Important notice

2.3 ASIC policy statement: managed discretionary account services

On 15 March 2004, the Australian Securities and Investments Commission (ASIC) released Policy Statement 179 on the regulation of managed discretionary account services (MDA services).

ASIC's policy approach (in summary form) to the regulation of MDA services was issued on 6 January 2004 in Information Release 04–01, 'ASIC policy approach to the regulation of managed discretionary accounts'.

As outlined in January, the policy statement details ASIC's exemption for operators of MDA services (MDA operators) from the managed investments provisions in Chapter 5C of the Corporations Act 2001 (the Act) and the product disclosure provisions in Part 7.9 of the Act. To have the benefit of this relief, MDA operators must comply with the licensing and conduct provisions in Parts 7.6 and 7.7 of the Act and some additional conduct requirements designed to promote consumer protection.

'Our policy approach aims to tailor the regulatory regime for operators of MDA services without minimising the protections available to retail clients who use them', Director of Financial Services Regulation, Legal and Technical Operations, Ms Pamela McAlister, said.

'MDA services are often promoted to retail clients on the basis that they contain an investment program or strategy which is suitable for the individual client. As a result, ASIC believes that MDA services can be effectively regulated through a supplemented application of the licensing and conduct requirements, including those relating to personal advice.

'These tailored requirements replace the need for MDA operators to comply with the managed investment and financial product disclosure requirements of the Corporations Act. In addition, ASIC has allowed for transitional arrangements to enable MDA operators time to meet the requirements in our policy', Ms McAlister said.

Copies of PS 179, Information Release 04–01 and related class orders are available from the ASIC website.

2.4 FSR disclosure to be clear, concise and effective

On 10 March 2004, the Australian Securities and Investments Commission (ASIC) confirmed that it expects key disclosure documents produced by financial services providers to be clear, concise and effective.

'Some industry participants have told us that their lawyers are advising them to produce Statements of Advice (SOAs) running to 80 or 90 pages in order to comply with the requirements of financial services regulation. This is not what we would expect to see under the law, and it is not helpful to consumers. ASIC sees disclosure under the new law as a consumer-centric regime, focussing on the consumer's information needs', ASIC Executive Director of Financial Services Regulation, Mr Ian Johnston said.

ASIC has already issued guidance about disclosure documents such as Financial Services Guides, Statements of Advice and Product Disclosure Statements (See Policy Statement 168 Disclosure: Product Disclosure Statements (and other disclosure obligations) and Policy Statement 175 Licensing: Financial product advisers – conduct and disclosure).

'In ASIC's view, the law is clear about what needs to be contained in such documents. However, if product issuers and advisors believe they need to produce overly complex documents in order to comply with the law, ASIC is prepared to consult with them and issue further guidance', Mr Johnston said.

Responding to some media comment about when an advisor might have to provide a SOA to clients, Mr Johnston said, 'It is not the case that a SOA needs to be provided every time an advisor talks to a client. Often those discussions will be about the existing investment strategy for the client with no further advice being given, for which the existing SOA my well suffice', he said.

ASIC also confirmed that a SOA need not always take the same form. In many circumstances, it will be acceptable to update advice in a shorter document, referring back to the original, more comprehensive SOA.

ASIC understands that many financial service providers will take a conservative course and produce documents which are 'boiler-plate'. ASIC has asked the Financial Planning Association to provide it with examples of SOAs it considers overly long and complex.

'However, we are also aware of examples which are in a shorter form and which correctly balance the disclosure of all information the client needs, with the requirements for the information to be presented in a clear, concise and effective manner', Mr Johnston said.
2.5 New data matching program between ASIC and Insolvency and Trustee Service Australia (ITSA)

A data-matching program commenced on 2 March 2004 with the cooperation of the Insolvency and Trustee Service Australia (ITSA).

The program will match data from the ITSA National Personal Insolvency Index (NPII) with data from ASIC's public database to identify persons automatically disqualified from managing corporations by operation of s206B(3) and (4) of the Corporations Act 2001. The results of the program will be used by ASIC to investigate possible breaches of the law.

The program protocol developed in consultation with the Office of the Federal Privacy Commissioner provides more information about this new program.

