties can make commercial decisions.

2.5 However, the disclosure requirements should be framed in a way so that they do not unnecessarily, or excessively, interfere with companies devoting resources to productive outputs.

2.6 The refinements to the company reporting obligations will deliver a simpler regulatory framework that reduces the regulatory burden on business, continues to protect investors, and reduces compliance costs. The amendments have their origins in the Rethinking Regulation report of the Taskforce on Reducing Regulatory Burdens on Business and the Corporate and Financial Services Regulation Review Proposals Paper of November 2006.

Summary of new law

2.7 The Bill will make a number of refinements to the company reporting obligations in the Corporations Act to:

•

establish a disclosure framework that will allow the accounting standards requirements for executive and director remuneration to be incorporated into Corporations Act. The Bill also introduces a new disclosure requirement in relation to executives and directors hedging their incentive remuneration and several other minor and technical amendments to further refine the framework;

•

increase the thresholds used to define a large proprietary company. A proprietary company will be defined as being large if it satisfies two of the following tests: revenue of $25 million; assets of $12.5 million; and 50 employees. The amendments also allow for future changes to the thresholds to be prescribed by regulations.

•

remove the requirement for companies to notify ASIC of the retirement or resignation of office holders where the office holders themselves have lodged notifications with ASIC;

•

provide for ASIC to use a company's contact address where that address is more convenient for the company;

•

remove the requirement to pay an annual review fee where the annual review date falls two months before or after the Gazette notice that the company is to be deregistered;

•

allow companies to pay their annual review fees for a period of 10 years by way of a single lump sum payment; and

•

enable companies, registered schemes and disclosing entities to make annual reports available on a web site and provide hard copies only to those members who elect to receive them in that form.

Comparison of key features of new law and current law

Detailed explanation of new law

Executive remuneration

2.1 The remuneration disclosure requirements for executives and directors of listed companies are currently contained in both the accounting standards and the Corporations Act (and the Corporations Regulations). There is considerable duplication between the requirements in the accounting standards and the Corporations Act as well as some minor inconsistencies.

2.2 The objective of the amendments is to consolidate the remuneration disclosure requirements currently contained in the accounting standards into the Corporations Act and Corporations Regulations. Following on from the amendments to the Corporations Act in this Bill, the remaining remuneration disclosure requirements in the accounting standards will be incorporated into the Corporations Regulations. This will simplify the requirements as companies will no longer be required to refer to both the accounting standards and the Corporations Act to determine their remuneration disclosure requirements.

2.3 The amendments also make other minor refinements to the requirements to strengthen the existing framework.

2.4 The range of directors and executives whose remuneration must be disclosed under the accounting standards is determined by whether the individual meets the definition of 'key management personnel'. The Corporations Act requires the remuneration of all directors and the five most highly remunerated executives from the company and the consolidated group to be disclosed.

2.5 The amendments ensure that the range of individuals whose remuneration must be disclosed remains the same after the accounting standard requirements are moved into the Corporations Act. To achieve this, the amendments require remuneration disclosures to be made for any individual that falls within the definition of 'key management personnel', in addition to the existing directors and executives required to be disclosed under section 300A of the Corporations Act. [Schedule 1, Part 1, items 24 to 27, 31 and 32]

2.6 The term key management personnel for the purposes of the Corporations Act will be defined in the accounting standards. This is to ensure consistency between the Corporations Act and the accounting standards. If a definition was included in the Corporations Act, the definition would need to be amended whenever changes were made to the accounting standards. [Schedule 1, Part 1, item 32]

2.7 One of the consequences of moving the remuneration disclosure requirements out of the accounting standards and into the Corporations Act is that the disclosures will be made in a company's directors' report instead of the financial report. The amendments introduce a requirement for a company's auditor to express an opinion on the remuneration information that has been moved from the audited financial reports into the directors' report. This ensures that the remuneration disclosures continue to be subject to assurance by an external auditor. [Schedule 1, Part 1, item 36]

2.8 The amendments impose a strict liability offence in relation to the audit of the information in the directors' report. This is consistent with the liability imposed on auditors in relation to auditing the company's financial report. The overall scope of the auditor's exposure to criminal liability has not changed as a result of these amendments. [Schedule 1, Part 1, item 37 and item 168]

2.9 The amendments also modify the scope of the remuneration disclosure requirements from listed companies to disclosing entities that are companies. This is necessary to bring the application of the Corporations Act disclosures into line with the application of the accounting standards disclosures. [Schedule 1, Part 1, item 33]

2.10 The amendments also make a number of minor refinements to strengthen the disclosure framework. The amendments require companies to disclose board policy in relation to directors and executives hedging their incentive remuneration and the mechanism that the company uses to enforce this policy [Schedule 1, Part 1, item 28] . This will ensure that shareholders are informed about the company's policy on this issue.

2.11 In addition, the amendments clarify the disclosure requirement in section 300A(1)(e)(iv) to ensure that the policy intention of the requirement is achieved [Schedule 1, Part 1, item 29] , and remove the requirement under subparagraph 300A(1)(e)(v) for companies to disclose the aggregate of options granted, exercised and that have lapsed during the year on the ground that is not being used by shareholders [Schedule 1, Part 1, item 30] .

Thresholds for reporting for large proprietary companies

2.12 Large proprietary companies are required to prepare a financial report and a directors' report for each financial year under subsection 292(1) of the Corporations Act.

2.13 Under the current requirements (subsection 45A(3) of the Corporations Act), a proprietary company is defined as a large proprietary company for a financial year if it satisfies at least two of the following tests:

•

the consolidated gross operating revenue for the financial year of the company and the entities it controls is $10 million or more;

•

the value of the consolidated gross assets for the financial year of the company and the entities it controls is $5 million or more; and

•

the company and the entities it controls have 50 or more employees at the end of the financial year.

2.14 These thresholds have not been reviewed since their introduction in 1995. As a result, the current monetary thresholds are set at too low a level to determine economic significance and have led to an increasing number of non-economically significant entities being subject to the reporting requirements.

2.15 In order to reduce the regulatory burden on non-economically significant proprietary companies and ensure that users still receive the financial information of economically significant proprietary companies, the monetary thresholds will be increased by 150 per cent. The employee thresholds will remain unchanged at 50 employees.

2.16 Under the new arrangements, a proprietary company will be defined as a large proprietary company for a financial year if it satisfies at least two of the following tests:

•

the consolidated operating revenue for the financial year of the company and the entities it controls is $25 million or more;

•

the value of the consolidated gross assets for the financial year of the company and the entities it controls is $12.5 million or more; and

•

the company and the entities it controls have 50 or more employees at the end of the financial year.

[Schedule 1, Part 1, items 16 to 18]

2.17 A corresponding increase in the revenue and asset thresholds used to define a small proprietary company under subsection 45A(2) will mirror the changes in the thresholds of large proprietary companies. [Schedule 1, Part 1, items 12 to 14]

2.18 A mechanism will also be included to regularly assess the thresholds through the Corporations Regulations to ensure that the thresholds continue to accurately reflect genuine economic significance during periods of long and sustained economic growth. The amendments will enable changes to the thresholds to be prescribed by regulation. [Schedule 1, Part 1, items 12 to 14 and 16 to 18]

2.19 Currently, section 45A of the Corporations Act uses the term 'consolidated gross operating revenue' to guide entities when calculating the group's total revenue to determine whether they meet the threshold tests. The accounting standards no longer refer to this term. Consequentially, this term will be replaced with 'consolidated operating revenue' to reflect changes to the accounting standards. [Schedule 1, Part 1, items 11, 15 and 19]

Notifications - change in office holders

2.20 The Bill will amend the Corporations Act to remove the requirement for companies to inform ASIC when office holders have resigned or retired where the office holders themselves have informed ASIC. The amendment is intended to reduce the compliance burden on companies in the sense that the current arrangements require companies to provide ASIC with information that ASIC may already have.

2.21 Currently, section 205A of the Corporations Act allows a ceasing office holder to notify ASIC that they no longer hold office, while section 205B requires a company to notify ASIC of any change in its office holders. The corporate register is updated by ASIC once it receives notification that a company office holder has resigned, regardless of whether it is the ceasing office holder or the company itself that has notified ASIC.

2.22 The Bill amends section 205B of the Corporations Act so that a company is no longer obliged to notify ASIC of the cessation of an officeholder where ASIC has already been notified by the departing office holder under section 205A. [Schedule 1, Part 3, items 204 and 205]

2.23 The Bill will also introduce a new exception to the current offence of a company failing to notify ASIC in section 205B of the Corporations Act. A company will not be liable for an offence where the departing officeholder gives ASIC a written notice of the person's retirement or resignation as an office holder of the company under section 205A.

2.24 This exception is aligned with the existing exception for alternate directors currently found in subsection 205B(6). Like the existing exemption, the evidentiary burden of proof is reversed, that is, it is placed on the defendant (the company) and not the prosecution. The reversal has been maintained for consistency with the current exception and to facilitate efficient business compliance and regulatory outcomes. [Schedule 1, Part 3, item 206]

2.25 The Bill also amends the Small Business Guide in Part 1.5 of the Corporations Act to make reference to the new arrangements. [Schedule 1, Part 3, items 198, 199 and 200]

Notifications - company addresses

2.26 The Bill will amend the Corporations Act to provide for a company notifying ASIC of a contact address. This will allow companies to nominate an address, separate from the registered office address, at which they prefer to receive documents from ASIC. Under existing arrangements, ASIC allows companies to provide it with a contact address, but that address is not recognised in the Corporations Act. Recognition of the contact address in the Corporations Act will provide greater transparency, as the contact address will be included on the register maintained by ASIC. After commencement of the new provisions, the contact address will be able to be updated on the same form as other company details.

2.27 The Bill inserts a new subsection 146A(1) into the Corporations Act to provide that a company may have a contact address and ASIC may send communications and notices to the company's contact address. The Bill also inserts a new subsection 146A(2) into the Corporations Act to provide that a company must lodge a change to its contact address in the prescribed form. [Schedule 1, Part 3, item 203]

2.28 The Bill also inserts a note at the end of subsection 142(1) of the Corporations Act to alert the reader to the fact that ASIC may send communications and notices to the company's contact address. [Schedule 1, Part 3, items 201 and 202]

Simplifying voluntary deregistration

2.29 A person (including the company) may apply to ASIC under section 601AA of the Corporations Act to deregister the company if, among other things, the company has paid all fees and penalties payable under the Corporations Act and has no outstanding liabilities.

2.30 Currently, companies that have applied for voluntary deregistration are still subject to annual review obligations (including the requirement to pay the annual review fee) up until the point of deregistration. This means that annual review fees may be incurred or become payable in the two-month period between approval of the deregistration application and the actual deregistration of the company. Annual review fees may also be payable in the period from application for deregistration to the time when ASIC has given notice of the proposed deregistration.

2.31 The Bill amends section 1351 of the Corporations Act to provide that review fees are not payable under the Corporations (Review Fees) Act 2003 if ASIC has given notice of the proposed deregistration of the company and the review date for that year falls two months before or after the publication of the notice. The amendment is intended to remove the obligation to pay annual review fees where a decision is made to deregister a company in close temporal proximity to an annual review date. [Schedule 1, Part 3, item 221]

Upfront payment of annual review fees for companies

2.32 The existing Corporations (Review Fees) Act 2003, in conjunction with the Corporations (Review Fees) Regulations 2003, requires an annual payment to ASIC of $212 by a proprietary company, $1000 by a public company or a registered scheme and $40 by a special purpose company. Transaction costs could be reduced by allowing for less frequent payment.

2.33 The Bill amends section 1351 of the Corporations Act to provide for a company making payment for a review date other than the current review date. [Schedule 1, Part 3, item 221]

2.34 The amendment to the Corporations Act allows regulations to be made under the Corporations (Review Fees) Act 2003 to provide for a payment of annual review fees for an extended period by way of a single lump sum payment.

Distribution of annual reports

2.35 Companies, registered schemes and disclosing entities are required to report to members either by:

•

using a web site as the default method of distributing the reports, in accordance with subclause 314(1AA); or

•

by sending hard copies as the default method of distributing the reports, in accordance with subclause 314(1AE). [Schedule 1, Part 1, item 38]

2.36 It is not mandatory for entities to use a web site as the default method of distributing the reports. An entity can continue to send a hard copy of the reports as the default method of distribution if it so chooses [Schedule 1, Part 1, item 38] .

2.37 Subclauses 314(1AA) to (1AD) apply if a company, registered scheme or disclosing entity uses a web site as the default method of distributing the reports.

2.38 A company, registered scheme or disclosing entity that reports in accordance with subclause 314(1AA) must:

•

send a hard copy of the reports to those members who have made an election under paragraph 314(1AB)(a) to receive a hard copy under subparagraph 314(1AA)(a)(i) [Schedule 1, Part 1, item 38] . Alternatively, the entity can send an electronic copy (such as a copy provided by e-mail or fax) of the reports where the entity offers to send the reports as an electronic copy and the member elects to receive an electronic copy under paragraph 314(1AB)(c) [Schedule 1, Part 1, item 38] ;

•

make a copy of the reports readily accessible on a web site under paragraph 314(1AA)(b) [Schedule 1, Part 1, item 38] . Placing a copy of the reports on a restricted area of a web site, for example, would not satisfy this requirement; and

•

under paragraph 314(1AA)(c) directly notify those members who did not receive a hard copy that the reports are accessible on the web site, and specify the direct address of the web site [Schedule 1, Part 1, item 38] . The direct address may be specified, for example, by providing the Uniform Resource Locator (URL) of the reports. The direct address is intended to enable the member to directly access the reports on the web site. This notification can be made in hard copy, or by electronic means (for example, e-mail or fax) in accordance with subclause 314(1AD) [Schedule 1, Part 1, item 38] . In addition, this notification could be included with other correspondence sent to members, for example, with the notice of the annual general meeting. This notification must also be sent directly to the member. A company announcement on the Australian Securities Exchange, for example, would not satisfy this requirement.

2.39 A company, registered scheme or disclosing entity that reports in accordance with subclause 314(1AA), must satisfy the requirements of that subclause by the deadline set out in section 315 of the Act. A company, registered scheme or disclosing entity that uses subclause 314(1AA) is taken to report at the time the company, registered scheme or disclosing entity has fully complied with the requirements of that subclause. [Schedule 1, Part 1, item 41]

2.40 A company, registered scheme or disclosing entity that reports in accordance with subclause 314(1AA) must directly notify each member that:

•

under paragraph 314(1AB)(a) the member has a right to elect to receive a hard copy of the reports free of charge [Schedule 1, Part 1, item 38] ;

•

if the member does not elect to receive a hard copy, the member may access the reports on a specified web site under paragraph 314(1AB)(b) [Schedule 1, Part 1, item 38] ; and

•

under paragraph 314(1AB)(c) the member can elect to receive the reports as a hard copy or an electronic copy (such as e-mail or fax) - if the entity offers its members an additional option to receive an electronic copy of the reports [Schedule 1, Part 1, item 38] .

2.41 The notification required by subclause 314(1AB) only needs to be sent to each member once. This one-off notification is intended to inform members of this amendment and the effect it will have on the default method of distributing reports. The notification is also intended to provide entities with an opportunity to collect members' preferences for distributing the reports.

2.42 Under subclause 314(1AC), the member's election to receive a copy of the reports under subclause 314(1AB) is a standing election for each subsequent financial year until the member changes his or her election [Schedule 1, Part 1, item 38] . The standing election ensures that members do not have to repeat their request for a hard copy each year. The existing law continues to allow members to change their election at any time using subsection 316(1).

2.43 The notification required by subclause 314(1AB) must be made to all members after the Act commences [Schedule 1, Part 6, item 233(2 )]. Notifications made in the past will not satisfy this requirement. However, an exception to this requirement provides that a company, registered scheme or disclosing entity is not required to provide the notification under subclause 314(1AB) to those members who have already notified the entity, under paragraph 316(1)(a), that they do not wish to receive the reports [Schedule 1, Part 6, item 233(3 )].

2.44 For an existing member, the notification required by subclause 314(1AB) can be made in hard copy, or by electronic means (for example, e-mail or fax) in accordance with subclause 314(1AD) [Schedule 1, Part 1, item 38] . For a new member, this notification could be sent, for example, as part of their initial registration pack.

2.45 Subclause 314(1AE) applies if a company, registered scheme or disclosing entity sends a hard copy of the reports as the default method of distribution to members. This maintains the status quo by allowing companies, registered schemes and disclosing entities to continue to provide, by default, a hard copy of the reports to members.

Application and transitional provisions

Executive remuneration

2.46 The amendments will apply to financial years that begin on or after the commencement of the legislation. [Schedule 1, Part 6, item 232]

Thresholds for reporting for large proprietary companies

2.47 The amendments will take effect in the financial year that ends on or after the day on which those items commence. [Schedule 1, Part 6, item 231]

Notifications - change in office holders

2.48 The amendments to remove the requirement for companies to inform ASIC when office holders have resigned or retired where the office holders themselves have informed ASIC will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent.

Notifications - company addresses

2.49 The amendments to provide for a company using a contact address will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent.

Simplifying voluntary deregistration

2.50 The amendments to remove the obligation to pay annual review fees two months before or after ASIC giving notice of a proposed deregistration of a company will apply to a review date that occurs on or after the day on which that item commences. The item will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent. [Schedule 1, Part 6, item 244]

Upfront payment of annual review fees for companies

2.51 The amendments to provide for regulations being made to allow a single lump sum payment of annual review fees to cover an extended period will commence on a date to be proclaimed, or if no date is proclaimed, six months after Royal Assent.

Distribution of annual reports

2.52 The amendments apply to reports for a financial year that ends on or after the day on which those items commence. [Schedule 1, Part 6, item 233(1 )]

2.53 Companies, registered schemes and disclosing entities will be required to provide the notification under subclause 314(1AB) after that subclause commences [Schedule 1, Part 6, item 233(2 )]. However, an exception to this notification requirement exists where a member has already notified the entity under paragraph 316(1)(a) that the member does not wish to receive the reports [Schedule 1, Part 6, item 233(3 )].

Consequential amendments

Thresholds for reporting for large proprietary companies

2.54 A number of consequential amendments will need to replace the thresholds used to define a designated private company in the Social Security Act 1991 and the Veterans' Entitlement Act 1986. [Schedule 1, Part 1, items 176 to 179 and items 182 to 185]

2.55 In addition, the term consolidated gross operating revenue will be replaced with consolidated operating revenue in the Social Security Act 1991 and the Veterans' Entitlement Act 1986. [Schedule 1, Part 1, items 180 and 181, and items 186 and 187]

Notifications - change in office holders

2.56 Section 222AOF of the Income Tax Assessment Act 1936 (ITAA 1936) allows the Commissioner of Taxation to rely on certain documents lodged with ASIC to indicate the address to which a penalty notice under section 222AOE of the ITAA 1936 may be sent to a current or former director.

2.57 Currently, the documents referred to are those lodged pursuant to sections 205B and 345 of the Corporations Act.

2.58 As a consequence of the notification of change in office holder amendments, companies may no longer have to lodge documents under section 205B where the office holder has lodged a document under section 205A.

2.59 The Bill will amend section 222AOF of the ITAA 1936 to refer to documents lodged with ASIC under both sections 205A and 205B of the Corporations Act. The Bill also corrects the incorrect reference to section 345 of the Corporations Act, with the correct reference to section 346C. [Schedule 1, Part 3, item 222]

Distribution of annual reports

2.60 The Bill repeals provisions relating to the use of electronic means to send reports to members under subsections 314(4), (5) and (6), as the ability to use electronic means has been incorporated into item 38 of Schedule 1. [Schedule 1, Part 1, item 40]

2.61 Subsection 314(1A) currently establishes a strict liability offence in relation to breaches of subsection 314(1). The Bill makes a consequential amendment to subsection 314(1A) to provide that a breach of subclause 314(1AB) is also a strict liability offence [Schedule 1, Part 1, item 39] . The notification provided under subclause 314(1AB) is required by paragraph 314(1AA)(a). The strict liability offence in subsection 314(1A) indirectly covers a breach of paragraph 314(1AA)(a), but does not cover a breach of subclause 314(1AB). Therefore, to ensure paragraph 314(1AA)(a) operates effectively, subclause 314(1AB) has been amended to provide a consistent criminal liability provision [Schedule 1, Part 1, item 169] .

2.62 The Bill amends paragraph 318(2)(a) and subsection 319(1) to replace a reference to 'sent' with a reference to 'provided'. [Schedule 1, Part 1, items 42 and 43]

Supporting Bill

Upfront payment of annual review fees for companies

2.63 The Corporations (Review Fees) Amendment Bill 2007 (the Review Fees Bill) will amend the Corporations (Review Fees) Act 2003 (the Review Fees Act) to insert a note after subsection 5(1) to alert the reader to the fact that the Corporations (Review Fees) Regulations 2003 may prescribe a fee to be paid upfront to cover review fees for a future year. [Schedule 1, item 1, Corporations (Review Fees) Amendment Bill 2007]

2.64 The Review Fees Bill will amend section 8 of the Review Fees Act to provide for regulations to be made under the Review Fees Act for the purposes of both section 1351 of the Corporations Act and for the purposes of the Review Fees Act. [Schedule 1, item 2, Corporations (Review Fees) Amendment Bill 2007]

Please do not delete the following section break

Chapter 3 Auditor Independence

Outline of chapter

3.1 This chapter outlines a number of refinements to the existing auditor independence requirements in the Corporations Act:

•

amendments relating to Proposal 3.1 of the Corporate and Financial Services Regulation Review Proposals Paper which proposed that remedial amendments contained in the Corporations Regulations and two ASIC class orders relating to the auditor's independence declaration should be included in the Corporations Act;

•

improvements arising out of public consultation on the comparative review of Australia's auditor independence requirements; and

•

a number of miscellaneous technical amendments designed to improve the operation of the existing auditor independence requirements.

Context of amendments

Anomalies arising from CLERP 9

3.2 The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (the CLERP 9 Act) established a comprehensive regime on auditor independence, implementing recommendations of the review on Independence of Australian Company Auditors (the Ramsay report) and some of the relevant recommendations of the report of the HIH Royal Commission.

