House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

15 Market misconduct and other prohibited conduct

Market misconduct provisions

15.1 The market misconduct provisions in proposed Part 7.10 are based on the current provisions in Parts 7.11 and 8.7 of the Corporations Law. These have generally been retained in their current form but their scope has been extended, as appropriate, to apply to all financial products and markets.

15.2 A number of the market misconduct provisions will become civil penalty provisions. This means that contraventions will be subject to both civil penalties and criminal consequences. Proposed section 1041I provides for actions for loss or damage for those market misconduct provision which are not also civil penalty provisions. As civil penalty provisions also give rise to a right to take action for loss or damage, this ensures that there is such a right in relation to all market misconduct provisions. Proposed subsection 1041H(4) ensures that the effect of section 1317S of the Corporations Law which provides relief from liability in relation to civil penalty provisions in some circumstances also applies to market misconduct provisions that will not be civil penalty provisions.

15.3 The market misconduct provisions in Division 2 have effect independently and they do not limit the scope of each other (proposed section 1041I).

Financial Services Civil Penalty Provisions

15.4 The civil penalty provisions in proposed Part 7.10 will differ from existing civil penalty provisions. It is proposed that Part 9.4B will be amended so that existing civil penalty provisions will be referred to as corporation/scheme civil penalty provisions while those in Part 7.10 will be referred to as financial services civil penalty provisions. These proposed amendments are contained in Items 435-444 of Schedule 1, Part 2.

15.5 It is proposed that subsection 1317G(1), which deals with the situations where pecuniary penalty orders may be made, will only apply in relation to corporation/scheme civil penalty provisions. A new subsection 1317G(1A) will be inserted to provide for the circumstances when a person may be liable to pay a civil penalty for a breach of a financial services civil penalty provision. Contraventions will have to materially prejudice the interests of acquirers, disposers or the issuer of the financial product to which it relates or the contravention will have to be serious before court may order the person who contravened the provision to pay the civil penalty.

15.6 Subsection 1317H(1) of the proposed Corporations Act, which provides for the making of compensation orders, will be amended so that it applies only in relation to corporation/scheme penalty provisions. Proposed section 1317HA will deal with compensation orders for financial services civil penalty provisions. This provision will allow for any person to be compensated for damage suffered as a result of another persons contravention of a financial services civil penalty provision (proposed subsection 1317J(3A)). Damages that may be awarded include profits made by any person resulting from the contravention.

15.7 Section 1317P of the proposed Corporations Act will be amended to clarify that criminal proceedings may be started even if a banning order or disqualification order has been made against the person in relation to substantially the same conduct.

General prohibition on misleading and deceptive conduct

15.8 A general prohibition on misleading and deceptive conduct will be introduced (proposed section 1041H) to replace section 995 of the proposed Corporations Act.

15.9 The new provision will provide a general prohibition on misleading and deceptive conduct which will apply in relation to financial products and services. The provision will apply to corporations and to unincorporated bodies. Contravention of the provision will attract civil liability only through proposed section 1041I.

15.10 The new provision will not apply to misleading or deceptive takeover, compulsory acquisition and fundraising documents or disclosure documents or statements as defined in proposed Parts 7.7 and 7.9. Chapters 6B and 6D of the Act together with Parts 7.7 and 7.9 provide self-contained liability regimes for these types of documents (see proposed subsection 1041H(2)). The application of a misleading and deceptive conduct requirement in these circumstances would defeat the specific defences included in these regimes such as, for example, the due diligence defence in section 731 of Chapter 6D.

State and Territory Fair Trading Acts

15.11 Proposed section 1041K deals with the interaction with State and Territory Fair Trading Acts. It replaces section 995A of the proposed Corporations Act. It states that the Division will only operate to the exclusion of State and Territory Fair Trading Acts in relation to the specialist disclosure regimes described above. This will enable concurrent operation of State and Territory Fair Trading Acts to the greatest extent possible while still providing the proposed Corporations Act with a self-contained liability regime in relation to financial products and services.