Both ASIC and ITSA adhere to the Privacy Commissioner's Guidelines on Data-Matching in Commonwealth Administration that includes standards for data-matching to protect the privacy of individuals.

3. Recent ASX Developments

(a) FSR Transition ASX advises that, according to the records maintained by ASX and ASIC, all ASX Participating Organisations and RIOTs and all ASX Futures Participants obtained Australian Financial Services Licences ahead of the 11 March 2004 ASIC deadline for transitioning to the new regime. (i) New rules take effect As foreshadowed, new ASX Market Rules, ACH Clearing Rules and ASTC Settlement Rules along with their associated procedures came into effect on 11 March 2004. The rules are available at both ASX Online and the ASX website. (ii) Terminology in new rules Certain existing agreements contain terminology that has either been replaced or removed under the relevant new operating rules. However ASX has advised that these agreements do not require novation or re-execution as the existing agreements provide for amendment from time to time. (iii) Derivatives Client Agreements under the ASX Market Rules and ACH Clearing Rules With respect to Client Agreements under the ASX Market Rules and the ACH Clearing Rules, the ASX Group has issued blanket “no action” relief in certain circumstances. These circumstances are set out in Participant Circular 116/04 dated 15 March 2004. (iv) AFS Licence terminology The changes to the rules also have implications for AFS licensees. ASX has been liaising with ASIC in relation to the implications for Participants of terminology on AFS Licences which refers to old rules and ASX Group entities. ASIC has advised that until such time as variations are made to the licence conditions of existing AFS licensees affected by the changes, ASIC will take the position that: “1. licensees who currently operate lawfully under the old ASX, ASXF and OCH structures and who have the benefit of the condition in [PF 209.10] may continue to operate under the new ASX structure as if the definition of "market participant" for the purposes of [PF 209.10] includes: a) a market participant as defined in the operating rules of the ASX (other than a market participant which is only a principal trader as defined in the operating rules of the ASX) who is required to comply with the ASX's operating rules, taking into account any waiver by ASX; and b) a participant as defined in the operating rules of ACH who is required to comply with ACH's operating rules, taking into account any waiver by ACH; and 2. licensees who currently have a "Registered Independent Options Trader" authorisation may continue to carry on business as if references in the AFS licence to "Registered Independent Options Trader" or "RIOT" are references to "Principal Trader as defined in the ASX operating rules".” (v) Capital requirements and commencement of the new market rules and clearing rules Some key points regarding implications of the new rules regarding capital requirements are summarised in the attachment to Participant Circular 105/04 dated 9 March 2004. The Circular contains an Appendix which sets out which rules apply to which participants and an attachment which contains a detailed analysis of the capital requirements under the new regime. (b) Listing rule amendments (i) ASX Listing Rule Amendments - Capital Raising Mechanisms Progress of ASX's proposed Listing Rule amendments dealing with capital raising mechanisms, which were exposed for public comment in October 2003 and proposed to take effect on 31 March is set out below. (ii) Proposed increase of 15% limit under Listing Rule 7.1 The submissions received in response to ASX's proposed Listing Rule amendments expressed wide support for the proposal to increase the limit for issues of securities that may be made without shareholder approval under listing rule 7.1 (the Limit) from 15% to 20%. However, some respondents expressed concern that certain investors may be disadvantaged by the proposed increase, in the absence of provisions limiting the price discount of securities issued under the Limit. Taking into account concerns expressed by these stakeholders and after liaising with ASIC, ASX has decided to further consider possible alternatives in relation to increasing the Limit. ASX may therefore issue a further discussion document seeking the views of stakeholders in relation to the proposal and any alternatives, with a view to introducing rule amendments in this regard at the earliest opportunity. As a result, any changes to the limit on placing capacity in listing rule 7.1 will not take effect on 31 March. (iii) Proposed amendments to take effect as from 31 March ASX intends to proceed with the following amendments, which will come into effect on 31 March 2004.           A new exception from listing rule 7.1 for securities to be issued under a security purchase plan (SPP) that does not require a prospectus or Product Disclosure Statement, pursuant to ASIC relief. The exception will not extend to issues to an underwriter of an SPP, and will be limited to issues of not more than 30% of ordinary issued capital, at a price that is not less than 80% of the average market price.          Reductions to the timetables for both renounceable and non-renounceable pro rata issues of 42%, from a total of 40 business days to a standard total of 23 business days.          A new exception from the rule for securities issued with investor approval under the takeover provisions of the Corporations Act.          Certain technical amendments, including those relating to convertible securities. (iv) Other proposed amendments deferred for further consideration          Proposed provisions to give investors the ability to confer a general mandate on an entity to issue securities with an unlimited discretion for a period of up to 13 months. ASX will undertake further analysis in this regard.          The proposal to include an issue to the underwriter of a dividend or distribution reinvestment plan in listing rule 7.2 exception 7. ASX will advise listed companies about the revised proposal by way of further update, as soon as possible. ASX has also determined not to proceed with rule amendments to listing rule 7.7 to remove the special New Zealand directive. (v) Technical Listing Rule amendments - Financial Services Reform Act - ASX Market Rules, ASTC Settlement Rules & ACH Clearing Rules Technical listing rule amendments consequential to the introduction of the ASX Market Rules, ASTC Settlement Rules and ACH Clearing Rules (the Rules) took effect from 11 March 2003. The amendments reflect changes in cross-references, nomenclature and definitions, as those changes are introduced in the Rules. The Listing Rules available on the ASX website and ASX Online have been updated to include these changes, and they will be incorporated in hard copies of the Listing Rules containing the amendments in relation to capital raising mechanisms, effective 31 March 2004. Listed entities and subscribers to the Listing Rules will receive these updates shortly.