3.3 The legislative framework of the auditor independence requirements in the CLERP 9 Act includes:

•

a general requirement for auditor independence;

•

specific auditor independence requirements which contain restrictions on an extensive range of specific employment and financial relationships between an auditor, and other persons connected to the auditor, and the audit client. The Ramsay report described these specific restrictions as involving 'core circumstances which, if they exist, necessarily mean that the auditor is not independent'; and

•

a number of additional requirements relating to other auditor independence issues, including the auditor's independence declaration.

3.4 A number of anomalies and unintended consequences were identified during the implementation of the CLERP 9 auditor independence requirements which required remedial action.

3.5 Three of these issues were addressed by amendments to the Corporations Regulations made in accordance with section 343 of the Corporations Act. The two remaining anomalies, which related to the auditor's independence declaration, were addressed by ASIC class orders.

3.6 In the context of the Government's consultation process to simplify the regulatory system, it was considered that the inclusion of auditor independence requirements in the Corporations Act, the Regulations and in ASIC class orders had the potential to create unnecessary complexity. Proposal 3.1 of the Corporate and Financial Services Regulation Review Proposals Paper (November 2006) recommended that these amendments to the Corporations Regulations and the matters dealt with in the two ASIC class orders should be incorporated into the Corporations Act.

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

3.7 The Government released a discussion paper Australian Auditor Independence Requirements: A Comparative Review (the comparative review) on 15 November 2006. The overall conclusion of the comparative review is that, despite differences in terminology, institutional arrangements and legal frameworks, there is a substantial underlying equivalence between the Australian requirements and international best practice standards.

3.8 When the comparative review was released, it was noted that several of the key findings are directly relevant to the Government's commitment to simplifying the regulatory system and reducing unnecessary or excessive red tape. The Government indicated that there may be scope, in line with overseas developments, to refine the existing auditor independence requirements without changing or weakening the existing robust regulatory framework. The Government said that it would consult with key stakeholders to identify whether any such measures could be included in the proposed Simpler Regulatory System Bill.

3.9 Treasury has undertaken a targeted consultation process on the review with the key stakeholders: ASIC, the Financial Reporting Council, the major audit firms and the professional accounting bodies.

3.10 All the stakeholders have agreed that refinements could be made in three areas of the auditor independence requirements in the Corporations Act:

•

the multiple former audit firm partner restriction;

•

the former audit partner 'cooling-off' restriction; and

•

the adoption of a 'covered person' approach in relation to the existing financial relationship restrictions.

Miscellaneous amendments

3.11 This group of technical amendments is designed to improve the effectiveness of the auditor independence requirements in the light of operational experience since the requirements were introduced by the CLERP 9 Act in 2004.

Summary of new law

Anomalies arising from CLERP 9

3.12 The measures will ensure that remedial action taken by amendment of the Corporations Regulations and by ASIC class orders to address anomalies in the auditor independence requirements introduced by the CLERP 9 Act will be incorporated in the Corporations Act.

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

3.13 There are three key measures:

•

the restriction applying to multiple former partners of an audit firm or former directors of an audit company will no longer apply to a former partner or former director who has ceased to be a member of the firm or the audit company for five or more years;

•

the way in which the existing two-year 'cooling off' period applying to a former audit partner of a firm, a former director of an audit company or a former lead or review auditor in an audit company is calculated, will be modified; and

•

the existing specific restrictions on financial investments applying to partners in a firm or directors in an audit company who are not involved in an audit and not in a position to influence the outcome of an audit will be removed.

Miscellaneous amendments

3.14 These amendments will improve the operational efficiency of the auditor independence requirements by addressing a number of anomalies and minor technical issues.

Comparison of key features of new law and current law

Detailed explanation of new law

Anomalies arising from CLERP 9

Timing of auditor's independence declaration

3.1 The CLERP 9 Act introduced a new requirement in section 307C of the Corporations Act that an auditor provide a declaration as to whether the auditor is aware of any contraventions of the auditor independence requirements of the Act or of any applicable codes of professional conduct.

3.2 Subsections 298(1) and 306(2) of the Corporations Act require the auditor's independence declaration to be included in the directors' report. Subsection 307C(5) requires the auditor to give the independence declaration to the directors with the auditor's report. This means that the auditor's report would need to be signed before the directors' report.

3.3 However, the auditing standards, which have the force of law under the Corporations Act, require the auditor to comment in the auditor's report on any material inconsistencies between the director's report and the financial report, and to consider the impact of any material misstatements of fact in the directors' report.

3.4 ASIC class order 05/83 granted relief by allowing the auditor's independence declaration to be signed before the directors' report had been signed and the auditor's report to be signed after the directors' report had been signed.

3.5 The measures in the Bill will address this timing inconsistency by amending paragraph 307C(5)(a) and inserting subsection 307C(5A). [Schedule 1, Part 1, items 34 and 35]

3.6 Paragraph 307C(5)(a) will provide that the declaration must either be given when the audit report is given to the directors of the company, registered scheme or disclosing entity or must satisfy the conditions in subsection 307C(5A).

3.7 Subsection 307C(5A) will provide that a declaration will satisfy the conditions in this subsection if:

•

the auditor's independence declaration is given to the directors and the directors sign the report within 7 days after the declaration is given to the directors;

•

the auditor's report on the financial report is made within 7 days after the directors' report is signed; and

•

the auditor's report includes a statement to the effect that either the declaration would be in the same terms if it had been given to the directors at the time the auditor's report was made, or circumstances have changed since the declaration was given to the directors, and setting out how the declaration would differ if it had been given to the directors at the time the auditor's report was made.

Auditor's independence declaration - reporting of inadvertent breaches

3.8 The CLERP 9 Act introduced a new requirement in section 307C of the Corporations Act that an auditor provide a declaration as to whether the auditor is aware of any contraventions of the auditor independence requirements of the Act or of any applicable codes of professional conduct.

3.9 The reporting obligations under subsections 307C(1) and 307C(3) require the declaration to include inadvertent breaches of the auditor independence requirements under subsections 324CE(2), 324CF(2) or 324CG(2) notwithstanding that the statutory defence in subsections 324CE(4), 324CF(4) or 324CG(4) applied to the defendant.

3.10 In the course of day-to-day audit practice, there would be many examples of inadvertent breaches of the auditor independence requirements which would be quickly addressed once the auditor became aware of the breach.

3.11 For purposes of the specific auditor independence requirements contained in sections 324CE, 324CF and 324CG of the Corporations Act, the policy intention is that for purposes of the reporting obligation in relation to an auditor's independence declaration, only contraventions under subsections 324CE(1), 324CF(1) or 324CG(1) should be included in the declaration because these contraventions relate to an intentional breach of the requirements where there is both knowledge and a failure to take reasonable steps, as soon as possible, to address the breach.

3.12 ASIC class order 05/910 exempted an auditor from making a declaration if there are any contraventions under subsections 324CE(2), 324CF(2) or 324CG(2) of the Corporations Act provided the statutory defence applied that is, the auditor had reasonable grounds to believe that it had in place, at the time of the contravention, a quality control system that provided reasonable assurance that the auditor would comply with the auditor independence requirements.

3.13 The measures in the Bill will ensure that an auditor will not be required to report inadvertent breaches of the auditor independence requirements in the auditor's declaration where the statutory defence would be applicable. Subsection 307C(5B) will provide that an individual auditor or a lead auditor is not required to give a declaration in respect of a contravention if the contravention was a contravention by a person of subsection 324CE(2), 324CF(2) or 324CG(2) and the person does not commit an offence because of subsection 324CE(4), 324CF(4) or 324CG(4). [Schedule 1, Part 1, item 35]

Money owed - debt: ordinary course of business exception

3.14 Item 15 of the table in subsection 324CH(1) of the Corporations Act prohibits an individual auditor, an audit firm or an audit company (and various other persons specified in the tables in subsections 324CE(5), 324CF(5) and 324CG(9) from owing an amount of more than $5000 to:

•

the audited body; or

•

a related body corporate; or

•

an entity that the audited body controls.

3.15 This restriction existed in the auditor independence requirements in the Corporations Act which pre-dated the CLERP 9 Act. This restriction was included in the CLERP 9 Act auditor independence requirements in accordance with a recommendation in the Ramsay report.

3.16 Notwithstanding that this restriction had been included in the corporations legislation for over 30 years, during the implementation of the CLERP 9 auditor independence requirements, concerns were raised by the accounting profession that this restriction was catching 'ordinary course of business' transactions between an auditor and an audit client. An example is where an audit firm that audited an airline, would not be able to fly with that airline unless it paid cash rather than operating an account with the airline on normal credit terms.

3.17 The Government accepted that as a general rule, debts incurred in the ordinary course of business and on normal terms and conditions would not constitute a threat to auditor independence.

3.18 Regulation 2M.6.05 of the Corporations Regulations (which was included in the Corporations Amendment Regulations 2006 (No. 4)) modified the operation of the auditor independence requirements by inserting a new ordinary course of business exception in paragraph 324CH(5)(b).

3.19 Paragraph 324CH(5)(b) provides that for the purposes of item 15 of the table in subsection 324CH(1) a debt owed by the person or firm to a body corporate or entity should be disregarded if:

•

the debt is on normal terms and conditions, and arises from the acquisition of goods or services on normal trading terms from:

•

the audited body; or

•

an entity that the audited body controls; or

•

a related body corporate; and

•

the goods or services will be used by the person or firm:

•

for the personal use of the person or firm; or

•

in the ordinary course of business of the person or firm.

3.20 The ordinary course of business exception will be replicated in subsection 324CH(5A), with some slight restructuring, to accord with the drafting style adopted in primary legislation. [Schedule 1, Part 1, item 56]

Money owed - deposit account

3.21 Item 16 of the table in subsection 324CH(1) of the Corporations Act prohibits amounts owing to an audit firm (and various other persons and entities specified in the tables in subsections 324CE(5), 324CF(5) and 324CG(9)) by the audited body under a loan.

3.22 While amounts owing by a bank under a cheque or savings account may not be regarded as a loan in a commercial sense, the legal interpretation of a loan includes deposit accounts with a bank.

3.23 This presented a considerable burden for auditors of banks and other financial institutions that offer cheque and savings account facilities to their customers. It involves the closing of all the savings and cheque accounts held by the audit firm and individual members of the audit team with the bank or financial institution.

3.24 The imposition of a regulatory requirement should not be disproportionate to the risk of potential damage or harm. In the context of cheque and savings accounts, the potential threat to auditor independence is perceived to be low, particularly if the cheque or savings account facility is arranged in the ordinary course of the audit client's business and made under normal lending procedures, terms and conditions.

3.25 The Government accepted that it should clarify that amounts owing under a deposit account that are 'on call' with an audited body that is an Australian ADI and which are provided in the ordinary course of business of the audited body, should be disregarded for purposes of item 16 of the table in subsection 324CH(1) of the Corporations Act.

3.26 Regulation 2M.6.05 of the Corporations Regulations (which was included in the Corporations Amendment Regulations 2006 (No. 4)) modified the operation of the auditor independence requirements by inserting in the Corporations Act a new paragraph 324CH(6)(b) which provides that for the purposes of item 16 of the table in subsection 324CH(1), a debt owed to the person or firm by the audited body, a related body corporate or an entity that the audited body controls should be disregarded if:

•

the body, body corporate or entity is an Australian ADI; and

•

the amount is in a basic deposit product (which is defined in section 761A of the Corporations Act) provided by the body, body corporate or entity; and

•

the amount was deposited in the ordinary course of the business of the audited body, body corporate or entity, and on the terms and conditions that normally apply to basic deposit products provided by the body, body corporate or entity.

3.27 The exception relating to amounts on call will be replicated in subsection 324CH(6A). [Schedule 1, Part 1, item 57]

3.28 A consequential drafting amendment will be made to table item 16 of subsection 324CH(1) referring to the new subsection 324CH(6A). [Schedule 1, Part 1, item 54]

Notification procedures

3.29 The audit reforms in the CLERP 9 Act introduced notification procedures to ensure that there was a staged procedure in place before an auditor's appointment was terminated on the grounds of the auditor's failure to address an auditor independence conflict of interest situation. The staged procedure involves the following steps:

•

An audit firm is required to notify ASIC within 7 days if it becomes aware that it has a conflict of interest situation that has not been resolved (subsection 324CF(1A) of the Corporations Act). Similar requirements apply to an individual auditor under subsection 324CE(1A) and to an audit company under subsection 324CG(1A) of the Corporations Act. No notification is required if the conflict is resolved before the end of the 7 day period. ASIC is required to give a copy of the notice to the audit client so that the company is put on notice that its auditor has an independence issue that needs to be resolved.

•

Where the audited body is a public company, after the firm has notified ASIC, the firm has a further 21 days (the remedial period) to resolve the conflict of interest situation (subsection 327B(2B). Similar requirements apply to an individual auditor under subsection 327B(2A) and to an audit company under subsection 327B(2C) of the Corporations Act.

•

An audit firm thus has a maximum period of 28 days after it becomes aware of a conflict of interest situation to rectify the conflict (the initial 7 day period plus the 21 day remedial period)).

•

If the conflict of interest situation is not resolved at the end of the 21 day remedial period, the audit firm's appointment as auditor of the particular audit client automatically terminates (subsection 327B(2B). Similar requirements apply to an individual auditor under subsection 327B(2A) and an audit company under subsection 327B(2C) of the Corporations Act.

3.30 A similar notification regime applies under the general requirements for auditor independence in subsections 324CA(1A), 324CB(1A) and 324CC(1A).

3.31 When the CLERP 9 Act was drafted, the maximum period of 28 days was considered to give an auditor sufficient time to rectify a conflict of interest situation. However, concerns have been raised that complex circumstances do arise that would not be able to be resolved with 28 days. ASIC was not given the power to extend this period.

3.32 An example where 28 days may not be sufficient to resolve a conflict of interest situation, is where a professional member of the audit team acquires a beneficial interest in shares of the audited body through a deceased estate. This interest in the shares may not be able to be disposed of until the probate in relation to the deceased estate has been finalised, which may take months or even years.

3.33 The Government agreed that the Corporations Act should be amended in order to give ASIC the power to extend the period within which an auditor is required to resolve a conflict of interest situation beyond the 21 day period under subsections 327(2A), 327(2B) and 327(2C).

3.34 The operation of Chapter 2M of the Act was modified by regulation 2M.6.05 of the Corporations Regulations (which was included in the Corporations Amendment Regulations 2006 (No. 4)) by omitting from subsections 327B(2A), (2B) and (2C) of the Act the words '21 days' and inserting '21 days, or such longer period as ASIC allows'.

3.35 These amendments to the Corporations Regulations will be replicated in paragraphs 327B(2A)(b), (2B)(b) and (2C)(b) of the Corporations Act. [Schedule 1, Part 1, item 63]

3.36 Similar measures will be introduced in relation to an auditor of a registered scheme in paragraphs 331AAA(2A)(b), (2B)(b) and (2C)(b) of the Corporations Act. [Schedule 1, Part 1, item 64]

3.37 Consequential amendments will be made to the notes to subsections 324CA(1A), 324CB(1A), 324CC(1A), 324CE(1A), 324CF(1A) and 324CG(1A) respectively. [Schedule 1, Part 1, items 45, 46, 49 and 51]

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

Multiple former audit firm partner restriction

3.38 The report of the HIH Royal Commission recommended that in implementing the proposed CLERP 9 Act, the proposals for restrictions on employment relationships between an auditor and the audit client should include 'a prohibition on any more than one former partner of an audit firm, at any time, being a director of or taking a senior management position with the client'.

3.39 The HIH recommendation was implemented as part of the CLERP 9 Act reforms in section 324CK of the Corporations Act.

3.40 In its response to the report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation, the Government announced that it would review the multiple audit firm partner restriction by the end of 2006. The Treasury progressed this review through its targeted consultation on the comparative review.

3.41 All the stakeholders agreed that the restriction in section 324CK serves a useful purpose, however there was also agreement that some changes should be made to address the perceived over reach of the existing requirement. The stakeholders proposed that former partners of an audit firm and former directors of an authorised audit firm who had departed from the firm or audit company for five or more years should be excluded from the restriction.

3.42 A minimum five year separation period was considered appropriate because the longer former partners have been out of the firm, the less likely they will be in a position to influence the current professional members of the audit team or be so familiar with the audit approach and testing strategy that they are able to circumvent them. A time limit is also easy to apply and enforce.

3.43 The amendment to paragraph 324CK(c) will limit the application of the restriction in section 324CK to a former member of an audit firm or former director of an audit company who becomes an officer of the audited body within a period of five years after the person ceased (or last ceased) to be a member of the audit firm or a director of the audit company (as the case may be). [Schedule 1, Part 1, item 62]

3.44 It is noted that where a former partner or former director, as described in paragraph 324CK(d), is also an officer of the audited body, the time when that former partner or former director ceased to be a partner of the firm or director of the audit company, is irrelevant in determining whether an offence under this section has been committed by the person referred to in paragraph 324CK(c).

'Cooling-off' period for former audit team partners

3.45 Section 324CI of the Corporations Act imposes a mandatory period of two years from the date of departure from the firm before a former partner of an audit firm, or a former director of an audit company, who was on the audit team can become an officer of the audit client. Section 324CJ imposes a similar restriction on the lead or review auditor of an authorised audit company.

3.46 The two year 'cooling-off' period is in line with overseas requirements (although Canada only imposes a one year 'cooling-off' period). The comparative review noted, however, that the Australian requirement, unlike the position overseas, applies regardless as to how far back the partner's participation on the audit team took place - the Australian requirement would, for example, apply to a former partner who last worked on the audit team 20 years ago. Canada, the UK and the US place a limit on the time of participation on an audit team prior to the partner's date of departure. All the key stakeholders agree that a similar limit should be included in the Australian restriction.

3.47 Most of the stakeholders have suggested that the two year 'cooling-off' period should run from the time the person ceased to be a member of the audit team, rather than from the time the person resigned from the audit firm.

3.48 The amendment to paragraph 324CI(d) will ensure that the two year separation period in relation to a former partner, or former director of an audit company, commences from the date the auditor's report under section 308 (annual financial report) or section 309 (half year financial report) was made in respect of the latest audit in which that partner or director participated. A similar amendment will be made to s. 324CJ(d) in relation to a former lead auditor or review auditor of an audit company. [Schedule 1, Part 1, items 60 and 61]

Introduction of a 'covered person' approach to existing financial relationship restrictions

3.49 The auditor independence regimes in Australia, Canada, the European Commission, the UK and the US have all adopted specific employment and financial relationship restrictions between an audit firm and an audit client.

3.50 The comparative review, however, identified that only Australia and the UK applied these restrictions on an 'all partner' basis rather than focusing on those persons in the audit firm with a close connection with a particular audit that is,. the professional members of the audit team. In the US, a person who has a close connection with an audit is referred to as a 'covered person'.

3.51 All the key stakeholders have agreed that the existing restrictions in relation to financial investments could be limited to professional members of the audit team rather than all the partners in the firm because it is considered that auditor independence can best be protected by applying the restrictions to persons in the firm who are in a position to influence the audit and also because of the reduction in the compliance burden for both the firm and for partners who have no connection with an audit. An example of a financial investment restriction is the existing prohibition on a professional member of the audit team owning a share in the audit client. It is noted in the context of this proposal that ASIC would always be able to use the general auditor independence obligations in the Corporations Act to challenge situations where a partner, unconnected to an audit, held a financial investment in the audit client and in the circumstances of the particular case, the investment gave rise to a perception threat to the audit firm's independence.

3.52 It is proposed to achieve a 'covered person' approach in relation to the restrictions on financial investments by:

•

expanding the scope of the definition of a 'professional member of the audit team' in section 324AE of the Corporations Act to include some additional persons who come within the scope of the definition of 'audit team' in the Code of Ethics for Professional Accountants (APES 110);

•

modifying the application of some of the existing prohibited financial relationships as they apply to a member of the firm and to a professional member of the audit team conducting the audit of the audited body; and

•

making a number of consequential amendments and also addressing some anomalies that have been identified in relation to the existing financial relationship restrictions.

3.53 The definition of a 'professional member of the audit team' in section 324AE will be amended to include:

•

any person who recommends or decides what the lead auditor is to be paid in connection with the performance of the audit; and

•

any person who provides, or takes part in providing, quality control for the audit. [Schedule 1, Part 1, item 44]

3.54 The table in subsection 324CF(5) which applies to an audit firm will be amended to achieve the following outcomes:

•

a member of an audit firm who is not a professional member of the audit team conducting the audit will no longer be subject to the specific financial investment restrictions in table items 10 to 14 of subsection 324CH(1);

•

a professional member of the audit team will be made subject to the non-loan and loan debt restrictions under subsection 324CH(1). This addresses an anomaly in the CLERP 9 reforms which did not apply non-loan debt restrictions to a professional member of the audit team; and

•

for consistency purposes, the non-loan and loan restrictions applying to an immediate family member of a professional member of the audit team conducting the audit of the audited body will be brought into line with the corresponding requirements applying to a professional member of the audit team. [Schedule 1, Part 1, item 50]

3.55 Corresponding amendments will be made to the table in subsection 324CE(5) which applies to an individual auditor and to the table in subsection 324CG(9) which applies to an audit company to achieve similar outcomes applying to an audit firm. [Schedule 1, Part 1, items 48 and 52]

3.56 Table item 15 of subsection 324CH(1) will be amended in order to remove the existing carve out for debts on non-commercial terms up to $5000. This exemption can no longer be justified in light of the introduction of the ordinary course of business exemption which was introduced by regulation in mid-2006. The Government has taken the view that there should be zero tolerance of any transaction on non-commercial terms between an auditor and an audit client because of the perception threat to auditor independence. [Schedule 1, Part 1, item 53]

3.57 Table item 18 of subsection 324CH(1) which applies to loan debt restrictions will be deleted. As table item 15 of subsection 324CH(1) will no longer contain the existing $5000 carve out, it is simpler to deal with both non-loan and loan debt restrictions under table item 15. [Schedule 1, Part 1, item 55]

3.58 The new subsection 324CH(5B) will replicate the ordinary commercial loan exemption in subsection 324CH(7) (which applies to table item 18) for purposes of the revised table item 15. Subsection 324CH(7) will also be repealed. These are consequential amendments as a result of the deletion of table item 18 of subsection 324CH(1). [Schedule 1, Part 1, items 56 and 58]

3.59 Subsection 324CH(8A) will clarify that a reference to a debt or amount owing in the section includes a reference to a debt or amount that will (or may) be owed under an existing agreement between the entities. The purpose of the amendment is to ensure that a debt or amount owing under an existing agreement between two entities, such as a loan, that has not yet crystallised as a 'debt' should be covered by section 324CH. A similar amendment has been made in relation to a liability under a guarantee of a loan. [Schedule 1, Part 1, item 59]

Miscellaneous amendments

Drafting amendment

3.60 A drafting error in table item 2 of subsection 324CE(5) will be addressed by deleting the word 'firm' and replacing it by a reference to 'individual auditor'. [Schedule 1, Part 1, item 47]

ASIC relief powers

3.61 ASIC at present has limited powers to exempt members of audit firms who are registered company auditors from the requirements of Division 3 of Part 2M.4 (auditor independence) of the Corporations Act.