Market manipulation

15.12 Sections 997 and 1259 of the proposed Corporations Act will be replaced by a new provision (proposed section 1041A) based on section 1259, but applying to all financial products traded on a financial market. The new provision will be a civil penalty provision so that a contravention could attract both civil penalty and criminal consequences.

15.13 As is currently provided in section 1259, the new provision will apply to a transaction, or two or more transactions, with the effect of creating or maintaining an artificial price.

False trading and market rigging

15.14 Sections 998 and 1260 of the proposed Corporations Act will be replaced by two provisions (proposed sections 1041B and 1041C) based on section 1260, but applying to all financial products traded on a financial market. The new provisions will be civil penalty provisions.

15.15 Subsections 1260(2) and (3) of the Corporations Law are replicated in proposed section 1041C. Subsection 1260(1) is contained in proposed section 1041B. In addition, the deeming provision in subsections 998(5) and 998(7) that provides an example of what constitutes creating a false or misleading appearance will be retained in proposed section 1041B.

Dissemination of information about illegal transactions

15.16 Sections 1001 and 1263 of the proposed Corporations Act will be replaced by a proposed section 1041D which is based on section 1263, but applying to all financial products. The new provision will be a civil penalty provision.

False or misleading statements

15.17 Sections 999 and 1261 of the proposed Corporations Act, which are identical apart from their application to securities or futures contracts, will be replaced by proposed section 1041E that applies to all financial products.

Fraudulently inducing persons to deal

15.18 Sections 1000 and 1262 of the proposed Corporations Act, which are identical apart from their application to securities or futures contracts, will be replaced by proposed section 1041F which will apply to all financial products. Proposed paragraph 1041F(1)(a) covers situations where a person knows or is reckless as to whether a statement is misleading, false or deceptive. As a consequence, an equivalent of paragraph 1001(1)(a) of the Corporations Law, which deals with the reckless making or publish of certain statements, has not been included.

Dishonest Conduct

15.19 A prohibition on people, in the course of carrying on a financial services business, engaging in dishonest conduct in relation to a financial product or service is contained in proposed section 1041G. A contravention of this provision will lead to criminal consequences and is also a civil penalty provision.

Insider trading

15.20 Division 2A of Part 7.11 (sections 1002 to 1002U) and Division 1 of Part 8.7 (sections 1251 to 1257) of the proposed Corporations Act will be replaced by the insider trading provisions in Division 3 of Part 7.10. These provisions are based on Division 2A of Part 7.11 of the Corporations Law.

15.21 The new provisions will apply to securities, derivatives, managed investment products, superannuation products (other than those exempted by regulation) and any other financial products traded on a financial market.

15.22 The new insider trading provisions will also be financial services civil penalty provisions.

15.23 The proposed provisions are Criminal Code compliant, which has required amendments to the fault elements that are contained in proposed section 1043A. This has generally required replacing the concept of knows or ought reasonably to know in current section 1002G with the concept of knowledge or recklessness. This subjective fault element is more appropriate to a serious offence carrying a maximum penalty of five years imprisonment and will promote certainty in the operation of the offence. It will apply to any person who is aware of a substantial risk of the relevant matter (see definition of recklessness in the Criminal Code), whereas previously it was necessary to demonstrate either that the defendant had actual knowledge or that they ought reasonably to have had actual knowledge.

Civil liability for contravention of market misconduct provisions

15.24 Currently, section 1005 of the Corporations Law provides for civil liability for contraventions of the market misconduct provisions. It will be retained (see proposed section 1041H) to the extent that it applies to market misconduct provisions which will not become civil penalty provisions. Civil liability for contraventions of the market misconduct provisions that will become civil penalty provisions will be provided for in Part 9.4B of the Act (see paragraph 15.6). The defence for publishers in subsection 1005(4) will also be preserved as proposed section 1044A.

15.25 Section 1013 of the Corporations Law provides for civil liability in respect of insider trading. An equivalent of this provision will be retained as proposed section 1043L.