4. Recent Takeovers Panel Decisions

4.1 Mildura Co-operative Fruit Company Limited: Panel makes declaration of unacceptable circumstances and accepts undertakings On 8 March 2004, the Panel announced that it had made declarations of unacceptable circumstances in the Mildura Co-operative Fruit Company Limited proceedings. The Panel has concluded the proceedings as a result of the applications made by Mildura Investment Company Pty Ltd (MIC) and the application made by Mildura Co-operative Fruit Company Limited (MCFC) following acceptance by the Panel of undertakings to the Panel provided by MIC and MCFC. (a) Background The Panel received two applications from MIC (the MIC Applications) pursuant to sections 657A, 657E and 657D of the Corporations Act 2001 (Cth) (the Act) in relation to MIC’s takeover bid for all of the ordinary shares in MCFC (the Bid). In MIC’s first application dated 27 January 2004 (the First Application), MIC applied to the Panel for a declaration of unacceptable circumstances and interim and final orders. In MIC’s second application dated 28 January 2004 (the Second Application), MIC applied to the Panel for a declaration of unacceptable circumstances and final orders. On 30 January 2004, the Panel received an application by MCFC (the MCFC Application) under sections 657A and 657D of the Act for a declaration of unacceptable circumstances and final orders in relation to the Bid. On 2 February 2004, the Panel decided to conduct proceedings (the Proceedings) in relation to the issues raised in the MIC Applications and MCFC Application. It should be noted that the Panel also received an application by MIC on 11 February 2004 under section 657A for a declaration of unacceptable circumstances and final orders. This application was withdrawn before the Panel commenced proceedings in relation to it. (i) MIC applications MCFC has sent a copy of its target’s statement (the Target’s Statement) to each holder of ordinary shares and each holder of preference shares in MCFC. The Target’s Statement refers separately to the existence of provisions in MCFC’s constitution which provide for limits (the Takeover Restrictions) on the number of ordinary shares which one person may hold or vote, which the directors of MCFC have a discretion to vary. On 23 January 2004, MIC wrote to MCFC alleging that the Target’s Statement failed to meet the disclosure requirements under the Act, contained statements that were misleading or deceptive and that various statements contravened section 638(5) of the Act. On 27 January, MCFC wrote to MIC responding to the allegations raised by MIC. Also on 23 January 2004, MIC wrote to MCFC asking MCFC to confirm that it did not receive any advice (whether written or oral, formal or informal) from any qualified person (such as KPMG) as to the value of MCFC’s ordinary shares or as to the adequacy, reasonableness or fairness of the Bid. On 25 January, MCFC wrote to MIC stating that it had not received any opinion from any qualified person as to the value of MCFC’s ordinary shares or to the adequacy, reasonableness or fairness of the Bid. However, in their response, MCFC stated that its directors had engaged in preliminary discussions with KPMG concerning the value of MCFC shares (the KPMG Advice). The Target’s Statement assessed the adequacy of the consideration offered by MIC under the Bid by reference to (among other things) a comparison between the bid price and the net asset backing of MCFC according to MCFC’s most recent financial statements; and comparisons between the price/earnings ratio and dividend multiple derived from the bid price and price/earnings ratios and dividend multiples for companies included in a stock exchange index (the S&P/ASX Small Ordinaries Index) (the Bid Price Comparisons). The First Application concerned the use in the Target’s Statement of statements by Mr Armour and his solicitors and statements based on statements made by them in contravention of section 638(5) of the Act. Details of the First Application are contained in the Panel’s Media Release TP 04/07. The main issues in the Second Application concerned whether MCFC should disclose details of the KPMG Advice in its Target’s Statement; whether or not the Target’s Statement should have been dispatched to preference shareholders; whether the Target’s Statement was misleading by statements and omissions