3.62 The auditor independence requirements of the CLERP 9 Act inserted new obligations applying to members of firms who are not registered company auditors, to retiring members of audit firms, to retiring directors of an audit company and to retiring professional employees of an audit company.

3.63 ASIC's existing relief powers will be extended to cover members of an audit firm who are not registered company auditors, former members of an audit firm, former directors of an audit company and former professional employees of an audit company. Section 342AA provides for ASIC to grant specific relief from the auditor independence requirements to these categories of persons. Section 324AB will enable ASIC to make class orders in relation to these persons. The criteria that ASIC must apply in making an order under either section 342AA or section 342AB are set out in section 342AC. These criteria are identical to the existing criteria in section 342 which apply to ASIC's existing relief powers. [Schedule 1, Part 1, item 65]

3.64 Subsection 342AA(5) is included to assist readers of the legislation, as the instrument is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. [Schedule 1, Part 1, item 65]

Audit of compliance plan

3.65 Subsection 601HG(1) requires a registered managed investment scheme's compliance plan to be audited by a registered company auditor. A registered company auditor must be a natural person and therefore an authorised audit company is ineligible to be appointed as the auditor of a compliance plan. This is inconsistent with subsection 601HG(4A) which assumes that the compliance plan can be audited by an authorised audit company.

3.66 This anomaly will be addressed by amending section 601HG to make it clear that a registered company auditor, an audit firm or an authorised audit company is eligible to be appointed as the auditor of a compliance plan. [Schedule 1, Part 1, item 67]

Deletion of cross reference to a repealed provision

3.67 Section 990A provides that nothing in sections 990B to 990H (deALIGN with the appointment of an auditor by a financial services licensee) applies where the licensee is a body corporate to which section 327 applies. Section 327 was repealed by the CLERP 9 Act. A revised section 990A will provide that nothing in sections 990B to 990H applies to a financial services licensee that is a public company. [Schedule 1, Part 1, item 127]

Appointment of auditor by licensee

3.68 Section 990B will be amended to clarify that an individual person and an authorised audit company can be appointed by a financial services licensee to audit its financial statements. [Schedule 1, Part 1, item 128]

Auditor's right of access to records, information etc

3.69 Subsections 990I(2) and (3) provide that an auditor of a financial services licensee may require assistance from the licensee and where the licensee is a body corporate, from any senior manager of the licensee. The reference to 'senior manager' is in contrast to the pre-CLERP 9 Act provisions which referred to an 'executive officer'. A director and secretary of a body corporate came within the scope of the definition of an 'executive officer' in the pre-CLERP 9 legislation. The definition of 'senior manager' expressly excludes a director or secretary of the body corporate.

3.70 The measures in subsections 990I(2) and (3) will enable ASIC to seek assistance from a director, secretary or senior manager of the body corporate where the licensee is a body corporate. [Schedule 1, Part 1, items 129 and 130]

Application and transitional provisions

Anomalies arising from CLERP 9

3.71 The amendments relating to the time when an auditor's independence declaration must be given to the directors and the reporting obligation in relation to inadvertent breaches in the auditor independence declaration will apply to a report for a financial year that ends on or after the day on which those amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 233]

Improvements arising out of public consultations on the comparative review of Australia's auditor independence requirements

3.72 The amendments which will give effect to a 'covered person' approach in relation to the auditor independence restrictions on financial relationships will apply to an audit of the financial report for a financial year or an audit or review of the financial report for a half-year in a financial year, if the financial year begins on or after the day on which the relevant amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 234]

3.73 The amendments which will modify the way in which the two-year 'cooling-off' period is calculated under sections 324CI and 324CJ, and the amendment to the multiple former audit partner restriction, will apply to any person who ceases to be a member of an audit firm, a director of an audit company or a professional employee of an audit company whether the person so ceases before or after the day on which those amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 235]

3.74 The amendments in sections 327B(2A), (2B) and (2C) and sections 331AAA(2A), (2B) and (2C) which will empower ASIC to extend the period within which an auditor is required to resolve a conflict of interest situation will apply in relation to information given to ASIC under those provisions on or after the day the amendments commence (the day on which the Act receives the Royal Assent). [Schedule 1, Part 6, item 236]

Chapter 4 Corporate Governance

Outline of chapter

4.1 The Bill contains amendments to the related party transaction provisions in the Corporations Act and to the administration of approvals for certain company names and constitutions.

Context of amendments

4.2 The changes outlined in this chapter contribute to the broader themes of the Bill to facilitate a simpler corporate regulatory system that delivers continued consumer protection, reduced compliance costs and greater ability for companies to attract capital.

4.3 Within the corporate governance context, the related party transaction provisions are an important check on the powers of the board to manage the affairs of a company. However, obtaining member approval for every related party transaction may unnecessarily put a company to a disproportionate compliance expense where the value of the transaction is small. The amendments in the Bill are aimed at addressing the potential for disproportionate compliance costs to cause corporate resources to be allocated inefficiently.

4.4 This amendment has its origins in the Corporate and Financial Services Review Proposals Paper of November 2006.

4.5 In addition, currently ministerial approval is required for the use of certain company names and changes to the constitutions of certain companies. Names and constitutions are basic features of companies, and the Bill provides for more streamlined administrative processes where approvals or notifications are required.

Summary of new law

4.6 The Bill will make amendments to the Corporations Act to:

•

allow public companies to give small financial benefits to related parties without seeking member approval in certain circumstances;

•

allow delegation to ASIC of the function of consenting to grant a particular company name notwithstanding it is identical to another name or otherwise unacceptable; and

•

remove the requirement for companies exempted from using 'limited' in their name to seek ministerial approval for changes to their constitutions, and replace it with a requirement to notify ASIC of any changes.

Comparison of key features of new law and current law

Detailed explanation of new law

Related party approval threshold

4.1 The related party transactions provisions in Part 2E.1 of the Corporations Act require that public companies obtain member approval before they can give any financial benefit to a related party (such as a director, a director's spouse, a controlling entity, or entities controlled by mutual entities), unless the benefit fits within certain exceptions.

4.2 The policy rationale for the related party transactions provisions is to protect shareholders' investments from being eroded by the board approving transactions with related parties that are non-commercial or non-arms'-length in nature. These transactions may not be in the best interests of the company and may result in the company missing out on commercial advantages or profits that would otherwise be gained where the transactions are with non-related parties.

4.3 The cost for business of obtaining member approval for related party transactions not otherwise allowed by the law can be substantial. If the related party benefit is small, then the compliance cost may well outweigh any governance benefits from requiring member approval.

4.4 The Bill will insert a provision into the Corporations Act to provide that member approval is not required for giving a financial benefit to a related party which is at or below a prescribed amount aggregated over a financial year. [Schedule 1, Part 2, item 190]

4.5 It is expected that the amount initially prescribed will be $5,000.

4.6 The new provision will repeal and replace the current section 213 and absorb its effect. The current provision allows payments at or below $2,000 to related parties who are directors or directors' spouses to be made without member approval. Under the new provision, member approval will not be required for giving a financial benefit to these related parties (ie directors or directors' spouses), which is at or below the prescribed level aggregated over a financial year.

4.7 By referring to 'amounts or values', the provision contemplates both monetary and non-monetary financial benefits. It is intended that non-monetary financial benefits will be valued by reference to ordinary valuation concepts.

4.8 In determining the total amounts of values to which the provision applies, the provision uses a similar aggregation method to the current section 213. That is, the amount is worked out by adding all the amounts or values of financial benefits given to the related party in the financial year from the public company or entity and the companies and entities it controls when the financial benefit is given, and disregarding any amounts repaid or falling under another related party transaction exception.

4.9 The new section 213 will not interfere with the requirements on directors or officers to exercise their powers and discharge their duties in accordance with other provisions of the Corporations Act, including the duties in Part 2D.1 and rules under the general law.

Approval of identical and otherwise unacceptable company names

4.10 Currently, section 147 of the Corporations Act provides that a name is available for use by a company unless the name is identical to another or unacceptable with reference to the rules in the Corporations Regulations. Section 601DC provides for a similar legislative scheme that applies to registrable Australian bodies and foreign companies. Regulation 2B.6.01 of the Corporations Regulations provides rules for determining whether a name is identical or unacceptable. As there may be particular reasons for a company wishing to use an identical or otherwise unacceptable name, the Corporations Act allows companies use of these names if the application receives ministerial consent.

4.11 The Minister may delegate the function of considering such an application to an officer of the Department under subsection 1345A(1) of the Corporations Act.

4.12 In the first instance, companies lodge these applications with ASIC, which then refers the applications to the Treasury. Given ASIC's role as the corporate regulator and manager of the company register, a more efficient administrative arrangement would be for ASIC to determine these name applications.

4.13 The Bill inserts a new subsection 1345A(1A) for the Minister, by signed instrument, to delegate the function of determining whether a particular company name should be granted, notwithstanding the name is identical or otherwise unacceptable, to a member of ASIC (ie a commissioner) or a staff member of ASIC. [Schedule 1, Part 2, item 197]

Pre-existing licences allowing companies to omit the word 'limited' from their names

4.14 A number of Australian companies hold a licence to omit the word 'limited' from their names. Such licences were generally issued by State and Territory Attorneys-General during the period when corporate law was a responsibility of the State and Territory Governments.

4.15 These licences generally require approval of the Minister responsible for corporate law, or another Minister of the Commonwealth, a State or a Territory, or an officer, instrumentality or agency of the Commonwealth, a State or a Territory for any changes to the constitutions of these companies.

4.16 A more efficient administrative arrangement would be for these companies to notify ASIC of changes to their constitutions, given ASIC's role as the corporate regulator and manager of the company register.

4.17 The Bill inserts new subsection 151(2AA) which replaces the requirement to seek approval for any changes to the constitutions of companies with pre-existing licences with a requirement to notify ASIC of any changes to their constitutions. [Schedule 1, Part 2, item 188]

4.18 ASIC will have the power to revoke a company's licence if the company fails to notify ASIC of a change to its constitution, in addition to its current powers to revoke a licence in subsection 151(3). [Schedule 1, Part 2, item 189]

Application and transitional provisions

Related party approval threshold

4.19 The amendment to remove the requirement for member approval of a related party transaction at or below a prescribed level aggregated over a financial year applies to a company's financial year that begins on or after the 1 July 2007, which is the day the amendment commences. [Schedule 1, Part 6, item 240]

Company names and pre-existing licences

4.20 The amendments to delegate approval of an identical or otherwise unacceptable name and the amendments to require a company with pre-existing licence to notify ASIC of changes to its constitution commence on 1 July 2007.

Chapter 5 Fundraising

Outline of chapter

5.1 This Bill contains six measures amending a number of provisions in the Corporations Act relating to fundraisings by corporate entities. The amendments are generally intended to facilitate fundraising by providing relief from unnecessary regulatory requirements such as the need, in some circumstances, to provide a disclosure document, removing unnecessary inconsistencies between different parts of the Corporations Act, or relaxing certain unnecessary restrictions (for example, time periods and amounts that can be raised under particular provisions).

Context of amendments

General background

5.2 The measures in this chapter relate to the fundraising provisions in the Corporations Act (mainly Chapter 6D, but also some parts of Part 7.9). Chapter 6D was inserted in the Corporations Act by the Corporate Law Economic Reform Program Act 1999. It builds on the previous general prospectus disclosure rules, but includes a number of additional provisions relating to the use of new instruments such as short form prospectuses and offer information statements, clarification of the persons liable for contraventions of the provisions and a new definition of sophisticated investors.

5.3 The introduction of the Government's new regime for the regulation of financial services in Chapter 7 of the Corporations Act occurred in 2001 through the Financial Services Reform Act 2001. One of the elements of this Act was that interests in managed investment schemes were taken out of the Chapter 6D fundraising regime and placed under a new disclosure regime in Part 7.9 of the Corporations Act. The Part 7.9 regime targets certain investment products marketed mainly to small retail investors. It was considered that such products had somewhat different disclosure requirements which justified treating them differently from the securities subject to Chapter 6D.

5.4 The Chapter 6D and Part 7.9 provisions have on the whole worked well and have supported a strong market in fundraisings since they were introduced. According to a recent survey conducted by KPMG, total equity fundraisings in Australia in 2005/06 amounted to A$42.5 billion, which represents an increase of 42 per cent since 2000/01.

5.5 Over time, however, it has become apparent that there are some shortcomings in the practical application of the provisions. Some of these affect the smooth operation of market processes, while others are more substantial in their effects, resulting in the skewing of market outcomes. The measures contained in this Chapter are intended to address a number of these shortcomings.

Rights issue disclosure for quoted securities and other financial products

5.6 Rights issues are a method of fundraising in which existing members in a company or managed investment scheme are given the opportunity to purchase new shares or units in proportion to their holdings on specified terms. The current legislation requires that rights issues must be accompanied by a prospectus or Product Disclosure Statement. As a result, the use of rights issues as a fundraising instrument has to some extent been superseded by other forms of fundraising with less onerous disclosure requirements. An example is a placement of shares to institutional investors, which can be accomplished without a prospectus or Product Disclosure Statement. One of the consequences of such placements is that existing members may be disadvantaged. Members with small holdings, for example, are generally not able to participate in institutional placements and therefore cannot acquire shares or units at the discount typically offered in such placements.

5.7 It is proposed to abolish the requirement to issue a prospectus or Product Disclosure Statement for rights issues of quoted securities or interests in managed investment schemes. The scope of the exemption is limited to quoted securities and interests in managed investment schemes on the grounds that the combination of an original prospectus or Product Disclosure Statement on listing and the continuous disclosure rules ensure the provision of an appropriate flow of information to members which will facilitate informed decision-making in relation to a rights issue.

Small scale offerings

5.8 This measure will facilitate small-scale fundraisings by granting some further measure of relief from the full disclosure requirements of the Corporations Act. The objective is to promote the creation and expansion of new businesses through easier access to capital.

5.9 The disclosure requirements in the Corporations Act do not apply to professional and sophisticated investors as defined in the legislation. New businesses, especially in 'sunrise' industries such as information technology or biotechnology, often rely on such investors to provide seed or start-up capital. The current definitions of professional and sophisticated investors in Chapter 6D and Chapter 7 of the Corporations Act are not entirely consistent.

5.10 The Corporations Amendment Regulations 2005 (No. 5) introduced changes which significantly expanded the scope of the wholesale investor category in Chapter 7 of the Corporations Act to whom the disclosure framework specified in that chapter does not apply. These changes were not applied to the sophisticated investor and professional investor exemptions in Chapter 6D. There does not appear to be any justification for this difference in the disclosure exemptions, and it is therefore proposed to align the definitions between the two chapters.

5.11 The use of Offer Information Statements, as defined in Chapter 6D of the Corporations Act, permits reduced disclosure requirements compared to a full prospectus. The market to date has not made wide use of this instrument, and it is proposed to provide further incentives to promote the wider use of offer information statements.

Secondary sale issues

5.12 This measure intends to facilitate the operation of the provisions in the Corporations Act relating to secondary sales of existing securities (as opposed to sales of shares to be newly issued). It includes a number of separate sub-measures.

5.13 Secondary sales of securities can be effected without a disclosure document under section 708A of the Corporations Act provided that a number of requirements set out in this section are satisfied.

5.14 Section 708A does not extend to secondary sales of securities that were initially transferred without disclosure by a person controlling the entity that issued the securities (a controller). Controllers therefore typically have to obtain relief from ASIC on a case-by-case basis to allow on-sale of those securities without disclosure. Submissions have been made that there is no justification for not allowing controllers to benefit from the general relief from the disclosure requirements provided in section 708A.

5.15 A further requirement for the secondary sales exemption in subsection 708A(5) is that the securities must have been listed for at least 12 months prior to sale. It has been proposed that this requirement is excessively restrictive and that the required listing period could be reduced while still satisfying the underlying policy rationale for the provision.

5.16 Certain types of quoted securities are classified as 'continuously quoted securities' in the Corporations Act if they satisfy a number of conditions. An example of such conditions is that the body issuing the securities must be listed on a financial market. An offer of continuously quoted securities enjoys substantial relief from the disclosure requirements in Chapter 6D and Part 7.9 of the Corporations Act where the securities have been quoted for at least 12 months. The reason is that such securities have been subject to the continuous disclosure rules for a significant period of time, during which they have had to disclose all price-sensitive information to the market on an ongoing basis.

5.17 Submissions have been made that the 12 month period is unnecessarily long and could be reduced without undermining the protection offered to investors through the provision. An appropriate period of 3 months has been suggested.

5.18 Listed entities are subject to the continuous disclosure requirements in the Corporations Act, whereby they must release all price-sensitive information to the market on an ongoing basis. Under the Australian Securities Exchange Listing Rules, there are certain situations where listed entities are allowed to withhold such information from the market. An example would be an important transaction where the negotiations had not been concluded yet and disclosure of information relating to the transaction might cause it to fail.

5.19 The Corporations Act requires that before secondary sales of securities and other financial products effected without disclosure can proceed, such information which has been withheld in accordance with the Listing Rules must be released to the market. The rationale for this requirement is to ensure that investors accepting such offers for sale are fully informed as to the state of the entity and its business. The information is released by providing a notice to the Australian Securities Exchange complying with certain conditions relating to content and timing of its release. This notice is generally known as a 'cleansing notice'.

5.20 Submissions from stakeholders have pointed out that some technical problems arise relating to the timing of the release of the cleansing notice to the market. The current wording of the relevant provision in the Corporations Act states that the notice must be released on the day before trading of these securities commences. This forces investors purchasing securities or other financial products offered to them in a secondary sale effected without disclosure to hold them for one day after they are transferred before they can be traded, even though existing securities of the same entity can be traded at the same time. This in effect requires holders of such securities to identify individually which securities can and which cannot be traded, which is impossible given the fungible nature of securities. Changes to the timing provisions relating to the release of the cleansing notice are necessary to improve the working of this part of the Corporations Act.

Employee unlisted share schemes

5.21 Employee share schemes are facilities that allow employees of a company to participate in the ownership of their employer through the acquisition of shares in the company. Based on the benefits employee share schemes may bring to the wider economy the Australian Government has a general policy of supporting the use of employee share schemes.

5.22 The following issues may arise under the Corporations Act in relation to the operation of an employee share scheme:

•

Disclosure: Broadly speaking, unless a relevant exception applies, companies are required to issue a prospectus for their employee share scheme unless it involves no more than 20 employees in any 12 month period and raises no more than $2 million.

•

Licensing: Where the employee share scheme offer document contains financial product advice about the scheme, the licensing provisions in the Corporations Act may require the issuer to hold an Australian Financial Services Licence for giving that financial product advice. Actual operation of the scheme may also require an Australian Financial Services Licence for deALIGN in securities or for providing a custodial or depository service.

•

Hawking: The offer of securities or other financial products under an employee share scheme may breach the hawking provisions in the Corporations Act.

5.23 Class Order CO 03/184 issued by ASIC provides some relief from these requirements for listed companies, subject to certain conditions. The rationale for this relief is that listed companies are subject to the continuous disclosure requirements, and therefore provide an adequate flow of information to the market (including their employees) on an ongoing basis.

5.24 Unlisted companies currently do not enjoy any relief from the disclosure, licensing and hawking provisions listed above.

Advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products

5.25 There are currently differences in the requirements relating to advertising and publicity for offers of securities requiring a prospectus, compared to those for offers or issues of other financial products. The requirements applying to other financial products are less restrictive and allow product providers more freedom in designing their advertisements. There does not appear to be any justification for the differences in the two advertising regimes.

Stapled securities disclosure

5.26 A stapled security consists of a unit in a managed investment scheme and a security such as a share. These two instruments cannot be disposed of separately but are 'stapled' together and must be traded as a single unit. The two components of the stapled security are frequently an interest in the trust holding the assets of the entity (an interest in a managed investment scheme) and a share in the company carrying out the asset management and/or development functions (a security). The offer of such a stapled security must be made under a Product Disclosure Statement (for the interest in a managed investment scheme component) and a prospectus (for the security component).

5.27 Due to differences in the disclosure regimes for prospectuses and Product Disclosure Statements, issues may arise in the preparation of a combined prospectus/Product Disclosure Statement. One of these issues is that there are no provisions allowing a Replacement Product Disclosure Statement to be prepared, whereas Chapter 6D contains provisions permitting lodgement of a replacement prospectus. As a result, a replacement combined prospectus/Product Disclosure Statement cannot be prepared if it is necessary to correct an error or omission in the original documents. To lodge a replacement document, ASIC is required to issue a stop order over the existing document, followed by the lodgment of a new Product Disclosure Statement. This triggers a new exposure period and lodgment fee.

5.28 There does not appear to be any justification for the differences between the prospectus and Product Disclosure Statement regimes in relation to replacement documents for stapled securities offers. Substantial relief could be provided to the market by aligning the two regimes in this regard.

Summary of new law

Rights issue disclosure for quoted securities and other financial products

5.29 The first measure amends the disclosure requirements relating to rights issues by listed entities. It provides that such rights issues may be conducted without the provision of a prospectus or Product Disclosure Statement. The relief is limited to rights issues of securities and interests in managed investment schemes.

5.30 The technical amendments required to achieve the desired exemption are relatively complex. This is mainly because rights issues can be conceived of as consisting of two elements, a 'right' to apply for securities or interests in managed investment schemes and an offer of securities or interests in managed investment schemes. Relief from the disclosure requirements must be achieved separately for these two elements.

5.31 Rights issues often occur in connection with significant transactions which have not been fully disclosed to the market, for example because negotiations for the transaction have not been completed. Provision is therefore made requiring that such information be disclosed before a rights issue can proceed. The appropriate mechanism for achieving this is a requirement for providing a cleansing notice modelled on the requirements of section 708A of the Corporations Act before the rights issue offers are made.

5.32 Furthermore, in certain circumstances rights issues may potentially lead to a shareholder or underwriter acquiring control or significantly increasing voting power. It is vital to ensure that members are provided with full information on the consequences of any potential effects on control of the entity. The requirement for a cleansing notice to be provided is therefore augmented with appropriate additional requirements to ensure that disclosure of this information occurs.

Small scale offerings

5.33 The second measure applies the relevant provisions included in Corporations Amendment Regulations 2005 (No. 5) to the definitions of sophisticated and professional investors in Chapter 6D, which will expand the number of investors able to take advantage of the relief provided to these categories of investors.

5.34 In order to encourage the wider use of the Offer Information Statement the maximum amount of money that may be raised using an Offer Information Statement (when combined with other funds previously raised) is increased to $10 million from $5 million. However, it is noted that due to the reduced disclosure requirements Offer Information Statements are not appropriate for use in listing entities on a financial market.

Secondary sale issues

5.35 The third measure provides that controllers may arrange sales of securities they hold without disclosure subject to the existing section 708A conditions, but subject to the requirement that the controller and the company provide a cleansing notice as set out in paragraph 708A(5)(e) in order to provide up to date price sensitive information to the market.

5.36 An entity wishing to rely on the disclosure exemption in section 708A should have some track record of complying with its continuous disclosure obligations. The required period for quotation of the securities sold is therefore reduced to three months to provide such a track record while providing some relief from the current requirement of 12 months.

5.37 A corresponding reduction is made to section 713 as a similar logic applies in that context. This means that continuously quoted securities as defined in the Corporations Act can benefit from reduced disclosure requirements provided they have been quoted for a period of at least 3 months.

5.38 Similar requirements apply to financial products covered under Part 7.9 of the Corporations Act. Corresponding amendments are made to that part of the Act reducing the quotation period to three months before secondary sales of such financial products without disclosure can proceed. Further amendments ensure that financial products falling under the definition of continuously quoted securities can benefit from reduced disclosure requirements provided they have been quoted for a period of three months.

5.39 The problem arising in relation to the timing of the provision of the cleansing notice is addressed by changing the wording of the relevant provisions so that the release of the notice may occur at any time before trading of the securities commences. This removes the need to wait for one day before starting trading. Corresponding requirements apply to other financial products in Part 7.9 of the Corporations Act and similar relief is provided for such products as well.

Employee unlisted share schemes

5.40 The fourth measure provides relief from certain of the licensing and hawking restrictions of the Corporations Act for employee share schemes for unlisted companies. This relief is made subject to the condition that such employee share schemes must be accompanied by a disclosure document such as an Offer Information Statement or a prospectus. Listed entities may also take advantage of this relief if they wish, subject to the same condition.

5.41 It is considered that Offer Information Statements as defined in Chapter 6D of the Corporations Act provide an appropriate level of disclosure for employees of companies and their financial advisers regarding the information required to make a decision as to whether to participate in an employee share scheme.

5.42 Offer Information Statements impose a lower level of disclosure than a full prospectus. This is due to the defined scope of the contents of an Offer Information Statement as set out in section 715, which reduces the requirement for legal advice and assistance in ensuring that the contents of the document are consistent with the requirements of the law. There is a cap on the total amount of funds that can be raised under an Offer Information Statement, which is currently $5 million and will be raised to $10 million under an associated measure. The Corporations Act provides a methodology for calculating the amount of funds raised for the purposes of this requirement. To facilitate the use of Offer Information Statements for employee share schemes, this measure removes amounts raised under an employee share scheme from this calculation.

5.43 The relief provided is made subject to a number of requirements which are also applied in ASIC Class Order CO 03/184 relating to employee share schemes for listed companies. Employee share scheme offers satisfying these criteria are defined as eligible offers.

5.44 At this stage only employee share schemes involving the issue of securities may use an Offer Information Statement as their disclosure document. Employee share schemes involving a sale of securities (for example through a wholly-owned trustee) will still have to provide a prospectus.

5.45 The following relief from the licensing requirements for eligible offers as defined above is provided:

•

Relief for an issuer from the requirement to hold an Australian Financial Services Licence for the provision of general advice in connection with the offers.

•

Relief for an issuer and its controlled entities from the requirement to hold an Australian Financial Services Licence for deALIGN in a financial product where the operation of an employee share scheme requires the purchase or disposal of shares which occurs:

-

through a person who holds an Australian Financial Services Licence authorising the holder to deal in financial products; or

-

in an overseas jurisdiction through a person who is licensed or otherwise authorised to deal in financial products in that jurisdiction.

•

Relief for an issuer and its controlled entities from the licensing requirement for the provision of a custodial and depository service, including licensing relief for deALIGN in a financial product in the course of providing such a custodial and depository service.

5.46 Amendments are made providing relief from the hawking provisions in the Corporations Act for eligible employee share schemes, to allow companies to contact their employees and make participation offers to them.

5.47 Contribution plans are exempted from the managed investment and licensing provisions in the Corporations Act. A contribution plan is an arrangement under which funds are deducted from employees' salaries, including through salary sacrifice arrangements, and used to pay for shares under an employee share scheme. Without the relief provided such plans may need to be registered under the managed investments provisions of the Corporations Act in Chapter 5C and may also attract the licensing requirements in Chapter 7 of the same act.

Advertising rules for offers of securities requiring a disclosure document and for offers of other financial products

5.48 The fifth measure aligns the advertising requirements for offers of quoted securities with the advertising requirements that apply to other financial products. Amendments are also made aligning the advertising provisions applying to offers of unquoted securities after the lodgment of a disclosure document with those applying to other financial products.

5.49 The provisions regarding advertising of unquoted securities prior to the lodgment of a disclosure document remain unchanged. The strict pre-lodgment advertising restrictions for unquoted securities were introduced to ensure that the requirement to have balanced and complete disclosure in the prospectus was not negated by the content of advertisements not subject to such restrictions or requirements. These restrictions have accordingly been considered a fundamental part of the Chapter 6D disclosure regime.

5.50 ASIC's stop order powers are extended to allow it to intervene in case of misleading and deceptive advertising of securities, as it is currently able to do in the case of other financial products under Chapter 7 of the Corporations Act.

Stapled securities disclosure

5.51 The sixth measure rectifies the issue regarding lodgment of replacement combined prospectus/Product Disclosure Statements by extending the application of the provisions relating to replacement prospectuses to allow for Replacement Product Disclosure Statements for stapled securities.

Comparison of key features of new law and current law

Detailed explanation of new law

Rights issue disclosure for quoted securities and other financial products

5.1 A definition of a rights issue to which the intended relief will apply is provided in section 9A. The definition states that it encompasses offers of securities or of interests in a managed investment scheme of the same class to existing holders of these products in proportion to the extent of their holdings. The definition is worded to include assignees of the existing holders. This ensures that certain types of rights issues where the rights can be sold (so-called 'renounceable' rights issues) fall within the scope of the relief offered.

5.2 Offers must be made to all such holders in Australia and New Zealand. A provision is included allowing entities conducting a rights offer to exclude persons in specific overseas jurisdictions otherwise entitled to participate in the issue subject to certain conditions. This is mainly intended to avoid them having to bear the costs of complying with the disclosure and other regulatory requirements in jurisdictions where there are only a limited number of existing holders of securities or interests in a scheme. In the case of renounceable rights issues, the rights attributable to such excluded persons must be sold and the net proceeds given to them. This provision is modelled on existing relief provided in the Australian Securities Exchange Listing Rules. [Schedule 1, Part 1, item 10]

5.3 Offers of securities under a rights issue are exempted from the disclosure requirements in Chapter 6D of the Corporations Act, subject to a number of conditions required by section 708AA. These include requirements that the securities must not have been suspended from trading for more than a specified maximum number of days, and that they have not been exempted from the disclosure requirements to which they would normally be subject.

5.4 ASIC may also make a determination disallowing the disclosure relief, if the entity has breached any of a number of key provisions in the Corporations Act. These include provisions such as the financial reporting requirements in Chapter 2M, the requirement for a trust deed and trustee in relation to an offer of debentures under Chapter 2L, as well as key requirements in relation to the continuous disclosure provisions. A provision is included stating that such a determination is not a legislative instrument. This provision is declaratory of the law and solely intended to assist readers, as these determinations are not legislative instruments within the meaning of section 5 of the Legislative Instruments Act 2003.

5.5 A final condition is that the entity must provide a cleansing notice to the market within 24 hours before it makes offers of the securities under the rights issue. Conditions apply to the content and preparation of the cleansing notice, defining what kind of information must be disclosed and what action must be taken if a notice is found to be defective. Finally, a specific requirement is imposed to disclose information relating to any potential effects the rights issue may have on the control of the company. The majority of the conditions imposed on the relief provided under this measure are modelled on the conditions applying to secondary sale offers of securities that may be conducted without disclosure under section 708A in Chapter 6D of the Corporations Act. [Schedule 1, Part 1, item 78]

5.6 The same relief subject to the same conditions is provided for rights issue offers of interests in a managed investment scheme under a rights issue by section 1012DAA. ASIC may make a similar determination as outlined above. A provision is included stating that such a determination is not a legislative instrument. This provision is declaratory of the law and is solely intended to assist readers, as these determinations are not legislative instruments within the meaning of section 5 of the Legislative Instruments Act 2003. [Schedule 1, Part 1, item 137]

5.7 The 'rights' element of a rights issue is defined as the right to acquire securities or interests in a managed investment scheme. These rights are included in the definition of securities in Chapter 7 of the Corporations Act by paragraph 761A(e). This ensures that the investor protection requirements contained in that Chapter apply to certain activities in relation to such rights. A financial adviser offering advice in relation to the rights to a retail client would, by virtue of this provision, be subject to the full licensing, conduct and disclosure requirements of Chapter 7. [Schedule 1, Part 1, item 96]

5.8 The rights are exempt from the disclosure requirements in Chapter 6D by virtue of subsection 700(1). This ensures that the exemption from the prospectus disclosure requirements which extends to the offer of securities under a rights issue also applies to offers of the rights created as part of the rights issue. [Schedule 1, Part 1, item 71]

Small scale offerings

5.9 This measure amends the amount specified in subsection 709(4) that may be raised under an Offer Information Statement from $5 million to $10 million. [Schedule 1, Part 1, item 84]

5.10 It also aligns the definition of sophisticated investor in section 708 in Chapter 6D with that in Chapter 7 by allowing the inclusion of the net assets and gross income of a company or trust controlled by the investor in the total net assets and gross income of the investor. As in Chapter 7, the concept is expanded to include offers of securities to a company or trust controlled by a person who satisfies the conditions for being classified as a sophisticated investor. [Schedule 1, Part 1, items 75 and 76]

5.11 The general definition of a professional investor in subsection 708(11) in Chapter 6D of the Corporations Act is aligned with that used in Chapter 7 so that it states that a person who has or controls gross assets of at least $10 million is a professional investor. [Schedule 1, Part 1, item 77]

5.12 The opportunity has been taken to correct a grammatical error in Note 1 to subsection 709(4). [Schedule 1, Part 1, item 85]

Secondary sale issues

5.13 Section 707 in Chapter 6D of the Corporations Act provides that secondary sales of securities by a controller must be accompanied by a disclosure document. The provisions allowing certain secondary sale offers to be effected without disclosure are not applicable to controllers (sections 708-708A).

5.14 This amendment changes section 708A to allow controllers to benefit from the existing relief from the requirement to issue a disclosure document for secondary sales of existing securities subject to the same conditions. [Schedule 1, Part 1, item 79]

5.15 The existing relief from the disclosure requirements is (among others) subject to a condition that the entity that issued the securities provides a notice known as a cleansing notice to the market operator disclosing certain price-sensitive information that has been withheld from the market. Withholding of such information may be permitted under defined circumstances by the listing rules issued by the market operator.

5.16 In the case of secondary sales conducted by controllers, a requirement is imposed through subparagraph 708A(5)(e)(ii) that both the controller as well as the entity that issued the securities must provide a cleansing notice to the market operator for release to the market. [Schedule 1, Part 1, item 83]

5.17 The same amendments are made to the relevant provisions in Part 7.9 to allow secondary sales by controllers of other financial products, subject to the same condition that both the controller as well as the entity that issued the financial products must provide a cleansing notice to the market operator for release to the market. In particular, subsection 1012DA(1A) is inserted and paragraph 1012DA(5) is amended. [Schedule 1, Part 1, items 138 and 142]

5.18 The disclosure relief applying to certain secondary sales of existing securities is subject to a requirement that the securities must have been quoted for a period of 12 months. This period is reduced to 3 months by the amendment of paragraph 708A(5)(a) as part of this measure. [Schedule 1, Part 1, item 80]

5.19 Corresponding relief from the disclosure requirements is also provided for certain secondary sales of other quoted financial products such as interests in a managed investment scheme. A similar amendment is made to paragraph 1012DA(5)(a) reducing the required period of quotation from 12 to 3 months. [Schedule 1, Part 1, item 139]

5.20 Offers of continuously quoted securities enjoy substantial relief from the disclosure requirements in Chapter 6D and Part 7.9 provided the financial products have been quoted for at least 12 months. This period is reduced to 3 months through an appropriate amendment to the definition of 'continuously quoted securities' in section 9 of the Corporations Act. [Schedule 1, Part 1, item 1]

5.21 The cleansing notice for secondary sales of securities can be provided at any time before the sales offers are made, rather than on the day before the offers are made. This is achieved by the amendment of paragraph 708A(5)(e). [Schedule 1, Part 1, item 83]

5.22 The same amendment is made in relation to the timing of the release of a cleansing notice for secondary sales of other financial products. This is achieved by the amendment of paragraph 1012DA(5)(e). [Schedule 1, Part 1, item 142]

5.23 The opportunity has been taken to make two minor corrections: to the definition of 'regulated person' in section 1011B and to paragraph 1012A(3)(c). [Schedule 1, Part 1, items 134 and 135]

Employee unlisted share schemes

5.24 A definition of an eligible employee share scheme is inserted in section 9 of the Corporations Act. All relief given under this measure only applies to employee share schemes falling in this category. The main requirements are that a disclosure document must be provided under the scheme, that offers are restricted to employees as defined in the Corporations Act, and that the offers are of fully paid shares and a limited number of other types of instruments. This definition is largely modelled on the one in ASIC's Class Order CO 03/184 which provides certain relief for employee share schemes of listed entities. [Schedule 1, Part 1, item 4]

5.25 A definition of a contribution plan is inserted in section 9. This includes conditions which must apply to the features and operation of the plan in order for it to qualify for the relief offered under this measure. Important features include, for example, that the deductions made under the plan must be authorised by the employee and may be discontinued at any time at the election of the employee. [Schedule 1, Part 1, item 3]

5.26 Amounts raised under an eligible employee share scheme are exempted from the calculation of the total funds raised under an Offer Information Statement by virtue of an amendment to subsection 709(5). [Schedule 1, Part 1, item 86]

5.27 Appropriate licensing relief is provided for the company or controlled entity (for example a trustee) operating the scheme through an amendment to subsection 911A(2). This includes relief for the following activities: the provision of general advice relating to the scheme; deALIGN in a financial product where the purchase or disposal of the products occurs through a licensed broker in or outside Australia; the operation of a custodial or depository service in connection with the scheme; and deALIGN in an interest in a contribution plan. Providing deALIGN relief where trading in the financial products occurs through a licensed broker outside Australia is required to ensure that employees of multinational companies can participate in schemes operated by the parent entity outside Australia. [Schedule 1, Part 1, item 106]

5.28 Relief is provided from the hawking provisions in the Corporations Act in relation to offers of securities as well as other financial products. This relief is provided through the amendment of subsection 736(2), section 992A and subsection 992AA(2). These provisions prevent sales offers from being made through unsolicited meetings or telephone calls. Applied to employee share schemes, these provisions could prevent companies from informing their employees about their schemes and inviting them to participate. [Schedule 1, Part 1, items 92, 131 and 132]

5.29 Contribution plans are exempted from the operation of the managed investment scheme requirements in Chapter 5C of the Corporations Act by virtue of an amendment to the definition of 'managed investment scheme' in section 9. The requirements of Chapter 5C would otherwise impose extensive regulatory requirements which are not justified in the special circumstances under which such plans operate. [Schedule 1, Part 1, item 6]

5.30 Contribution plans are exempted from the operation of most of Part 7.9 of the Corporations Act by virtue of new section 1010BA. Part 7.9 would otherwise require a Product Disclosure Statement to be prepared. This is unnecessary in view of the fact that the employee share scheme as a whole is required to be covered by a disclosure document under the conditions attached to this measure. [Schedule 1, Part 1, item 133]

Advertising rules for offers of securities requiring a disclosure document and for offers of other financial products

5.31 The provisions relating to advertising for offers of quoted securities under Chapter 6D prior to lodgement of the disclosure document are amended to align with those relating to advertising for offers or issues of other financial products in Part 7.9. This is achieved by the amendment of paragraph 734(5)(a).

5.32 The advertisement must include a statement regarding the following prescribed matters: the identity of the issuer of the securities and the seller, if there is one; that a disclosure document will be made available later, and when and where it will be available; that a person should consider the disclosure document in deciding whether to acquire the securities, and that anyone who wants to acquire the securities must do so using the application form in the disclosure document. [Schedule 1, Part 3, item 210]

5.33 Subsection 734(6) which relates to advertising of offers of quoted and unquoted securities conducted under Chapter 6D after lodgement of the disclosure document is amended in a similar fashion, taking account of the fact that the document has already been lodged. Thus the prescribed statement must say that the disclosure document is already available, and where it can be obtained. [Schedule 1, Part 3, item 212]

5.34 The measure ensures that ASIC's stop-order powers in Chapter 6D extend to defective advertisements for offers of quoted securities prior to lodgement of the disclosure document as well as of quoted and unquoted securities after lodgement of the disclosure document. This is achieved by the amendment of section 739. [Schedule 1, Part 3, item 213]

5.35 Further provisions are included in section 739 to clarify the meaning of 'defective' in the context of ASIC's stop order power. The term 'defective' in this context includes making a misleading or deceptive statement, omitting material that is required, or making a statement about future matters without having reasonable grounds for doing so. It is made clear that this is not intended to limit what may constitute a misleading statement to these cases. [Schedule 1, Part 3, item 215]

5.36 The opportunity is taken to correct a minor formatting error in paragraph 734(5)(b). [Schedule 1, Part 3, item 211]

Stapled securities disclosure

5.37 A cross reference to a definition of a Replacement Product Disclosure Statement is included in section 761A (the definitions section) at the beginning of Chapter 7 of the Corporations Act. The new definition of this term is in section 1014H. [Schedule 1, Part 1, items 94 and 146]

5.38 The measure inserts a new Subdivision DA in Division 2 of Part 7.9 of the Corporations Act containing the main provisions relating to Replacement Product Disclosure Statements. New section 1014G clarifies that Replacement Product Disclosure Statements may only be issued for offers of stapled securities where a Product Disclosure Statement has been lodged as well as a prospectus.

5.39 A Replacement Product Disclosure Statement is defined in new section 1014H as a document replacing a Product Disclosure Statement in order to make certain corrections or fill certain gaps in the original Product Disclosure Statement. Particular attention is drawn to the fact that a Replacement Product Disclosure Statement may contain changes to important information supplied in the original Product Disclosure Statement concerning minimum amounts that must be raised if the financial product is to be issued or sold, or concerning plans to list the financial products on a financial market.

5.40 A deeming provision is included in the new section 1014 stating that a reference to a Product Disclosure Statement throughout the Corporations Act is taken to be a reference to the Replacement Product Disclosure Statement once the latter is lodged. This ensures that all the relevant provisions in the Corporations Act apply appropriately to Replacement Product Disclosure Statements, even where no specific amendments have been made to achieve this.

5.41 A statement that the document is a Replacement Product Disclosure Statement is required to be placed at the beginning of the document. A requirement to identify the original Product Disclosure Statement which is being replaced is included. Otherwise the main provisions in the Corporations Act relating to the preparation and contents of Product Disclosure Statements apply to Replacement Product Disclosure Statements in the same way. These requirements are included in new section 1014K.

5.42 The new provisions import a number of further requirements deALIGN mainly with the lodgement of certain Product Disclosure Statements with ASIC and the manner in which a Product Disclosure Statement must be given to a person to ensure that they also apply to Replacement Product Disclosure Statements. This is achieved by new section 1014L. [Schedule 1, Part 1, item 146]

5.43 Under certain provisions in the Corporations Act, if a Product Disclosure Statement states that a financial product will be tradable on a financial market, then the product must be able to be traded, or else an application has to be made within seven days after a certain relevant date to a market operator to enable such trading to occur. Further, if the product is not able to be traded at the end of three months after a certain relevant date, the issue or transfer of such financial products is void, and the person to whom the products were issued or transferred must be repaid if any payment has been received.

5.44 Subsection 1016D(3) is amended to clarify that, if such a statement is express or implied in a Replacement Product Disclosure Statement, the relevant date is the date of the Replacement Product Disclosure Statement, and not that of the original Product Disclosure Statement. [Schedule 1, Part 1, item 148]

5.45 Further provisions prescribe certain actions applying to a person making an offer of financial products under a Product Disclosure Statement that states that the products will only be issued or sold if a minimum number of products are applied for or a minimum amount is raised, and where these conditions have not been fulfilled within 4 months after a certain relevant date.