regarding the Takeover Restrictions; whether the Bid Price Comparison was misleading; and whether statements in the Target’s Statement about Mr Armour and MIC’s expertise in running MCFC’s business were misleading. (ii) MCFC application MIC published newspaper advertisements, and Mr Armour made statements to the media, stating that, should MIC obtain control of MCFC under the Bid, it would cause MCFC to review the prices MCFC pays to suppliers for produce (Grower Payments) with a view to ensuring that Grower Prices are at least at market level and endeavouring to ensure that, wherever possible, Grower Prices are above the rate that would otherwise be set by the market. MIC made no specific statement about intentions in relation to Grower Payments in the Bidder’s Statement. In the MCFC Application, MCFC alleged that Mr Armour’s statements regarding Grower Payments did not explain what the review would entail or how the increased rates would be achieved. (b) The Panel’s decision (i) Section 638(5) – consent The Panel has accepted an undertaking from MCFC that, among other things, it will send to each shareholder a supplementary target’s statement (the Supplementary Target’s Statement) which prominently at the beginning of the document states that by including Mr Armour’s statements in the Target’s Statement without his consent, MCFC failed to comply with subsection 638(5) of the Act. Nevertheless, the Panel decided to make a declaration of unacceptable circumstances, as MCFC breached subsection 638(5). That provision is an important part of the machinery of Chapter 6, it creates an offence of strict liability, and is basic to the incidence of civil and criminal liability for statements made in takeover documents. MCFC did not obtain the consent of Mr Armour to use his statements in the Target’s Statement, nor the form and context in which he was quoted. In addition, the Target’s Statement did not state that Mr Armour had consented to the use of the quotations, as the section requires. The Panel considered that the obligation to provide all material information in subsection 638(1) does not prevail over the prohibition on using a person’s statement without their consent in subsection 638(5) because the specific prohibition in that subsection overrides the general obligation in subsection (1). The Panel noted that MCFC made no attempt to seek the consent of Mr Armour to the use of the quotations. The Panel considered an appropriate course of action would have been for MCFC to consult with Piper Alderman to seek Mr Armour’s consent to include the relevant quotations in the Target’s Statement prior to releasing the Target’s Statement. If that consent was not forthcoming, MCFC could then have applied to ASIC for an exemption from subsection 638(5) on the basis that those statements were material to shareholders and would assist them in making an informed decision whether to accept MIC’s offer. (ii) Preference shareholders The Panel did not make a declaration on this issue. The Panel formed the view that the terms of the covering letter sent to preference shareholders with the Target’s Statement were such as to ensure that MCFC’s preference shareholders were not misled by having been sent the Target’s Statement into believing they could accept the bid for their preference shares. That letter also made it clear that it was highly unlikely that any of the preference shares would be converted into ordinary shares during the offer period. These matters having been made clear, the Panel saw no harm in MCFC having provided copies of the Target’s Statement to its preference shareholders, whether or not it was required to do so. (iii) Bid price comparisons The Panel found that the use of the Bid Price Comparisons analysis was misleading on the basis that the Target’s Statement did not explain with sufficient clarity that the Bid Price Comparisons were only presented on the basis of an assumed proposal to acquire a controlling interest in MCFC and were not appropriate to the assessment of a bid for a minority interest in MCFC. The Panel decided not to make a declaration of unacceptable circumstances following acceptance by the Panel of undertakings provided by MCFC that it would set out in the Supplementary Target’s Statement limitations to the use by offeree shareholders of the Bid Price Comparisons in responding to the Bid, in