5.46 Subsection 1016E(4) is amended to clarify that, if such a statement is express or implied in the Replacement Product Disclosure Statement, the relevant date is the date of the Replacement Product Disclosure Statement, and not that of the original Product Disclosure Statement. In such cases the person making the offer must either repay monies received from any applicants, or provide a new disclosure document as prescribed and give any applicants one month to withdraw their application and be repaid. [Schedule 1, Part 1, item 150]

5.47 A minor formatting error in subsection 1016D(3) is corrected. [Schedule 1, Part 1, item 147]

Application and transitional provisions

Rights issue disclosure for quoted securities and other financial products

5.48 The amendments relating to rights issues commence on Royal Assent. [Clause 2]

5.49 The amendments abolishing the requirement for a prospectus or Product Disclosure Statement for a rights issue will apply to rights issues offered on or after the day on which the relevant items commence. [Schedule 1, Part 6, item 229]

Small scale offerings

5.50 The amendments relating to small scale offerings commence on Royal Assent. [Clause 2]

5.51 The amendments apply to offers of securities made on or after the day the amendments commence. [Schedule 1, Part 6, item 237]

Secondary sale issues

5.52 The amendments relating to secondary sale issues commence on Royal Assent. [Clause 2]

Employee unlisted share schemes

5.53 The amendments relating to the contribution plans operated as part of employee share schemes commence on Royal Assent. [Clause 2]

5.54 The amendments apply to employee share schemes offered on or after the day on which the amendments commence and to contribution plans offered on or after the day on which those amendments commence. [Schedule 1, Part 6, item 227 and 228]

Advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products

5.55 The amendments relating to advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products commence on proclamation or six months after Royal Assent, whichever is earlier. [Clause 2]

5.56 The amendments apply to an advertisement or publication made after commencement. [Schedule 1, Part 6, item 242]

Stapled securities disclosure

5.57 The amendments relating to Replacement Product Disclosure Statements for stapled securities commence on Royal Assent. [Clause 2]

5.58 The amendments apply to any Product Disclosure Statement lodged with ASIC at the time of commencement or thereafter. [Schedule 1, Part 6, item 230]

Consequential amendments

Rights issue disclosure for quoted securities and other financial products

5.59 A reference to the new definition of 'rights issues' is inserted in the general definitions section 9 at the beginning of the Corporations Act. [Schedule 1, Part 1, item 9]

5.60 A number of references to offers of securities that may be made without disclosure are updated to include the new section removing the requirement for a disclosure document for a rights issue. [Schedule 1, Part 1, items 20, 21, 72, 74, 89 and 136]

5.61 ASIC has powers to exclude an offer of continuously quoted securities (and certain other financial products) from the reduced disclosure requirements contained in sections 713 and 1013 FA if that body has contravened certain provisions in the Corporations Act. Failure to comply with key provisions applying to rights issues conducted without disclosure are included in the list of contraventions based on which ASIC may make such a determination. [Schedule 1, Part 1, items 87, 88, 143 and 144]

5.62 Giving a cleansing notice that does not comply with the new rights issues disclosure provisions does not constitute a contravention of section 727 or section 1021C which state that it is an offence to offer securities or other financial products without providing appropriate disclosure as required by Chapter 6D or Part 7.9. [Schedule 1, Part 1, items 90, 91, 152, 153 and 154]

5.63 Amendments are made clarifying that certain enforcement provisions relating to offences, such as a failure to provide a disclosure document or statement, or providing a defective disclosure document or statement, apply to the new rights issue provisions, and that the defendant bears the evidential burden in relation to these provisions. [Schedule 1, Part 1, items 151, 155 and 159]

5.64 Amendments are made ensuring that a failure to comply with the requirements applying to the cleansing notice required for rights issues without disclosure constitutes an offence under the relevant provisions of the Corporations Act. [Schedule 1, Part 1, items 161, 162, 163, 164, 165 and 166]

5.65 Entities breaching the continuous disclosure requirements may be subject to an infringement notice issued by ASIC imposing a pecuniary penalty and requiring certain compliance action to be taken. Failure to comply with the notice provides an opportunity for specific proceedings to be taken against the breaching entity. In such circumstances no other proceedings than those specified may be started against the entity. It is clarified that a determination by ASIC made under the new rights issues disclosure provisions preventing an entity from benefiting from the relief provided may still be made, even if other proceedings may not be started. [Schedule 1, Part 1, item 167]

5.66 The maximum penalty is specified for the offence of breaching the requirement to correct a defective cleansing notice provided under the new rights issues disclosure provisions. The penalty is the same as that for a failure to do the same in relation to a secondary sale of securities without disclosure conducted under the existing provisions in section 708A. [Schedule 1, Part 1, items 172 and 175]

Small scale offerings

5.67 A consequential amendment is made to the table at section 705 reflecting the change in the amount that can be raised through an Offer Information Statement. [Schedule 1, Part 1, item 73]

Secondary sale issues

5.68 Amendments are made to reflect the reduced requirement for the securities and other financial products subject to the secondary sales provisions to have been quoted for 3 months instead of 12 months. [Schedule 1, Part 1, items 2, 81, 82, 140 and 141]

Employee unlisted share schemes

5.69 The definition of employee share schemes in section 9 is adapted to reflect the possibility of schemes offering options over unissued shares as a consequence of the definition of what constitutes an eligible employee share scheme. [Schedule 1, Part 1, item 5]

Advertising rules for offers of securities requiring a disclosure document and for offers of other financial products

5.70 An amendment is required to make certain conditions and powers apply to ASIC's expanded stop order powers with respect to advertisements for offers under Chapter 6D. These conditions relate to ASIC's obligation to hold a hearing and its power to make interim orders in certain circumstances. [Schedule 1, Part 3, item 214]

Stapled securities disclosure

5.71 A number of notes are inserted alerting readers to the operation of the new provisions relating to Replacement Product Disclosure Statements. [Schedule 1, Part 1, items 7, 93 and 145]

5.72 A reference to the definition of Replacement Product Disclosure Statements in Chapter 7 is placed in the general definitions in section 9 in the Corporations Act. [Schedule 1, Part 1, item 8]

5.73 A reference to the definition of a Replacement Product Disclosure Statement in the new section 1014H is placed in the definitions section in Chapter 7. [Schedule 1, Part 1, item 94]

5.74 The appropriate operation of the continuous disclosure requirements in relation to information that would have to be disclosed in a Replacement Product Disclosure Statement is ensured through an appropriate amendment. [Schedule 1, Part 1, item 70]

5.75 An appropriate amendment ensures that certain remedies applying in cases of a defective Product Disclosure Statement or Supplementary Product Disclosure Statement also apply to a Replacement Product Disclosure Statement. [Schedule 1, Part 1, item 149]

5.76 An appropriate amendment ensures that certain enforcement provisions relating to Product Disclosure Statements and Supplementary Product Disclosure Statements that do not satisfy some of the contents provisions of the Corporations Act also apply to Replacement Product Disclosure Statements. The provisions relate to requirements such as that a Product Disclosure Statement must be dated, carries an appropriate title as prescribed and is not combined with a Financial Services Guide except as allowed under the Corporations Act. [Schedule 1, Part 1, items 156, 157 and 158]

Chapter 6 Takeovers

Outline of chapter

6.1 This chapter describes amendments to repeal the provisions in the Corporations Act which relate to telephone monitoring during takeover bids and the requirements to provide section 665D and 665E notices (85 per cent notices).

Context of amendments

Remove telephone monitoring during takeover bids

6.2 Currently a bidder and a target in a takeover situation must record all telephone calls they make to security holders (other than wholesale holders) to discuss a takeover bid during the bid period.

6.3 Subdivision D, Division 5, Part 6.5 of the Corporations Act was introduced by the Financial Services Reform Act 2001. It imposes obligations relating to the identification, indexing, storing, destroying, accessing and copying of the recordings.

6.4 The purpose of the subdivision was to ensure that security holders did not receive information from the takeover bidder or target that could be considered misleading.

6.5 The existing provisions have not increased the protection of security holders and impose significant costs on the parties involved.

Remove section 665D and 665E notices (85 per cent notices)

6.6 Currently section 665D of the Corporations Act requires those persons who hold 85 per cent or more of a class of securities in a company to notify the company in writing of that fact within 14 days of becoming aware that they are a 85 per cent holder and then remind the company on an annual basis.

6.7 Section 665E requires a company that has been given a notice under section 665D to inform its members the next time it sends its members a notice or report under another provision of the Corporations Act.

6.8 The provisions were enacted to provide holders of securities with an advanced warning that the majority holder is approaching the 90 per cent limit, at which the majority holder can compulsorily acquire their securities.

6.9 However, it is often the case that the minority are already aware of the majority holder's position. For listed entities, other mechanisms in the Corporations Act will mean that the information is already publicly disclosed.

6.10 Furthermore, even if notice is given, it could be the case that a significant time has lapsed between the majority holder providing the information to the company and the issue of the company's next notice or report.

6.11 These provisions have proved to be of little benefit to minority holders but impose significant costs on majority holders and companies.

Summary of new law

6.12 The Bill will remove the requirement to monitor telephone calls during a takeover bid. It will also remove the requirement to issue section 665D and 665E notices.

Comparison of key features of new law and current law

Detailed explanation of new law

6.1 Subdivision D of Division 5 of Part 6.5 will be repealed. This will remove the requirement for telephone monitoring during the takeover bid period. [Schedule 1, Part 1, item 68]

6.2 Division 3 of Part 6A.2 of the Corporations Act will be repealed. This will remove the requirement for holders of 85 per cent or more of a class of securities in a company to notify the company. It will also remove the requirement for the company to notify its members. [Schedule 1, Part 1, item 69]

Application and transitional provisions

6.3 The repeal of the telephone monitoring and 85 per cent notice requirements will take effect on the day of Royal Assent.

Consequential amendments

6.4 The penalty provisions related to telephone monitoring (Items 201A to 201M of Schedule 3) will be removed from the Corporations Act. [Schedule 1, Part 1, item 170]

6.5 The penalty provisions related to section 665D and 665E notices (Items 219 and 220 of Schedule 3) will be removed from the penalties schedule. [Schedule 1, Part 1, item 171]

Please do not delete the following section break

Chapter 7 Compliance

Outline of chapter

7.1 This chapter describes amendments to the Corporations Act to streamline compliance procedures and ensure companies can access newer technologies, by simplifying returns of company particulars and permitting electronic registration of charges.

Context of amendments

7.2 The amendments seek to address concerns that the current compliance framework can stymie companies from using newer technologies and cause them to devote too many resources to unproductive outputs.

7.3 The amendments are based on proposals appearing in the Corporate and Financial Services Review Proposals Paper of November 2006.

Summary of new law

7.4 The Bill will make amendments to the Corporations Act to:

•

limit when ASIC can issue a return of particulars to instances where it suspects or believes the particulars on the corporate register are not correct, and give companies two months to respond; and

•

allow ASIC to register company charges electronically.

Comparison of key features of new law and current law

Detailed explanation of new law

Simplifying returns of company particulars

7.1 Under the current law, ASIC may give to a company or responsible entity of a registered scheme a return of particulars for the company in three situations: if the review fee for the company or scheme has not been paid by the due date; if ASIC suspects or believes that particulars recorded in a register maintained by ASIC are not correct; or if no documents have been lodged with ASIC for at least one year.

7.2 In addition, the response to the return of particulars must be lodged with ASIC within 28 days of the date of issue of the return.

7.3 The requirement to respond to a return of particulars for a company or scheme can involve considerable compliance burden as the issuing of the return of particulars cannot be anticipated by the company or scheme. Companies and schemes also risk being penalised by late lodgment fees if the response is not lodged within 28 days.

7.4 The compliance burden on companies could be reduced by better targeting the circumstances in which a return of particulars may be issued and allow for a longer period to respond. The most appropriate circumstances for ASIC to issue a return of particulars would be it if has reasonable grounds to suspect or believe that particulars recorded in a register are not correct.

7.5 The Bill will repeal existing subsection 348A(1) of the Corporations Act, substituting it with a new subsection 348A(1) that allows ASIC to give a company or responsible entity of a registered scheme a return of particulars for the company or scheme if ASIC suspects or believes that particulars recorded in a registered are not correct. [Schedule 1, Part 3, item 208]

7.6 In addition, the Bill amends paragraph 348D(2)(a) of the Corporations Act, increasing the time in which a return of particulars must be lodged with ASIC from 28 days to two months. [Schedule 1, Part 3, item 209]

Electronic registration of company charges

7.7 From 1 July 2007, ASIC will provide a facility that allows for the electronic registration of charges. Currently, charges can only be lodged with, and certified by, ASIC on paper.

7.8 The Bill will amend subsection 352(1) of the Corporations Act to allow ASIC to approve the lodgement documents in a particular class by electronic means. This will allow ASIC to establish a system for the electronic registration of charges under which all documents in the class of documents related to charges can be lodged with ASIC electronically. [Schedule 1, Part 2, item 196]

7.9 As the timing of the registration of charges is important for issues of priority, the Bill will amend also section 274 of the Corporations Act to provide ASIC with the ability to apply to the Court to have the register rectified in circumstances where the electronic system to register the charges fails. This power would allow ASIC to have the register reflect the order in which charges were registered notwithstanding that the electronic system register was unavailable for a period of time. [Schedule 1, Part 2, items 194 and 195]

7.10 In relation to charge certificates, the Bill will remove the requirement in subsections 272(1) and 272(3) of the Corporations Act for ASIC to issue a certificate providing details of a charge under ASIC's common seal, that is, on paper. Removing this requirement will facilitate ASIC issuing electronic certificates that provide details of a registered charge. This amendment is not intended to remove the requirement for a charge certificate, merely how it comes into existence. [Schedule 1, Part 2, items 191 and 193]

7.11 In addition, to ensure consistency within the charge certificate provisions in the Corporations Act, the Bill will amend subsection 272(3) to replace 'register' with 'Register', so that the provision expressly refers to the Australian Register of Company Charges, to avoid any doubt. [Schedule 1, Part 2, item 192]

Application and transitional provisions

7.12 The amendments providing a facility to allow for the electronic registration of company charges will commence on 1 July 2007.

7.13 The amendment in relation to circumstances when ASIC can issue a return of particulars will commence on a date to be fixed by proclamation or otherwise six months after Royal Assent, and will apply to returns of particulars issued on or after commencement [Schedule 1, Part 6, item 241]

Consequential amendments

Electronic registration of company charges

7.14 Subparagraph 264(1)(a)(ii) of the Corporations Act contains an incorrect cross reference to paragraph 263(1)(a) of the Corporations Act. The Bill will correct the reference so that it refers to paragraph 263(1)(b) in relation to a company issuing a series of debentures constituting a charge by resolution or resolutions passed by the company. This amendment will commence on a date to be fixed by proclamation or otherwise six months after Royal Assent. [Schedule 1, Part 3, item 207]

Please do not delete the following

Chapter 8 Regulation impact statement: financial services regulation

Background

The Financial Services Reform Act 2001 (FSR Act)

7.1 The FSR Act, which commenced on 11 March 2002, introduced a single licensing regime for financial sales, advice and deALIGNs in relation to financial products; consistent and comparable financial product disclosure; and a single authorisation procedure for financial markets and clearing and settlement facilities. The FSR Act provided the legislative response to a number of recommendations of the Financial System Inquiry, commissioned by the Australian Government in 1997.

7.2 The previous regulation of providers of financial services was product-specific and contained in a number of different Acts and non-legislative instruments. The FSR Act removed unnecessary distinctions between financial products to rationalise compliance obligations and put in place a competitively neutral regulatory system. In addition, it aimed to give consumers a more consistent framework of consumer protection in which to make their financial decisions.

7.3 The FSR Act replaced the existing Chapters 7 and 8 of the Corporations Act with a new Chapter 7. Following a two-year transition period, the changes introduced by the FSR Act took full effect on 11 March 2004.

7.4 During the transition to the new requirements, several issues were raised by industry participants and consumer representatives in relation to the practical operation of the legislation. Many of these issues were dealt with through the making of Corporations Regulations and the passage of the Financial Services Reform Amendment Act 2003.

7.5 However, following the full implementation of the legislation, and after a reasonable period in which to judge its impact, the Australian Government recognised that concern remained about various aspects of the legislation. Chief among these were aspects of the disclosure requirements.

Refinements to Financial Services Regulation

Refinements to financial services regulation proposals paper

7.6 In May 2005 the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, released a paper titled Refinements to Financial Services Regulation Proposals Paper. The purpose of the paper was to raise for discussion with industry and consumer representatives a number of suggestions for refinements to the legislation to improve its operation, particularly by reducing compliance costs for industry participants, while preserving the consumer protection benefits introduced by the FSR Act.

7.7 The paper complemented a report by the Financial Sector Advisory Council which included recommendations based on the results of a survey of industry experience with financial services regulation since its introduction.

7.8 The intention of the financial services regulation refinements was to:

•

ensure that consumers receive information that is relevant to their needs;

•

reduce the compliance burden on industry; and

•

clarify the intent of the legislative and regulatory framework that applies to the financial services industry.

7.9 Around 40 submissions were received in response to the paper. In addition, the Australian Government held a number of consultation meetings to further discuss the refinement proposals. By December 2005, the refinements were completed, with 18 refinements being implemented by amendments to Corporations Regulations and the remaining seven proposals implemented by ASIC.

7.10 As part of the consultation on the 2005 refinements to financial services regulation, industry provided comments on a number of residual issues which extended beyond the scope of the proposals considered in the Refinements to Financial Services Regulation Proposals Paper. These residual issues were not able to be addressed as part of the refinements project, but the feedback from industry has emphasised the need for further refinements in outstanding areas of concern. These issues were included for discussion in the Corporate and Financial Services Regulation Review Consultation Paper of April 2006.

Corporate and Financial Services Regulation Review Consultation Paper

7.11 On 7 April 2006, the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP, released the Corporate and Financial Services Regulation Review Consultation Paper for a six-week consultation period, which ended on 19 May 2006. The consultation paper sought comments from consumer and industry representatives on ideas for improving aspects of corporate and financial services regulation.

7.12 The release of the consultation paper coincided with the release of the Government response to the Rethinking Regulation report of the Taskforce on Reducing the Regulatory Burden on Business, which recommended that the Australian Government establish a further process to enable additional refinements to be made to the operation of the financial services regulatory regime in outstanding areas of concern. These outstanding areas of concern include those which were raised as part of the 2005 refinements, as well as further representations that have been made to Treasury and the Parliamentary Secretary to the Treasurer by industry.

7.13 The consultation paper raised 56 topics in relation to financial services regulation and regulation in relation to company reporting obligations, auditor independence, corporate governance, fundraising, takeovers, collective investments and deALIGN with regulators. Generally, the paper sought comments on whether there was a need to simplify and/or improve aspects of regulation in these areas.

7.14 Over 80 submissions were received from a range of industry and consumer representatives, including industry organisations and individual firms and practitioners. The Business Regulation Advisory Group met on 9 June 2006 to consider the submissions and provide views on the issues to the Parliamentary Secretary.

7.15 On 14 August 2006, the Parliamentary Secretary announced the intended way forward on the consultation issues, which principally included further consultation on defined proposals. Some of the more straightforward financial services regulation issues will be progressed through draft regulations, which will also be released for public consultation. The draft regulations were released for consultation on 23 March 2007.

Corporate and Financial Services Regulation Review Proposals Paper

7.16 On 16 November 2006, the Parliamentary Secretary to the Treasurer released the Corporate and Financial Services Regulation Review Proposals Paper to seek comments from stakeholders on 35 defined proposals, which take into account the comments made in submissions on the Consultation Paper.

7.17 Over 100 submissions were received in response to the paper. Overall, the reaction to the proposals was substantially positive, with many submissions expressing appreciation for the Australian Government's work to improve the effectiveness of the regulatory regime and the consultative manner in which this has been undertaken.

7.18 This Regulation Impact Statement (RIS) considers the options available to implement two significant proposals contained in the Corporate and Financial Services Regulation Review Proposals Paper in relation to the financial services regulation issues.

7.19 The financial services regulation proposals from the proposals paper to which this RIS refers are:

Proposal 1.3 Scope of financial services advice - threshold for requiring a Statement of Advice

Proposal 1.9 Product activity and data collection

7.20 In some cases, these proposals share common issues, objectives, consultation methods, implementation and review, and where possible, these themes are addressed as a whole. However, the RIS also contains an individual assessment of the problem, desired objectives, options, impact assessment and recommended option for each proposal.

7.21 The options examined in Part 4 below take into account comments from consumer and industry representatives in response to the consultation processes outlined above, as well as feedback that has been provided by these groups through informal liaison and from the regulator (ASIC) with Treasury and the Parliamentary Secretary to the Treasurer.

Problem identification

7.22 The regulation of financial services is directed at market integrity and consumer protection. The submissions received in response to the two consultations undertaken as part of the Corporate and Financial Services Regulation Review and representations with various other stakeholders have raised problems with regard to the operation of financial services regulation in practice, beyond those which were addressed as part of the Refinements to Financial Services Regulation project. In the area of financial advice, for example, these problems relate to inefficiencies caused by information asymmetry, arising in part from cost and access.

7.23 The financial services regulatory framework is founded on the principle that consumers must take responsibility for their own investment decisions and that, in order to do so, consumers must be given adequate information on which to base their decisions. However, there are some instances where the regulation of financial services inhibits the appropriate flow of information or the provision of services.

7.24 Some industry representatives have suggested that the cost of complying with some aspects of the financial services regulatory regime is too onerous such that it is not economically viable for some advisers to provide advice to clients who have a relatively small amount to invest or are only interested in a particular type of relatively simple financial product. Alternatively, some financial product issuers who are not authorised to provide personal advice are unable to provide useful information on products to clients where that advice would constitute personal advice. Both scenarios have potential to result in a reduction in accessibility and/or affordability of financial advice for consumers. This RIS examines a measure to reduce the cost and increase affordability of advice in relation to small scale investments.

7.25 Other issues with regard to the operation of financial services regulation in practice relate to the requirements of financial product issuers to report certain matters to the regulator, the Australian Securities and Investments Commission (ASIC). This RIS examines a measure to improve an aspect of reporting with regulators and improve the usefulness of that information in regulatory activities.

7.26 Section 4 provides more specific problems and analysis on the individual proposals.

Objectives

7.27 Broadly, the intention of refining financial services regulation is to ensure that the framework is operating as the policy intended it to, that is, to ensure a competitively neutral regulatory system by providing uniform regulation, reducing administrative and compliance costs, and removing unnecessary distinctions between products. In addition, the framework was intended to facilitate innovation and promote business while ensuring adequate levels of consumer protection and market integrity.^[1]

7.28 The objective of reducing compliance costs for business without diminishing consumer protection is consistent with the Government's response to the recommendations by the Taskforce on Reducing the Regulatory Burden on Business to further refine the operation of the financial services regulatory framework.

7.29 The objective of refining other aspects of the financial services regulatory framework is to improve the efficiency and effectiveness with which ASIC is able to undertake its role of monitoring and enforcing financial service providers' compliance with financial services regulation requirements.

Identification of options, impact analysis, conclusions and recommendations

Impact assessment methodology

7.30 Impacts are divided between three impact groups (consumers, business and government). Typical impacts of an option on consumers might be changes in access to a market, the level of information and disclosure provided, or prices of goods or services. Typical impacts of an option on business would be the changes in the costs of compliance with a regulatory requirement. Typical impacts on government might be the costs of administering a regulatory requirement. Some impacts, such as changes in overall confidence in a market, may impact on more than one impact group.

7.31 The assessment of impacts in this draft regulation statement is based on a seven-point scale (-3 to +3). The impacts of each option are compared with the equivalent impact of the 'do nothing' option. If an impact on the impact group would, relative to doing nothing, be beneficial, the impact is allocated a positive rating of +1 to +3, depending on the magnitude of the relative benefit. On the other hand, if the impact imposes an additional cost on the impact group relative to the status quo, the impact is allocated a negative rating of -1 to -3, depending on the magnitude of the relative cost. If the impact is the same as that imposed under the current situation, a zero score would be given (although usually the impact would not be listed in such a case).

7.32 The magnitude of the rating of a particular impact associated with an option has been assigned taking into account the overall potential impact on the impact group. The reference point is always the status quo (or 'do nothing' option). Whether the cost or benefit is one-off or recurring, and whether it would fall on a small or large proportion of the impact group (in the case of business and consumers), is factored into the rating. For example, a cost or benefit, even though large for the persons concerned, may not result in the maximum rating (+/-3) if it is a one-off event that only falls on a few individuals. Conversely, a small increase in costs or benefits might be given a moderate or high rating if it would be likely to recur or if it falls on a large proportion of the impact group. The rating scale for individual impacts is explained in the table below.

7.1 The ratings for the individual impacts compared to the status quo are then tallied to produce an overall outcome for the option. If it is positive, it indicates that the option is likely to produce a more favourable cost/benefit ratio than the status quo. If it is zero there would be no overall benefit from adopting the option, and if negative the option would provide overall a less favourable cost/benefit ratio than the 'do nothing' option. Ordinarily, options that have the highest positive score would be the favoured courses of action.

7.2 What is classed as a 'large', 'moderate' or 'small' cost or benefit depends on the nature of the problem and options being considered. Of course, the costs and benefits associated with options to address a problem costing billions of dollars per year are likely to be of a much greater absolute magnitude than the costs and benefits of options for deALIGN with a rather modest issue that affects only a handful of persons. However, as all the ratings are made relative to the status quo/ do nothing option for a particular problem, the absolute value of 'large' or 'moderate' or 'small' is not really important. All that matters is that within a problem assessment, the impacts of each option are given appropriate ratings relative to the status quo and each other. If that occurs, it will be sufficient for the methodology to yield an overall rating that assists in assessing the relative merits of options, from a cost/benefit perspective, to address the particular problem.

7.3 An example of the rating calculation for an option, using the seven-point scale ratings of impacts, is in the table below. The example is based on a purely hypothetical scenario that a new type of long-wearing vehicle tyre is being sold and marketed, but it has become apparent that the new tyres have a higher risk of exploding while in motion than conventional tyres. The example is designed merely to illustrate how the rating scale might be used to compare a proposal's costs and benefits option to the 'do nothing' option - it is not intended to be a comprehensive or realistic assessment of options to address such a problem.

Illustrative rating for the problem of a long-wearing tyre that may fail

Option A: Do nothing

Option B: Ban on sale of the new tyre

Option C: Industry-developed quality control standards

7.1 In the above hypothetical example, Option C appears to have a better impact for consumers and a better overall cost/benefit rating than Option B. Although Option B appears to offer a slightly better impact for consumers, it appears to be less effective from an overall cost/benefit perspective than Option C.

Identification of problems, options, impact analysis, conclusions and recommendations in relation to the Statement of Advice threshold (Proposal 1.3)

Problem

Situation

7.2 The definition of personal advice captures situations where a financial service provider uses personal information and product information to make a recommendation to a retail client. The personal advice definition is triggered if a financial service provider knows a client's objectives, financial situation or needs and considers that information in recommending or selling a product. In these circumstances, a Statement of Advice (SOA) is required to be provided to the client.

7.3 An SOA is provided by a financial adviser when they provide personal advice to a client. The SOA sets out:

•

the advice they have given;

•

the information on which it is based;

•

how the adviser is paid (including commissions); and

•

any interests, associations or relationships that could influence them.

Problem

7.4 There is evidence that the cost of producing an SOA is not economic for an adviser where a client is seeking a minor piece of advice and/or has a relatively small amount of money to invest. Many advisers are choosing not to provide personal advice to such clients, with the result that in these circumstances small scale consumers may not be able to access advice that may benefit them.

7.5 Some industry participants have submitted that in some cases, the cost of producing an SOA is not economical for an adviser where a client is seeking a minor piece of advice and/or has a relatively small amount of money to invest. Many advisers are choosing not to provide personal advice to such clients, with the result that often they cannot access advice that may benefit them.

7.6 For instance, industry has indicated that the cost of preparing an SOA is approximately $260^[2] on average. For a financial planner to at least recover this cost when providing personal advice to clients, they would need to either charge the client a fee of $260, or receive a commission of $260 from the sale of a financial product as a result of the financial advice provided. If a financial adviser decides to charge an up-front fee for providing advice, it is likely that a $260 fee would inhibit many smaller-scale investors from seeking such advice.

7.7 Alternatively, if a financial adviser used a commission-based structure for remuneration, in order to break even, they would need to receive a commission of $260. Given that financial adviser commission rates generally range from one to two per cent. Based on a commission of one per cent of the amount invested, the cost of preparing the SOA would be recovered if the investment amount to which the advice related was $26,000. Based on a commission of two per cent of the amount invested, the cost of preparing the SOA would be recovered if the investment amount to which the advice related was $13,000.

7.8 Therefore, it is unlikely that a financial adviser that receives remuneration through a commission payment structure would be willing to provide financial advice to small scale investors where they are unable to recover the cost of providing the SOA.

Objective

7.9 The policy objective is to encourage the provision of financial advice by advisers and facilitate access to advice for consumers, while maintaining important consumer protections, such as ensuring that advice is appropriate and documented and that documentation is accessible.

7.10 Appropriate reduction of the costs of providing advice may encourage the provision of small scale advice by advisers and improve access to advice for consumers currently excluded from the advice market.

Options

Option A: No action

7.11 Maintain the existing requirements to provide an SOA in all situations where personal advice is provided (except where exemptions apply).

Option B: Subjective proportionate threshold for the provision of a Statement of Advice

7.12 Introduce a threshold which determines when an SOA is required to be provided that is proportionate to the client's gross annual income. A threshold of 10 per cent could be introduced, whereby an adviser would not need to provide the client with an SOA if the investment amount to which the advice related was lower than 10 per cent of the client's gross annual income. Information on a client's income would generally be obtained through consultations with the client regarding their financial situation. For advice relating to amounts less than 10 per cent of a client's gross annual income, an adviser would be required to keep a Record of Advice (ROA).

7.13 For example, an investor with an average annual income of $42,000^[3], an SOA would need to be prepared and provided to a client for an investment amount greater than $4,200.

7.14 In contrast to an SOA, an ROA allows advisers to document further advice to clients with brevity. Prior to the introduction of an ROA, all advice was required to be documented in an SOA. The ROA sets out the advice given to the client or brief particulars of the recommendations made to the client including the basis on which the recommendations were made. It also has to contain information about the consequences of partially or wholly replacing one financial product with another, where such advice is provided.

7.15 An ROA is currently used in the circumstance where initial advice has been provided by the adviser in an SOA and where the client's relevant personal circumstances have not changed significantly since the giving of the prior advice. In these circumstances, an ROA is provided to the client upon their request, not as a matter of course. This option proposes allowing an ROA to be provided for initial advice (where the threshold is met) and requiring it to be provided to the client.

Option C: Objective dollar threshold for the provision of a Statement of Advice

7.16 Introduce a threshold into the SOA requirements, such that a full SOA would only be required if the advice given is in relation to an investment amount that is above a certain monetary threshold. For simplicity, a threshold of $15,000 is proposed which relates to a level that should make the threshold commercially useful without inappropriately undermining consumer protection. This would mean that an SOA would be required to be prepared and provided to a client if the amount to which the advice relates is $15,000 or more. For advice relating to amounts less than $15,000, it is proposed to require the adviser to provide an ROA to the client. The threshold will be reviewable as appropriate.

7.17 Given that superannuation holdings generally involve a significant accumulated investment or potential accumulated investment, and advice in relation to superannuation can have a potentially significant impact on consumers' financial situation, it is proposed to limit the application of this option in relation to superannuation, to the following circumstances. Where that advice is to consolidate or supplement superannuation into an existing fund the SOA exemption may be relied on. Where this occurs, the ROA must contain the section 947D disclosure requirements contained in the Corporations Act. These disclosures relate primarily to charges and pecuniary interests relevant to the client. Where the advice relates to the consolidation or supplementation of superannuation in relation to an investment amount of $15,000, the proposal will extend to the consideration of the life risk insurance where it is packaged with the superannuation interest in order to reasonably make recommendations regarding superannuation taking into consideration all the features of the relevant superannuation products.

7.18 The existing SOA arrangements that apply to general insurance products (including in relation to sickness and accident and consumer credit insurance) would not be altered by this proposal. General insurance products (other than sickness and accident and consumer credit insurance) have previously been granted an exemption from the provision of an SOA..

7.19 It is not proposed that the threshold apply to advice in relation to life risk insurance products (other than as discussed above) and derivatives for reasons including the following:

•

The difficulty in determining how a threshold would appropriately be applied to these products. For example, if the threshold was to be applied to the premium, it is likely that the threshold would always apply, and if the threshold was to apply to the amount insured, it is not likely that the SOA exemption would be able to be used as the amount would always be above the threshold.

•

There is potential for advice in relation to these products to have a significant impact on a consumer's overall investment and/or risk coverage.

•

The complexity of these products which often means that they are not easily or commonly understood.

7.20 The proposal would not alter the need for the advice to be appropriate or for the adviser to be appropriately trained to provide personal advice.

Impact analysis

Impact group identification

7.21 Groups that will be affected by the proposed amendments are:

•

financial service providers involved in the provision of personal advice;

•

consumers of personal advice; and

•

government and regulators.

Assessment of costs and benefits

Option A: No action

Option B: Subjective proportionate threshold for the provision of a Statement of Advice

Option C: Objective dollar threshold for the provision of a Statement of Advice

Business Cost Calculator

7.1 This section presents the results of the analysis of the cost impact on business of the various options.

7.2 All options assumed the following: 3000 businesses were affected by this proposal based on the number of licensees authorised to give personal advice; approximately 720,000 SOAs are produced per annum; the cost of producing an SOA is $260 (as stated earlier) and approximately 5 per cent of those SOAs are provided for advice in relation to investments of less than $15,000. Further it was assumed that the variable costs in relation to this proposal related to the documentation time of an SOA or an ROA, and that the research and preparatory times were fixed. On this basis, it was assumed that the documentation time (and therefore cost) for producing an ROA was approximately half that of an SOA.

7.3 The analysis results in the following costs for each option:

7.1 Against the benchmark of the current regulatory requirement (Option A) to provide an SOA in all circumstances where personal advice is provided, Options B and C both reduced the cost of disclosure for the provision of advice in relation to the population group (that is, advice in relation to investments of less than $15,000). The industry wide cost of Option B is slightly greater than that of Option C due in part to the complexity of determining the threshold under this Option B. In addition, Option B would open up the provision of high value advice without SOA documentation where the client has higher gross annual income. In conclusion, Option C resulted in the greatest cost saving, is less complex to administer and provides consumer safeguards in relation to the cap of the value of advice documented by an ROA and the limitations in relation to superannuation advice.

Consultation

Summary of comments

7.2 Submissions to the Corporate and Financial Services Regulation Review Proposals Paper outlined the following views of the proposal.

7.3 Industry was generally in support of the proposal in principle and the aims it was seeking to achieve. A general dollar threshold was considered a sound approach as it was easy to apply in all situations and provided meaningful relief to advisers and therefore would contribute significantly to expanding access to robust financial advice.

7.4 Some submissions considered that it is often the clients holding smaller account balances who require the protection offered by an SOA. However, currently it is these clients who are unable to access advice at all, either because an adviser does not consider it worthwhile to provide advice, or because the client is unable to afford the fee charged by the adviser.

7.5 Some submissions noted that a threshold would enable advisers to provide personal advice to clients on a more commercially-viable basis. There were variations in what was considered to be an appropriate threshold. Industry considered the level of the threshold to be too low (when set at $10,000) and as such not broadly applicable or valuable, therefore $15,000 was considered a reasonable threshold.

7.6 Further comments on the proposal were:

•

The exclusion of superannuation and life risk insurance from the threshold was considered to skew advice away from superannuation, create operational difficulties in managing super and non-super clients; and exacerbate the perceived underinsurance of Australian lives;

•

The application of the threshold to future or regular contributions without a sunset period would mean the threshold would rarely apply, as most investments to which future or regular contributions were made would at some point reach the threshold;

•

The ongoing relevance of the threshold if it were not appropriately indexed;

•

The appropriateness of still requiring the ROA as a disclosure option, given it still imposes burden on the planner and therefore should be modified;

•

The value of the proposal is limited if it is applied only to initial investments, given the minimum investment requirements attached to most products. The proposed threshold should apply irrespective of an existing balance the client might have.

7.7 Consumer groups argued that there was insufficient evidence to suggest that the proposal will in fact expand the availability of personal advice. As discussed above however, it is currently these clients who are unable to access advice at all, and industry has indicated that they supportive of the option which should lead to be an increase in the provision of small scale investment advice.

7.8 In addition, consumer groups argued that there lacked evidence to suggest that advice will be of sufficient quality to assist the consumer and that it will not be conflicted advice associated with a product recommendation. They considered that consumers with relatively small amounts to invest are most vulnerable, lack investment experience and financial literacy, and will not be given an adequate level of disclosure.

7.9 They were concerned that investment products will be sold as a series of parcels in order to avoid the SOA. It is proposed to apply a sunset clause to the value of the advice so that where the advice commits the client to regular or future investments, the threshold will relate to the value that the initial investment and the future amounts anticipated to be reached in the next 12 months. Further, it is proposed to introduce an anti-avoidance mechanism aimed at ensuring it is not possible to carve up an investment amount into parcels less than $15,000 in order to be providing advice on an investment less than $15,000 and therefore avoid the requirement to produce an SOA. This mechanism will take the form of an anti-avoidance provision that will provide for civil or criminal action for a breach of s 946A (the requirement to give a Statement of Advice) of the Corporations Act.

7.10 Further, consumer groups raised concerns that the removal of the SOA for investments allowed for advice to be provided without adequate consumer protection. They argue that a ROA is not sufficient to provide ASIC with the ability to examine the appropriateness of that advice. It was considered to limit the ability of internal and external dispute resolution schemes to review and resolve problems between the consumer and licensee.

7.11 The option includes a number of safeguards designed to address these concerns to the extent possible such as the requirement to provide the ROA to the client rather than upon their request. The ROA is then available for dispute resolution purposes.

7.12 While more supportive of the proposal, the superannuation industry groups supported the consumer views that superannuation should be excluded from the threshold. However, the exclusion of superannuation would to some extent create unintended outcomes such as advice skewed away from superannuation and additional cost to business in establishing dual mechanisms for superannuation and non-superannuation activities.

Conclusion and recommended option

7.13 The problem to be addressed is that consumers that wish to obtain financial advice in relation to a relatively small investment amount are unable to access or afford financial advice due to the relatively high costs of advice.

7.14 Option A is not preferred as it would not reduce the costs associated with preparing SOAs for advice in relation to relatively small investment amounts.

7.15 Options B and C would reduce the costs associated with preparing SOAs in relation to advice on relatively small investment amounts while still ensuring that records of advice are kept.

7.16 Consultations have highlighted the difficulty in determining what might be an appropriate threshold above which an SOA would be required. Consideration was given to the relative significance of an investment amount and the relative simplicity of complying with a threshold. Option B would apply a scale of significance relative to annual income, which may not be an appropriate measure for at least two reasons. Firstly, this may not improve access to advice for lower income earners as an SOA would be required to be prepared well below the adviser's break-even point of recovering the cost of preparing the SOA. Secondly, high income earners would not receive an SOA if the investment amount was less than 10 per cent of their wage, even if the amount would generally be considered to be substantial. For example, a client with an annual income of $200,000 would not receive an SOA for advice in relation to an investment amount of $19,000, even though this amount might be considered to be substantial and it is likely that the adviser would be able to at least recover the cost of preparing the SOA through remuneration.

7.17 Option B would also introduce a movable and subjective threshold that would be difficult for the adviser and consumer to determine, and would be difficult for the regulator to monitor compliance.

7.18 While Option C creates a threshold of what is considered to be 'significant', it is linked to the point at which it becomes commercially viable for an adviser provide advice, based on recovering the cost of preparing an SOA. An objective threshold test would also be relatively simple to comply with and administer.

7.19 Option C is the preferred option as it would reduce the costs for advisers in providing advice for relatively small-scale investors and as a consequence, would increase consumers' access to affordable financial advice. Consumer protection would be maintained through the requirement to provide an SOA for advice above the threshold and the requirement to provide a Record of Advice below the threshold.

Product activity and data collection (Proposal 1.9)

Problem

Situation

7.20 A Product Disclosure Statement (PDS) contains key information regarding a financial product offered to investors. For most classes of financial product, section 1015D of the Corporations Act requires the product issuer to lodge an 'in use' notice with ASIC within five business days of the first use of the PDS. The requirement ensures ASIC is aware of all products being promoted in the market.

Problem

7.21 Currently notices are provided to ASIC in hardcopy on a downloadable form (FS53) from the ASIC website. ASIC received approximately 12,000 such notices in 2005. Some submissions calculated the cost to industry of lodging in-use notices. With approximately 12,000 notices issued in 2004 each attracting a $33 lodgment fee, this equates to $396 000 for lodgment alone. While there is a relatively small cost for lodging an 'in-use' notice with ASIC, for large businesses when multiplied across the wide range of PDSs prepared by banks and the competitive positioning of interest rates, the cost of lodging fresh 'in-use' notices with ASIC can be significant.

7.22 Once received by ASIC, the notice has limited regulatory use because the data does not provide any means for informing ASIC when a PDS is out of date and/or when a product is withdrawn from the market other than receipt of a new notice which assumes it replaces the prior notice.

7.23 Business considers the preparation of the in-use notice to be time-consuming and repetitive as often the change is simply a new date of issue or new fee information. All questions, such as those relating to the complaints mechanism, contact person and so forth, must still be completed each time a form is lodged even when there has been no change. The current mechanism is not sufficiently flexible to address a range of varying circumstances as it is a one-size-fits-all document with many items relevant only to superannuation.

7.24 Further, where the change is one relating to a change in broader circumstances such as an interest rate change, a change in the monetary amount of an already applicable fee or government tax or, in the case of pensioner deeming accounts, a change in the deeming interest rate (which can be made at any time by the responsible Minister), business is required to revise its PDSs and lodge a new 'in-use' notice to reflect these changes for circumstances beyond their control using a mechanism that they consider is time consuming, inefficient and potentially costly.

Objective

The policy objectives are to:

•

ensure ASIC is aware of all product information that it requires to be useful;

•

minimise cost to business in providing the information; and

•

enhance protection of consumers by ensuring ASIC has regulatory oversight of all financial products able to be sold to investors.

Options

Option A: No action

7.25 Continue with the current arrangements whereby hard copy in-use notices are provided to ASIC.

Option B: Remove all legislative requirements to report Product Disclosure Statements to ASIC

7.26 Option B proposes the abolition of the requirement to notify ASIC of new Product Disclosure Statements.

Option C: Introduce on-line reporting of Product Disclosure Statements to ASIC

7.27 Option C proposes an on-line reporting mechanism for product issuers to advise ASIC of matters relating to PDS distribution. This mechanism will create efficiencies for business in their lodgement of the required information and for ASIC in their administration of that information.

7.28 It proposes continuation of payment of a lodgment fee when the first in use notice is lodged only. All subsequent changes to that notification will not be charged.

7.29 The report will be required to be lodged when:

•

A Statement (as defined for section 1015D(2)) is first given to someone in a recommendation, issue or sale situation.

•

A Statement is no longer given in a recommendation, issue or sale situation.

•

Changes are made to the fees and charges contained in the enhanced fee disclosure table that must be provided in a Statement. The enhanced fee disclosure table provides a standard approach for superannuation and managed investment products to disclose fees to consumers and enable consumers to more effectively make comparisons between products.

7.30 The enhanced fee disclosure table was introduced as part of Superannuation Choice on 1 July 2005. The table standardises the description and calculation methods for fees and costs to allow for comparability and understanding of this information in Product Disclosure Statements.