particular that they only related to the valuation of the company as a whole and not to a minority interest in it. (iv) Takeover restrictions The Panel found that the Target’s Statement did not disclose with sufficient clarity the MCFC’s directors’ views and intentions regarding the Takeover Restrictions and the effect of the Takeover Restrictions on the Bid Price Comparisons analysis. The Panel decided not to make a declaration of unacceptable circumstances following acceptance by the Panel of undertakings provided by MCFC that it would, among other things, set out in the Supplementary Target’s Statement how the directors of MCFC would exercise their powers under the Takeover Restrictions in relation to the Bid, and whether the directors would restrain transfers and voting of shares for which acceptances of offers under the Bid are accepted under the Takeover Restrictions. (v) MIC’s expertise in running MCFC The Panel did not find the statements in the Target’s Statement regarding MIC’s expertise in running MCFC were misleading or deceptive, taken in context, or that they created an impression that MIC would run MCFC’s business, without necessary expertise. (vi) KPMG advice The Panel reviewed the KPMG Advice (which included a paper titled “Indicative Pricing Analysis” dated 15 January 2004), a letter from KPMG to MCFC, and a witness statement from KPMG that the result of the valuation exercise in their analysis supported the MCFC directors’ assessment of the bid price in the Target’s Statement. On the basis of that information, the Panel was satisfied that KPMG’s analysis did not attract the principle in Ridley MI v Joe White Maltings (1996) 22 ACSR 319 that an expert valuation report in the hands of a target board may be material information which subsection 638(1) requires the board to disclose in the relevant target’s statement. (vii) Grower payments The Panel found that Mr Armour’s comments concerning MIC’s intentions about Grower Payments were misleading as they tended to induce a belief that if MIC obtained control of MCFC, it was probable that Grower Payments would increase for which there appeared to be no reasonable basis, and also had the potential to cause confusion among shareholders. However, the Panel decided not to make a declaration following acceptance by the Panel of undertakings provided by MIC that it would send shareholders a supplementary bidder’s statement (the Supplementary Bidder’s Statement) stating whether the review of Grower Payments would apply to dried fruits, citrus or other produce, stating whether MCFC has power to increase relevant Grower Payments unilaterally and setting out its grounds for believing that MCFC could sustainably make Grower Payments above the rate that would otherwise be set by the market (or that it has no grounds for such a belief). However, the Panel decided to make a declaration of unacceptable circumstances because MIC did not formulate and disclose intentions regarding the Grower Payments in its bidder’s statements (the Bidder’s Statement) on the basis that this constituted a serious departure from the policy of paragraphs 602(a) and (b)(iii). In making these decisions, the Panel considered the special nature of a co-operative and formed the view that the ongoing trading relationship between suppliers and the co-operative is generally a critical issue when supplier-members decide whether to accept a takeover bid for an agricultural or trading co-operative. In that context, details of the intentions of MIC in relation to Grower Payments were material to shareholders to enable them to make an informed and critical assessment of the offer. In his reported comments, Mr Armour did not make sufficiently clear the distinction between increases to Grower Payments to dried fruit suppliers and citrus suppliers. Accordingly, they implied that MCFC had the unilateral power to control the Grower Payments in relation to dried fruits, as well as citrus. Given MIC’s acknowledged lack of expertise regarding MCFC’s business, its stated concern to maintain the profit level of MCFC, its stated concern about MCFC’s existing profit level and the magnitude of the Grower Payments relative to MCFC’s profit, as disclosed by MCFC’s financial statements, the Panel was concerned that MIC’s and Mr Armour’s reported statements about Grower Payments appeared to lack a reasonable basis.