7.31 Amongst other things, the table requires Product Disclosure Statements for superannuation and managed investment products to include the following components:

•

A 'Consumer Advisory Warning Box' which alerts consumers to the importance of value for money and the compounding value of fees and costs and their impact over time on end benefits;

•

A 'Fees and Costs' template which is a standardised fee table that simplifies the disclosure of fees and costs and allow for more effective comparison across products;

•

An 'Additional Explanation of Fees and Costs' section which will include additional important information about fees and costs; and

•

An 'Example of Annual Fees and Costs' which will provides an illustrative worked example of fees and costs in a balanced investment option for a specified account balance and level of contributions.

Impact analysis

Impact group identification

7.32 Groups that will be affected by the proposed amendments are:

•

consumers

•

financial product issuers; and

•

government and regulators.

Assessment of costs and benefits

Option A: No action

Option B: Remove all legislative requirements to report Product Disclosure Statements to ASIC

Option C: Introduce on-line reporting of Product Disclosure Statements to ASIC

Business Cost Calculator

7.1 This section presents the results of the analysis of the cost impact on business of the various options.

7.2 For all options, it was assumed that all businesses licensed by ASIC with the authorisation to issue financial products do so. It was assumed that the number of in use notices currently received by ASIC per annum represented the number of new products and changes notified to ASIC and that a small percentage of these would be withdrawn or amended each year. Assumptions were made regarding the length of time required to complete and submit the required form and hourly administration costs to business.

7.3 The analysis results in the following costs for each option:

7.1 Option B proposes that all legislative requirements to report PDSs to ASIC be abolished. While this creates the lowest cost outcome, it is considered that abolishing all reporting to ASIC imposes unnecessary risk due to the limitations of information that would be available to ASIC. Option C will reduce the cost to business of providing in use notice information to ASIC through the provision of a more efficient mechanism than is currently available. It is noted that there will be initial cost to the Government in this option of establishing the on line mechanism.

Consultation

7.2 Submissions received in response to the Corporate and Financial Services Regulation Review Proposals Paper were strongly in favour of enabling electronic lodgement of in-use notices. In addition to requiring electronic lodgement of in-use notices, the proposal expands the triggers for requiring notification of information in in-use notices to ASIC. Industry was concerned that the additional triggers may impose further red tape and cost on their operations.

7.3 The additional triggers proposed were: change of contact details previously reported; withdrawal of a financial product; and change to fees and charges set out in the fee disclosure table.

7.4 ASIC has advised that the critical information for regulatory purposes is notification of:

•

the date a new PDS takes effect (that is, the date it becomes in-use);

•

the date a PDS is no longer on offer (that is, the date it becomes out of use) (industry is arguing that this can be difficult to determine particularly in relation to life risk insurance); and

•

changes to fees and charges set out in the enhanced fee disclosure table.

7.5 If the proposal to enable electronic lodgement of in-use notices proceeds, industry is keen to ensure that the solution:

•

is tailored to take into account the category of financial product selected so that only those items relevant to the product are required to be completed (rather than the current paper notice that requires completion of the whole form each time); and

•

provides adequate security and access controls over the portal.

7.6 These are both matters of implementation that ASIC would take into consideration when developing the electronic solution. In addition, industry would like the proposal to:

•

reconsider the five day reporting requirement from the date the product is first recommended and instead requires reporting from the date the PDS is prepared; and

•

address the payment of lodgement fees and apply an appropriate fee structure given there are a greater number of circumstances that will trigger lodgement.

7.7 Reporting periods were considered appropriate and not subject to change. It was considered appropriate to apply fees when the first in use notice is lodged only. All subsequent changes to that notification will not be charged.

Conclusion and recommended option

7.8 The problem relates to the costs associated with lodging PDS in-use notices, compared with the regulatory benefit from ASIC receiving such notices.

7.9 Option A reflects the current regulatory arrangements which do not address the current problem that ASIC has in being unable to efficiently monitor the market for financial products and determine when a product is no longer in use, which results in a growing database of PDSs that have been lodged with ASIC irrespective of whether the product is still available in the market. It is against this backdrop that the other options were considered.

7.10 Option B would reduce the cost to both industry and the regulator in terms of lodging PDS in-use notices and administering a notice system, but would remove the ability for the regulator to monitor the market for financial products.

7.11 Option C is the preferred option as it would improve the regulatory usefulness and efficiency of the PDS in-use notice system and would reduce compliance burdens on business.

Implementation and review

7.12 The recommended actions all require legislative amendments to the Corporations Act.

7.13 ASIC, in its role as regulator, will provide guidance to licensees to assist them in meeting these requirements. ASIC, through its role in monitoring compliance and approving alternative arrangements, will monitor the effectiveness of implementation and will advise on any practical difficulties on an ongoing basis. Through this monitoring role, the Government will be kept informed on any problems the proposed regulation may cause in meeting its objectives or in possibly having unintended consequences.

7.14 A review of the regulations will be undertaken as part of the Government's ongoing review processes.

Chapter 9 Regulation impact statement: thresholds for reporting for large proprietary companies

Background

9.1 A proprietary company is a company incorporated under the Corporations Act that is limited by share capital, has no more than 50 non-employee shareholders and has not raised money from the public. Under the Corporations Act 2001, a proprietary company is large for a financial year if it satisfies at least two of the following tests:

•

the consolidated gross operating revenue for the financial year of the company and the entities it controls is $10 million or more;

•

the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls is $5 million or more; and

•

the company and the entities it controls have 50 or more employees at the end of the financial year.

9.2 A large proprietary company is required to prepare and lodge an annual report with the Australian Securities and Investments Commission (ASIC). However, there are two minor exceptions to the general requirement for large proprietary companies to lodge annual reports. These exemptions are applied to wholly-owned subsidiaries using an ASIC class order and companies incorporated prior to 1995 and had their accounted audited.

9.3 The annual report is made of up an audited financial report and a directors' report. Once they are lodged with ASIC, they are made available to members of the public for a prescribed fee ($17 if the report is less than 10 pages and $33 if it is 10 pages or more). Estimates from ASIC indicate that, on average, annual reports are accessed approximately 3 times per year. However, this figure underestimates the actual number of people that benefit from the information contained in the annual reports. A range of users, including credit-rating agencies and journalists, directly access this material from ASIC and disseminate it further within the community.

9.4 There are currently 5,030 large proprietary companies which lodge annual reports with ASIC. The requirement for large proprietary companies to lodge their financial reports was introduced in the First Corporate Law Simplification Act 1995 to focus regulation on the financial affairs of proprietary companies which have a significant economic influence. Requiring these companies to lodge annual reports is in the public interest for the following reasons:

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The collapse of an economically significant company could have a wider impact on the community in general particularly in regional areas. As such, the community has an interest in the financial position of large proprietary companies.

•

Smaller trade creditors are not in a position to demand financial information before doing business with a company. In most cases, trade creditors spread their risk by supplying goods or services to a large number of companies. However, the larger a company gets, the more likely it is that trade creditors will be supplying goods or services only to that company.

•

Employees and representative groups are not in a position to demand financial information from a company. The ability to access public information on the financial position of the company ensures they have some comfort that the company is able to guarantee their ongoing operations. It also ensures that they are not disadvantaged in the negotiation of employment contracts. These types of agreements are more likely to be negotiated with large employers.

9.5 These users derive a direct benefit to the extent that they act on the information in the annual report and an indirect benefit because they derive confidence in the knowledge that they can access the information if they desire it. It is arguable that all companies should be required to prepare and lodge annual reports because companies, unlike other business entities, have the benefit of limited liability. However, it is considered that the costs of imposing financial reporting obligations on small proprietary companies would outweigh the benefits given their operations are not economically significant.

Problem identification

9.6 The issue that is being addressed is that under the current thresholds, 5,030 proprietary companies are required to prepare and lodge annual reports. The thresholds for a large proprietary company have not been adjusted since 1995. As a result, the current thresholds are set at too low a level to determine economic significance. This means that financial reporting obligations are unnecessarily being imposed on a proportion of the proprietary companies that are currently preparing annual reports. As outlined in the analysis of the impact of options section, it is estimated that, on average, it costs $60,000 for a company to produce an annual report.

Objectives

9.7 The objective is to ensure that all economically significant proprietary companies are required to prepare and lodge annual reports. Economically significant entities are publicly accountable because of their size and potential to affect the community and the economy. Adjusting the thresholds to an appropriate level will reduce the compliance cost burden for proprietary companies that are not economically significant as they would no longer be required to prepare and lodge audited annual reports.

Identification of options

9.8 Outlined below are the options that have been identified for addressing the problems identified above.

Option 1

9.9 Under this option, the monetary thresholds for the definition of a large proprietary company would be increased to reflect changes in inflation (as measured by movements in the gross domestic product deflator) since they were introduced in 1995. This would mean that the thresholds increase to:

•

consolidated gross operating revenue for the financial year of the company and the entities it controls of $13 million or more; and

•

consolidated gross assets at the end of the financial year of the company and the entities it controls of $6.5 million or more.

9.10 In addition, the employee threshold would be removed because the revenue and asset tests provide the most relevant indicators of company size. A proprietary company would be large if it satisfies either of the monetary tests above.

Option 2

9.11 Under this option, the monetary thresholds for the definition of a large proprietary company would be doubled to account for nominal economic growth (as measured by changes in nominal gross domestic product) since they were introduced in 1995. Adjusting the thresholds for nominal economic growth (instead of real economic growth) means that the increase in the thresholds will include a component for inflation as well as economic growth. Under this option, the thresholds increase to:

•

consolidated gross operating revenue for the financial year of the company and the entities it controls of $20 million or more; and

•

consolidated gross assets at the end of the financial year of the company and the entities it controls of $10 million or more.

9.12 In addition, the employee threshold would be removed because the revenue and asset tests provide the most relevant indicators of company size. A proprietary company would be large if it satisfies either of the monetary tests above.

Option 3

9.13 Under this option, the monetary thresholds would be increased by a multiple of 2.5 (that is, 150 per cent). This would result in increases to the revenue and assets thresholds of $5 million and $2.5 million respectively in addition to adjusting the thresholds for nominal economic growth. Under this option, the thresholds increase to:

•

consolidated gross operating revenue for the financial year of the company and the entities it controls of $25 million or more; and

•

consolidated gross assets at the end of the financial year of the company and the entities it controls of $12.5 million or more.

9.14 In addition, the employee threshold would be removed because the revenue and asset tests provide the most relevant indicators of company size. A proprietary company would be large if it satisfies either of the monetary tests above.

Option 4

9.15 Under this option, proprietary companies would not be required to prepare an annual report. Outlined below are the options that have been identified for addressing the problems identified above.

Analysis of the impact of the options

9.16 These options are being evaluated against each other as well as the status quo. The following discussion of costs and benefits of the options is largely qualitative, with some estimates where information is available. The draft Regulatory Impact Statement, which was released in conjunction with the Proposals Paper, sought to gain an insight into the costs and benefits of requiring proprietary company financial reporting.

Option 1

Benefits

9.17 Under this option, approximately 134 fewer large proprietary companies would be required to prepare and lodge annual reports. This means that there would be 4,896 large proprietary companies that meet the new thresholds lodging annual reports with ASIC.

9.18 It is estimated that the average cost of preparing an annual report is $60,000. This figure is based on the assumption that the average cost to audit the financial report of a large proprietary company is $40,000 (this figure would vary depending on the size and complexity of the audit) and it costs a large proprietary company, on average, $20,000 to prepare a financial report and directors' report (this figure attempts to take into account that companies will already be preparing some financial information for internal reporting and taxation purposes). The saving to business as a result of this option would be approximately $8.0 million per year.

Costs

9.19 Users would no longer be able to access the annual reports of 134 proprietary companies. This is a cost for direct users of the annual reports and an indirect cost to the market as a whole as people no longer have the confidence in knowing that annual reports are available. It will also disadvantage people who benefited from the information being disseminated in the market as identified in the background section (for example, a credit-rating agency would no longer be able make recommendations on these companies because they will not have access to the necessary financial information). The benefit that users would lose because they are no longer able to access those reports is difficult to estimate. However, it is expected that the costs will not be significant because the 134 companies that would no longer be required to report are not economically significant, so it is unlikely that the public would be currently accessing their annual reports.

Option 2

Benefits

9.20 Under this option, 645 fewer large proprietary companies would be required to lodge annual reports with ASIC. This means that there would be 4,385 large proprietary companies that meet the new thresholds lodging annual reports with ASIC. Using the assumptions presented under Option 1, the benefit to business would be approximately $38.7 million per year.

Costs

9.21 Users would no longer be able to access the annual reports of 645 proprietary companies. This is a cost for direct users of the annual reports and an indirect cost to the market as a whole as people no longer have the confidence in knowing that annual reports are available. It will also disadvantage people who benefited from the information being disseminated in the market as identified in the background section (for example, a credit-rating agency would no longer be able make recommendations on these companies because they will not have access to the necessary financial information). The benefit that users would lose because they are no longer able to access those reports is difficult to estimate. However, the costs will be greater than the costs for Option 1, but are still unlikely to be significant because the additional 511 companies (645 less the 134 excluded as a result of Option 1) that would no longer be required to report are also not economically significant. As these companies are no longer considered to be economically significant, the public is unlikely to require access to this information.

Option 3

Benefits

9.22 Under this option, 1,006 fewer large proprietary companies would be required to lodge annual reports with ASIC. This means that there would be 4,024 large proprietary companies that meet the new thresholds lodging annual reports with ASIC. Using the assumptions presented under Option 1, the benefit to business would be approximately $60.4 million per year.

Costs

9.23 Users would no longer be able to access the annual reports of 1,006 proprietary companies. This is a cost for direct users of the annual reports and an indirect cost to the market as a whole as people no longer have the confidence in knowing that annual reports are available. It will also disadvantage people who benefited from the information being disseminated in the market as identified in the background section (for example, a credit-rating agency would no longer be able make recommendations on these companies because they will not have access to the necessary financial information). The benefit that users would lose because they are no longer able to access those reports is difficult to estimate. However, the costs will be greater than the costs for Options 1 and 2, but are still unlikely to be significant because the additional 361 companies (1006 less the 645 excluded as a result of Option 2) that would no longer be required to report are also not economically significant. As these companies are no longer considered to be economically significant, the public is unlikely to require access to this information.

Option 4

Benefits

9.24 This option would result in 5,030 fewer large proprietary companies being required to prepare and lodge annual reports. Using the assumptions presented under Option 1, the benefit to business would be approximately $301.8 million per year.

Costs

9.25 Under this option, all large proprietary companies would be exempt from the requirements to prepare and lodge annual reports. On top of the costs outlined in options 1, 2 and 3, removing the mandatory requirements is likely to result in additional costs that could affect the wider economy through the loss of confidence and by constraining the ability of large proprietary companies to access capital (see analysis below). These costs are unlikely to be relevant for options 1, 2 and 3. However, they are likely to be substantive for large proprietary companies with revenues in excess of $25 million.

Economy wide effects

9.26 Under the current regime, economically significant proprietary companies are required to prepare and lodge annual reports. The reports provide a means to access and understand the company's economic behaviour and bring together fragmented sources of information into a more informed medium. The information contained in these reports can provide valuable signals to the market, particularly about the underlying state of the business, which could affect its on going operations or financial viability.

9.27 Removing the mandatory requirements would restrict information flows. The preparation of financial reports provides confidence in this market sector by providing greater financial transparency. For example, investors may obtain comfort in knowing the specific factors behind a company going into administration that can be derived from the company's annual report. This will help ensure that the collapse of one company does not reduce confidence in the market more generally. The effects from any market wide loss of confidence could have a significant impact on the economy and future economic growth. For example, investors may divert their savings into other investment forms which are less productive, reduce liquidity and the depth of the domestic capital markets and lead to volatility in asset prices. This may also have a flow on effect of reducing consumption and investments.

9.28 In addition, having annual reports publicly available through ASIC is likely to significantly lower the search costs for direct users.

Large proprietary companies - accessing capital

9.29 Removing the obligations to prepare financial reports may limit immediate access to alternative forms of capital and therefore restrict a company's ability to expand. For example, in order to list on a stock exchange, a company must provide audited accounts for the last three financial years. The absence of statutory requirements to produce financial reports will not in itself prevent an entity from raising capital from a public listing as they could voluntarily start producing this material in anticipation of any public listing. However, the advantage of the statutory financial reporting requirement is that it enables entities to gain more immediate access to new capital.

9.30 If entities were unable to access capital through a public listing, they would have to rely on more traditional forms of financing facilities, such as bank financing. Access to capital markets enables them to expand their operations beyond that which would normally be available through bank finance and pursue innovative ideas. Therefore, removing the requirements to prepare financial reports could restrict access to varying forms of capital, leading to a sub-optimal allocation of resources.

Total costs

9.31 The total cost associated with large proprietary companies not preparing financial reports for all purposes is difficult to estimate. However, given the wider economic effects, the potential impact on large proprietary companies accessing capital and general user concerns, these costs would be significantly greater than the costs under Options 1, 2, and 3. It is expected that the costs of this Option would be considerable and outweigh the benefits.

Consultation

9.32 The Australian Government released a consultation paper Corporate and Financial Services Regulation Review Proposals Paper on 16 November 2006, which contained initiatives to simplify the regulatory system and reduce compliance costs on business. One of the proposals contained in the Proposals Paper canvassed increasing the reporting thresholds used to define a large proprietary company to ensure that only economically significant companies prepare and lodge their financial reports. The period for public submissions closed on 19 January 2007.

9.33 Submissions were generally supportive of large proprietary companies preparing and lodging their financial reports with ASIC. In the main, respondents recognised that economically significant proprietary companies were publicly accountable with financial reporting obligations. For example, one respondent noted that the requirement for large proprietary companies to prepare audited financial reports significantly enhances the governance of these entities. Most of the submissions from respondents focussed on the monetary thresholds used to define a large proprietary company.

9.34 Overall submissions were largely supportive of the proposed 150 per cent increase in the revenue and asset thresholds. There was broad acceptance that the higher monetary thresholds would ensure that only genuine economically significant entities would be captured under the new reporting framework.

9.35 However, some respondents raised concerns about the proposal to remove the employee limb. They claimed that removing the employee limb would lead to a larger number of asset-rich entities that have few employees and limited revenue streams being required to report for the first time. They argued that the removal of the employee limb would lead to higher compliance and administration costs, which was inconsistent with the Government's objective to reduce the regulatory burden on business. A number of respondents argued that this anomaly could be addressed by retaining the employee limb, that is, a return to the 'two out of three' test.

9.36 The majority of respondents observed that a mechanism for the periodic review of the thresholds was necessary to ensure that the thresholds continue to accurately reflect genuine economic significance during period and long and sustained economic growth. They also noted that this would ensure that as the economy expands, entities that are no longer economically significant would not be captured.

Conclusion and recommended option

9.37 The Government recognises that there is a cost to proprietary companies in preparing their financial reports. Therefore, it only seeks to impose these reporting requirements on economically significant proprietary companies. However, the existing size test has not kept pace with economic growth and inflation because it has not been adjusted since 1995. This has increased the regulatory burden on proprietary companies as more companies exceed the threshold.

9.38 There is significant public interest in the annual reports of proprietary companies that are economically significant. This discounts the adoption of Option 4 as the overall costs of not requiring the preparation of annual reports will significantly outweigh the benefits that would flow to these companies from reducing the compliance burden. As identified in the background section, potential users of annual reports include trade creditors, employees, credit-rating agencies, journalists and the wider community. In addition, requiring economically significant proprietary companies to report promotes greater confidence in the market place and facilitates the public listing of large proprietary companies as a means of access alternative forms of capital. A size test provides a simple objective test which a company can apply to determine whether it is required to lodge an annual report.

9.39 However, submissions to the Proposals Paper raised a concern about the removal of the employee limb. Submissions noted that the removal of the employee limb would result in asset-rich entities with few employees and limited revenue streams being captured whereas in the past these entities were not required to report.

9.40 Following analysis of this issue, the Government has decided to retain the employee limb (at 50 employees) and return to the 'two out of three' test. Unlike the monetary thresholds, the number of employees is not influenced by economic growth or inflation. In addition, productivity improvements have also meant that businesses can produce higher output levels with the same level of employees than in the corresponding period in 1995.

9.41 Under the recommended option, the new thresholds are:

•

consolidated revenue for the financial year of the company and the entities it controls of $25 million or more;

•

consolidated gross assets at the end of the financial year of the company and the entities it controls of $12.5 million or more; and

•

the company and the entities it controls (if any) have 50 employees at the end of the financial year.

9.42 A proprietary company would be large if it satisfies 'two of the three' tests above.

9.43 There would be 1,646 fewer large proprietary companies that would be required to lodge their annual reports with ASIC under this option. This means that there would be 3,384 large proprietary companies that meet the new thresholds. Using the same assumptions that were presented under Option 1, the benefit to business would be $98.9 million. The main cost associated with this option is related to the fact that 1,646 proprietary companies are no longer preparing and lodging their financial reports. Similar to previous options, the costs relate to direct users losing confidence in knowing that annual reports were no longer available or loss of information that was previously disseminated. Given that these entities are not considered to be economically significant, the costs are unlikely to be significant.

9.44 There was widespread support from stakeholders, including the three professional bodies (Institute of Chartered Accountants, CPA Australia and the National Institute of Accountants) for the recommended option.

Implementation and review

9.45 It is anticipated that the required legislation to enable the changes to the reporting thresholds would form part of the Simpler Regulatory System Bill, which is expected to be introduced in the 2007 sittings.

9.46 The Government recognises that the thresholds need to be reviewed on a regular basis to ensure that only economically significant entities are captured under the reporting framework. The Government has decided in corporate a mechanism to regularly assess the thresholds through the Corporation Regulations.

Financial impact statement

9.47 Large proprietary companies are currently required to lodge their financial statements with ASIC. Direct users of the reports are allowed to access them for a prescribed fee. This fee is applied to recover ASIC's administration costs for making the report available to the public. As a result, implementation of the proposed thresholds will have no financial impact on the Commonwealth.

Chapter 10 Regulation impact statement: rights issues and employee share schemes

Background

10.1 The issues contained in this Regulatory Impact Statement (RIS) relate to the fundraising provisions in the Corporations Act 2001 (the Corporations Act). These provisions are contained in Chapter 6D 'Fundraising' of the Act.

10.2 Chapter 6D was inserted in the Corporations Act through the Corporate Law Economic Reform Program Act 1999. It builds on the previous general prospectus disclosure rules, but includes a number of additional provisions relating to the use of new instruments such as short form prospectuses and offer information statements, clarification of the persons liable for contraventions of the provisions, a new definition of sophisticated investors and others.

10.3 The Chapter 6D provisions have on the whole worked well and have supported a strong market in fundraisings since they were introduced. According to a recent survey conducted by KPMG, total equity fundraisings in Australia in 2005/06 amounted to A$42.5 billion, which represents an increase of 42 per cent since 2000/01. Over time, however, it has become apparent that there are some shortcomings in the practical application of the provisions. Some of these affect the smooth operation of market processes, while others are more substantial in their effects, resulting in the skewing of market outcomes in ways that may not accord with Government policy.

10.4 The proposals examined in this RIS relate to those shortcomings which have a more substantial distorting effect on the market.

Problem identification

Rights Issues

10.5 Rights issues are a method of fundraising in which existing shareholders in a listed entity are given the opportunity to purchase new shares in proportion to their holdings at specified terms. The current legislation requires that rights issues must be accompanied by a prospectus (or a Product Disclosure Statement (PDS) in the case of a listed managed investment scheme). As a result, the use of rights issues as a fundraising instrument has, to some extent, been superseded by other forms of fundraising with less onerous disclosure requirements. An example is a placement of shares to large institutional investors, which can be accomplished without a prospectus. One of the consequences of such placements is that existing shareholders and fund members may be disadvantaged. Small shareholders, for example, are generally not able to participate in these placements and therefore cannot acquire shares at the discount typically offered in such placements.

10.6 Further, rights issues often occur in circumstances where speed of execution is an important factor. The requirement to produce a prospectus or PDS may give rise to delays which may cause issuers difficulties in the circumstances and may lead to some other, faster form of fundraising being favoured, with consequences for existing shareholders similar to those set out above.

10.7 The impact of easing disclosure requirements may be illustrated using the placements market as an example in comparison to the rights issue market. The ability to raise funds through a placement of shares without full prospectus disclosure was made possible through the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 which inserted section 708A in Chapter 6D of the Corporations Act. The relevant provisions formally commenced on 1 July 2004, so that any impact they had on the fundraising market would have become apparent in the statistics for the 2004/05 financial year. The statistics shown in the table below demonstrate a marked increase in funds raised through placements in that and the following year. Amounts raised through rights issues have, in contrast, stayed at a similar level in those two years and have lagged behind funds raised through placements.

Source: KPMG, survey of Australian capital markets 2005-06.

Employee shareholder schemes

10.1 Employee Shareholder Schemes (ESSs) are held to improve the productivity of the economy by aligning the interests of employees with those of their employer. The Australian Government's established policy therefore supports the introduction of ESSs in companies, with a variety of measures being put in place to give effect to the Government's policy.

10.2 The offer and issue of shares to employees constitute actions that fall within the scope of the investor protection provisions of the Corporations Act. The consequences are that under the law, companies establishing ESSs must comply with the fundraising requirements in Chapter 6D as well as the licensing and disclosure requirements in Chapter 7 of that Act. In addition, the current law relating to the self-acquisition of shares by companies creates difficulties for the practical implementation of ESSs. The cumulative effect is to discourage the wider establishment of ESSs, especially among unlisted companies.

10.3 Relief from the full provisions of the law is provided by the Australian Securities and Investments Commission (ASIC) for listed companies, based on the consideration that ongoing disclosure of all price-sensitive information is required as a condition of maintaining a listing. Unlisted companies, however, do not benefit from this relief. The ultimate consequence is that employees of unlisted companies generally have fewer opportunities to participate in the ownership of their employers than in the case of listed companies.

Policy objective

Rights issues

10.4 The objective is to create an environment in which companies make decisions on fundraising methods based on comparative merits and characteristics rather than on regulatory requirements. This would be achieved by creating a level playing field for all comparable fundraising methods.

10.5 The solutions identified should impose the lowest possible costs on companies wishing to raise funds, in order to encourage an active market in fundraisings of all descriptions. It is, however, important at the same time to ensure that investors are provided with all the information they require to make an informed decision about whether to participate in the fundraising or not.

Employee share schemes

10.6 The discouragement of ESSs in unlisted companies through the impact of the investor protection provisions of the Corporations Act does not accord with the general policy of supporting the introduction of ESSs. The objective is to minimise the impact of these investor protection provisions on the formation of ESSs in unlisted companies, while ensuring that employees who are offered a chance to participate in an unlisted company ESSs are provided with sufficient information to make an informed decision on whether to participate or not.

10.7 The Australian Government's policy supporting ESSs in general is based on a number of benefits that may accrue to companies and the wider economy through the establishment of ESSs. The Nelson Report into employee share ownership in Australia (tabled in 2000) identified the main benefits as follows:

•

better alignment of the interests of general employees and employers, leading to more productive enterprises;

•

an increase in national savings;

•

facilitation of the development of certain small and medium-sized companies, especially in certain sunrise industries such as information technology and biotechnology; and

•

facilitation of employee buyouts and succession planning in small businesses.

10.8 The Government's response to the Nelson Report reaffirmed its policy approach to ESSs, which balances promoting benefits that may accrue as a result of aligning the interests of employees and employers and limiting opportunities for overuse. In 2004, the Government set a target to increase the proportion of employees with shares in their company to 11 per cent by 2009, compared to 5.9 per cent in 2004.

10.9 To further encourage the growth of ESSs in Australia, the Government has established an Employee Share Ownership Development Unit within the Department of Employment and Workplace Relations (DEWR). The unit's activities include:

•

providing information and raising awareness about the potential benefits of employee share ownership through information materials and seminars;

•

assisting employers and employees with design and implementation of schemes; and

•

collecting information about the barriers to the uptake of employee share ownership and informing developments to overcome these barriers.

10.10 Information on the Government's policies in relation to ESSs and specific measures to encourage their wider use is available through the units website, which may be accessed through the DEWR website at www.dewr.gov.au.

10.11 The Australian Government has also provided a range of tax benefits to encourage the wider establishment of ESSs. However, the amendments examined in this RIS do not address the tax treatment of ESSs and do not propose any changes in this respect.

Implementation options

Rights issues

Option A: Do nothing:

•

Under this option listed entities raising funds through a rights issue would have to produce a prospectus or PDS. Certain other forms of fundraising such as institutional placements would not require a prospectus, as provided for in the current law.

Option B: Require a prospectus for all fundraisings:

•

Under this option all forms of fundraising would require a prospectus or PDS, in order to ensure that all investors, including retail investors, were able to participate in these fundraisings. This would address the disadvantage suffered by small members of listed entities in institutional placements where they are not able to participate because of the lack of adequate disclosure.

Option C: Remove the prospectus requirement for rights issues subject to the obligation to provide certain defined information to the market:

•

Under this option the requirement to issue a prospectus or PDS for rights issues would be removed in the case of listed entities. The scope of the exemption would be limited to listed entities on the grounds that the combination of an original prospectus on listing and the continuous disclosure rules would ensure the provision of an appropriate flow of information to members necessary for informed decision-making.

•

However, under certain circumstances as defined in the Australian Securities Exchange Listing Rules price-sensitive information may be withheld from the market. It would be necessary to provide that such information must be disclosed before a rights issue can proceed. This could be achieved by requiring that a 'cleansing' notice, modelled on the provisions of section 708A of the Corporations Act, be provided.

•

Cleansing notices as required under section 708A are limited to the provision of any information withheld from the market under the Australian Securities Exchange Listing Rules. They are therefore far more restricted in scope than a prospectus or other disclosure document as defined in Chapter 6D of the Corporations Act, and therefore impose a much lower compliance burden on issuers.

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Under this option a new section would be inserted in the Corporations Act deALIGN with the exemption of rights issues from the disclosure requirements, including the requirement to provide a cleansing notice. The exemption would extend to the issuer only, since any on-sales by third parties (such as an underwriter to the issue) could take advantage of the existing disclosure exemption in section 708A. Such on-sales would have to be covered by the issue of another cleansing notice, as required under section 708A.

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Further, in certain circumstances rights issues may potentially lead to a shareholder or underwriter acquiring control or obtaining or significantly increasing voting power above the 20 per cent takeover threshold. It is vital to ensure that members are provided with full information on the potential effects of the rights issue before they decide whether or not to take up their rights. The contents requirements for the cleansing notice would therefore be worded in such a way that issuers would have to provide information on the effects of the rights issue on the control of the company, as well as the consequences of any potential effects on control.

Employee share schemes

Option A: Do nothing:

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Under this option unlisted company ESSs would continue to have to comply with the disclosure and licensing provisions of the Corporations Act. The main requirement in this respect is the provision of a prospectus including audited financial statements. Certain licensing requirements would also apply to the sponsoring company or related entities established for the operation of the ESS. An example would be the requirement for trustees managing the scheme on behalf of employees to hold a licence for the provision of custodial and depository services. Listed companies, as mentioned above, would continue to receive relief from most of these requirements.

Option B: Provide extensive relief for unlisted company ESSs from the relevant provisions of the Corporations Act

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The main relief would be to remove the requirement to provide a prospectus including audited financial statements, and substitute a specific ESS document tailored to the needs of employees in these situations.

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The requirements in relation to the proposed ESS document would differ from the prospectus requirements by providing a specific list of items to be included. The items would mainly relate to the nature of the securities to be offered, the working of the plan under which employees would participate in the ESS, amounts payable by employees for shares acquired, the tax implications for participating employees and an explanation of how the plan would be administered and managed. Small proprietary companies as defined in the Corporations Act would be released from the requirement to provide audited financial statements. In addition a statement would have to be included that the document was not a prospectus, and provided a lower level of disclosure than a prospectus.

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The general disclosure test applying to a prospectus, that it must contain all information that an investor and their professional adviser would reasonably require to make an informed assessment of the offer, would not apply to the ESS disclosure document. The specific items that are required to be included in a prospectus would not apply. This would result in a lower level of disclosure of information to employees, and would significantly reduce the cost of compliance to companies in producing these documents.

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Extensive licensing relief would also be provided, which would free companies from the need to submit relevant applications to ASIC and comply with the initial and ongoing licensing requirements.

Option C: Provide limited relief for unlisted company ESSs from the relevant provisions of the Corporations Act

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Under this option the licensing and disclosure requirements would be reduced to a level that would remain consistent with providing an adequate level of investor protection for employees considering participating in unlisted company ESSs. Specific proposals under this option include:

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Facilitate the use of Offer Information Statements as defined in the Corporations Act for unlisted company ESSs. The content requirements for prospectuses are defined on a very high level in the Corporations Act as encompassing all the information that an investor would reasonably require to assess the offer made. As a consequence, substantial due diligence by legal advisers is required to ensure compliance with the law. The content requirements for an Offer Information Statement, on the other hand, are expressed in narrower terms that do not require extensive due diligence exercises.

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Audited financial statements would continue to be required. The reason is that reliable financial statements are held to be essential for assessing the condition and prospects of a company.

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Partial licensing relief would be granted where it would not impact on the interests of employees. Certain critical functions, such as offering advice to employees considering participation in the scheme, would continue to require an appropriate licence.

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Relief from the provisions of the law relating to the prohibition of the self-acquisition of shares by a company or related entity would be granted to facilitate the daily operation of ESSs.

Assessment of impacts

10.12 Impacts are divided between three impact groups (consumers, business and government). Typical impacts of an option on consumers might be changes in access to a market, the level of information and disclosure provided, or prices of goods or services. Typical impacts of an option on business would be the changes in the costs of compliance with a regulatory requirement. Typical impacts on government might be the costs of administering a regulatory requirement. Some impacts, such as changes in overall confidence in a market, may impact on more than one impact group.

10.13 The assessment of impacts in this regulation statement is based on a seven-point scale (-3 to +3). The impacts of each option are compared with the equivalent impact of the 'do nothing' option. If an impact on the impact group would, relative to doing nothing, be beneficial, the impact is allocated a positive rating of +1 to +3, depending on the magnitude of the relative benefit. On the other hand, if the impact imposes an additional cost on the impact group relative to the status quo, the impact is allocated a negative rating of -1 to -3, depending on the magnitude of the relative cost. If the impact is the same as that imposed under the current situation, a zero score would be given (although usually the impact would not be listed in such a case).

10.14 The magnitude of the rating of a particular impact associated with an option has been assigned taking into account the overall potential impact on the impact group. The reference point is always the status quo (or 'do nothing' option). Whether the cost or benefit is one-off or recurring, and whether it would fall on a small or large proportion of the impact group (in the case of business and consumers), is factored into the rating. For example, a cost or benefit, even though large for the persons concerned, may not result in the maximum rating (+/-3) if it is a one-off event that only falls on a few individuals. Conversely, a small increase in costs or benefits might be given a moderate or high rating if it would be likely to recur or if it falls on a large proportion of the impact group. The rating scale for individual impacts is explained in the table below.

10.1 The ratings for the individual impacts compared to the status quo are then tallied to produce an overall outcome for the option. If it is positive, it indicates that the option is likely to produce a more favourable cost/benefit ratio than the status quo. If it is zero there would be no overall benefit from adopting the option, and if negative the option would provide overall a less favourable cost/benefit ratio than the 'do nothing' option. Ordinarily, options that have the highest positive score would be the favoured courses of action.

10.2 What is classed as a 'large', 'moderate' or 'small' cost or benefit depends on the nature of the problem and options being considered. Of course, the costs and benefits associated with options to address a problem costing billions of dollars per year are likely to be of a much greater absolute magnitude than the costs and benefits of options for deALIGN with a rather modest issue that effects only a handful of persons. However, as all the ratings are made relative to the status quo/ do nothing option for a particular problem, the absolute value of 'large' or 'moderate' or 'small' is not really important. All that matters is that within a problem assessment, the impacts of each option are given appropriate ratings relative to the status quo and each other. If that occurs, it will be sufficient for the methodology to yield an overall rating that assists in assessing the relative merits of options, from a cost/benefit perspective, to address the particular problem.

10.3 An example of the rating calculation for an option, using the seven-point scale ratings of impacts, is in the table below. The example is based on a purely hypothetical scenario that a new type of long-wearing vehicle tyre is being sold and marketed, but it has become apparent that the new tyres have a higher risk of exploding while in motion than conventional tyres. The example is designed merely to illustrate how the rating scale might be used to compare a proposal's costs and benefits option to the 'do nothing' option - it is not intended to be a comprehensive or realistic assessment of options to address such a problem.

10.4 Illustrative ratings for the problem of a long-wearing tyre that may fail are provided in the table below:

Option A: Do nothing

Option B: Ban on sale of the new tyre

Option C: Industry-developed quality control standards

10.1 In the above hypothetical example, Option C appears to have a better impact for consumers and a better overall cost/benefit rating than Option B. Although Option B appears to offer a slightly better impact for consumers, it appears to be less effective from an overall cost/benefit perspective than Option C.

Analysis of costs/benefits

Rights issues

10.2 The analysis of the costs and benefits of the options associated with this measure are summarised in the tables below.

Option A: Do nothing

Option B: Require a prospectus for all fundraisings

Option B: Require a prospectus for all fundraisings (continued)

Option C: Remove the prospectus requirement for rights issues subject to the obligation to provide certain defined information to the market

Option C: Remove the prospectus requirement for rights issues subject to the obligation to provide certain defined information to the market (continued)

Employee shareholder schemes

10.1 The analysis of the costs and benefits of the options associated with this measure are summarised in the tables below.

Option A: Do nothing

Option B: Provide extensive relief for unlisted company ESS from the provisions of the Corporations Act

Option C: Exempt unlisted company ESSs from certain provisions of the Corporations Act, while maintaining an adequate level of investor protection for employees considering participation in such schemes

Business cost calculator

10.1 This section presents the results of the analysis of the cost impact on business of the various options. In all cases it was assumed that the status quo option would not impose additional costs on business.

10.2 For rights issues, the option to require a disclosure document for all fundraisings including rights issues was assumed to affect 1350 fundraisings in total, based on previous year information on fundraisings in the Australian capital markets. Assumptions were made on the average cost of producing a prospectus, including the cost of legal advice and the preparation of audited financial statements. The analysis results in a per business cost of $145,000 and a total cost of $195.75 million. A similar analysis was then performed for Option C, abolishing the requirement for a prospectus to be provided for rights issues and substituting instead a requirement for a cleansing notice to be released to the market. Due to the less onerous legal requirements applying to cleansing notices the per business cost for this option is estimated to be approximately $14,000. This option would also only apply to rights issues and not affect any other forms of fundraisings, resulting in a lower total cost to industry of $10.2 million.

10.3 With respects to unlisted company ESSs, the main difficulty lies in estimating the number of companies that could be affected by the various options. Statistics provided by an industry association indicate that there are a total of 42,100 unlisted companies that could be affected, of which about 2,500 are assumed to already have an ESS based on Australian Bureau of Statistics information. Option B would result in extensive relief from the current disclosure and licensing requirements, and is therefore assumed to lead to a doubling in the number of companies with an ESS to 5,000. This results in total industry costs of $267.9 million based on an annual cost per business of approximately $53,580 to set up and run an ESS over 25 years. Option C, which provides limited relief from the current requirements, the corresponding figures are $260 million based on an annual cost per business of $69,333. Because of the more restrictive nature of the relief provided, the number of businesses with an ESS is assumed to grow by 50% to 3,750. The smaller number of businesses assumed to establish an ESS under Option C results in a lower total cost to industry. However, the annual cost per business is higher than under Option B, reflecting the more stringent disclosure requirements of this option.

Consultation

10.4 Preliminary consultation on these measures was undertaken as part of the April 2006 Corporate and Financial Services Regulation Review Consultation Paper. Comments received in response to the consultation paper have been taken into consideration in identifying and examining the options outlined in this RIS.

10.5 The majority of the submissions received in relation to rights issues supported the removal of the obligation to produce a prospectus or PDS for rights issues of listed entities. The argument generally put forward was that listed companies are obliged to keep the market informed about significant developments on an ongoing basis, so that there is little need to require additional disclosure for a rights issue. One submission from a major accounting firm proposed that rights issues involving material acquisitions should not be allowed relief from the obligation to provide a prospectus or PDS. One submission from an individual stakeholder suggested extending the relief provided to cover rights issues by overseas listed companies offered into Australia.

10.6 In addition to the Corporate and Financial Services Regulation Review, the problems in relation to unlisted company ESSs were considered by a consultation group originally established by Treasury's Revenue Group to discuss taxation aspects of ESSs. Two sessions were held with this group to discuss the impact of the Corporations Act provisions on unlisted company ESSs. In addition, the group provided a submission specifying in detail the relief requested in relation to Corporations Act provisions. Feedback received following the consultation paper, as well as the views expressed by the consultation group, were taken into account in identifying and examining the options outlined in this RIS.

10.7 The consultation group, which consists mainly of law firms, accounting firms and specialised consultants that offer advice to companies interested in establishing an ESS, proposed wide-ranging relief for unlisted companies from the relevant provisions of the Corporations Act. The submissions responding to the consultation paper generally expressed some caution with respect to this proposal. While acknowledging the merits of ESSs they also mentioned factors such as the level of risk involved in unlisted companies, the difficulty of obtaining relevant information and the comparatively low level of financial sophistication of most employees. While there was some support for providing relief for unlisted company ESSs, there was also considerable concern that an appropriate level of investor protection should be maintained.

10.8 A second round of consultation was held through the release of a Proposals Paper in November 2006. The proposal for abolishing the requirement for a prospectus or PDS for rights issues by listed entities was supported by all 14 submissions which commented on this proposal. One submission wanted to maintain the prospectus or PDS requirement where the rights issue was conducted in connection with a material acquisition. This suggestion is not supported since this information will have to be disclosed under the continuous disclosure requirements in any case. Other submissions wanted to extend the relief in a number of ways, including raising the current limit applying to share purchase plans ($5,000). This suggestion will be brought to the attention of ASIC, as the current relief in relation to share purchase plans was provided through an ASIC class order.

10.9 Eleven submissions were received on the proposals relating to ESSs. All the submissions supported the proposals, which reflected Option C as set out above. Several submissions argued that the proposed relief did not go far enough, and made a variety of suggestions on how they could be extended. It is unlikely that these suggestions will be accepted, due to the need to maintain an appropriate balance between providing relief to industry and maintaining an adequate level of protection for the potential participants in these schemes. A number of technical suggestions were made to facilitate the operation of the proposals. Due to time pressure these suggestions will not be able to be considered for implementation at this stage, but may be considered during further consultations with industry in the future.

10.10 Consultation on the draft legislation has been limited in scope due to insufficient time available prior to introduction of the legislation.

Conclusion and recommended option

Rights issues

10.11 With respect to the problem relating to rights issues in comparison to other fundraising methods with reduced disclosure requirements, the conclusion is to recommend Option C.

10.12 Compared to Option A (the 'do nothing' option), Option B imposes heavy additional costs without contributing sufficient benefits to justify them. These costs are quantified in the Business Cost Calculator (BCC) analysis provided in section 5.4 and arise from requiring a prospectus for placements, for which there is no commensurate benefit. While the measure would achieve the stated objective in removing the bias inherent in the regulations against rights issues, it would only do so at an excessive cost which could have serious implications for the development of the equity market.

10.13 Option C achieves the desired objective of removing the bias against rights issues without imposing excessive costs on industry and other stakeholders, as can be seen in the BCC analysis in section 5.4. This is done by requiring an appropriate level of information to be given to investors, allowing them to make an informed decision on the merits of the offer, while providing for an efficient way for companies to make the information available. In the overall impact assessment provided in section 5.2, Option C is superior to Option B, but also provides a net benefit compared to Option A, and is therefore the preferred option.

ESSs for unlisted companies

10.14 In relation to ESSs for unlisted companies, the conclusion is to recommend Option C.

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Index

Unless otherwise indicated, items are in Schedule 1 of the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007.