Saxby Bridge Financial Planning Pty Ltd and Ors and Australian Se Curities and Investments Commission
[2003] AATA 480
•28 May 2003
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2003] AATA 480
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2001/1770
GENERAL ADMINISTRATIVE DIVISION ) Re Saxby Bridge Financial Planning Pty Ltd and Others Applicant
And
Australian Securities and Investments Commission
Respondent
DECISION
Tribunal Mr RP Handley, Deputy President Date28 May 2003
PlaceSydney
Decision The Tribunal sets aside the decisions under review and remits the matter to the Respondent with directions, first, that the securities dealers licences of Saxby Bridge Financial Planning and ABS Securities be reinstated subject to appropriate conditions, pursuant to s 786(1) of the Australian Securities and Investments Commission Act 2001, with a view to achieving more effective compliance with s 849(2) of the Act; and, second, that the banning order on Jeffrey Braysich should not have been imposed.
...............................................
RP Handley
Deputy President
ORDER TO AMEND WRITTEN DECISION [2003] AATA 480
TribunalMr RP Handley, Deputy President
Date5 June 2003
PlaceSydney
WHEREAS:
1. The Tribunal released a written decision in this matter, which was dated 28 May 2003.
2. It has come to the Tribunal’s attention that there was an error in the decision, in that the decision of the Tribunal on the first page referred to s 786(1) of the Australian Securities and Investments Commission Act 2001 instead of the Corporations Act 2001.
3. The Tribunal wishes to amend the written decision so as to rectify the error and wishing to do so with the least cost and inconvenience to the parties, applies the provision of section 43AA of the Administrative Appeals Tribunal Act1975.
NOW THE TRIBUNAL THEREFORE ORDERS:
That the decision of the Tribunal as recorded under the heading Decision should read as follows:
The Tribunal sets aside the decision under review and remits the matter to the Respondent with directions, first, that the securities dealers licences of Saxby Bridge Financial Planning and ABS Securities be reinstated subject to appropriate conditions, pursuant to s 786(1) of the Corporations Act 2001, with a view to achieving more effective compliance with s 849(2) of the Act; and, second, that the banning order on Jeffrey Braysich should not have been imposed.
……………………………………………
RP Handley
Deputy President
CATCHWORDS
Corporations Law – Securities law – contravention of the requirements of a securities dealers licence – whether holder of dealers licence acted efficiently, honestly and fairly – whether there was a conflict of interest between the dealer’s personal interests and those of its clients – the appropriateness of products recommended – whether there was adequate disclosure under the Corporations Act of fees, commissions and benefits – whether there was adequate supervision and training of representatives – examination of the regulation of dealers under the Corporations Act and Australian Securities and Investment Commission Act – examination of the investment products recommended to clients – examination as to why products recommended – examination of enforcement action available under the Corporations Act and Australian Securities and Investment Commission Act – held that the Tribunal is not satisfied that the Applicants did not perform their duties efficiently, honestly and fairly – held that the first and second Applicants’ securities dealers licences should be reinstated subject to conditions and that the banning order on the third Applicant should not have been imposed.
Corporations Act 2001 ss 826, 826(1), 827, 829, 830, 849, 849(1)(2)(3)(4)(5)(6), 849(2)(c)(d), 851,
Corporations Law Regulations 7.3.02, 7.3.02(1),
Australian Securities and Investments Commission Act 2001 ss 93AA(1), 786(1)(2), 827, 826, 828, 829, 830
Australian Securities and Investment Commission v Donald [2002] FCA 1174
Australian Securities Commission v Kippe (1996) 67 FCR 499; 137 ALR 423
Bank of Western Australia v Ocean Trawlers Pty Ltd (1995) 16 ACSR 501
Donald v Australian Securities and Investments Commission (2000) 35 ACSR 383
Farley and Australian Securities Commission (1998) 16 ACLR 1502
Nisic v Corporate Affairs Commission (1998) 8 ACLC 514
Re Campbell and Australian Securities and Investments Commission [2001] 37 ACSR 238
Re Donald and Australian Securities and Investments Commission (2001) 38 ACSR 661
Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634
Re Foster and Australian Securities and Investments Commission (1999) 57 ALD 779
Re Kippe v Australian Securities Commission (1997) 16 ACLC 190
Story v National Companies and Securities Commission (1988) 13 NSWLR 661
REASONS FOR DECISION
28 May 2003 Mr RP Handley, Deputy President
TABLE OF CONTENTS
Paragraph No
A. Introduction.............................................................................................................. 1
B. Background............................................................................................................. 2
C. Applicable Legislation .......................................................................................... 9
D. Summary of the Respondent’s Contentions ................................................... 15
E. A Protective/Preventative Approach ................................................................ 17
F. The Expert Witnesses ......................................................................................... 23
G. Saxby Bridge Financial Planning and ABS Securities .................................. 31
H. Section 849 Compliance (Disclosure)
(a) Relevant Law and Policy............................................................................ 51
(b) The Respondent’s Contentions re s 849 ............................................... 57
(c) Table of Investment Products
Part A – MBIs ......................................................................................... 68
Part B – Master Trusts................................................................................... 69
(d) Other Relevant Evidence........................................................................... 70
(e) Conclusions.................................................................................................. 80
I. Section 851 Compliance
(a) Relevant Law and Policy............................................................................. 84
(b) Client’s Needs
(i) The Respondent’s Contentions...................................................... 91
(ii) The Applicants’ Contentions............................................................ 94
(iii) Assessment of Client Needs – Relevant Evidence.................... 97
(iv) The Suitability of Investments Recommended for Clients –
Relevant Evidence............................................................................
(v) Considerations and Findings......................................................... 141
(c) Product Research
(i) The Respondent’s Contentions.......................................................... 147
(ii) The Applicants’ Contentions................................................................ 151
(iii) Relevant Evidence .............................................................................. 161
(iv) Consideration and Findings................................................................ 234
J. Licence Conditions – Regulation 7.3.02
(a) Relevant Law and Policy ........................................................................... 243
(b) Supervision of Representatives in the performance of their duties –
ensuring compliance................................................................................. 246
(c) Expert Oral Evidence on Supervision....................................................... 261
(d) Findings on Supervision.............................................................................. 272
(e) Providing Sufficient Initial and Ongoing Training.................................... 273
(f) Relevant Oral Evidence.............................................................................. 278
(g) Findings on Training.................................................................................... 291
K. Performance of Duties - Efficiently, Honestly and Fairly
(a) Relevant Law.............................................................................................. 293
(b) The Respondent’s Contentions................................................................ 296
(c) The Applicants’ Contentions..................................................................... 299
(d) Findings....................................................................................................... 305
L. Enforcement Action
(a) Relevant Law and Practice....................................................................... 311
(b) Conclusion................................................................................................... 328
A. INTRODUCTION
1. This matter concerns an application dated 21 November 2001 made by Saxby Bridge Financial Planning Pty Ltd (the First Applicant), ABS Securities Pty Ltd (the Second Applicant) and Jeffrey Joseph Braysich (the Third Applicant) for a review of decisions of a delegate of the Australian Securities and Investment Commission (ASIC, the Respondent) made on 30 October 2001 as follows:
(a)that the securities dealers licence of Saxby Bridge Financial Planning Pty Ltd be revoked.
(b)that the securities dealers licence of ABS Securities Pty Ltd be revoked.
(c)that Jeffrey Joseph Braysich be prohibited from doing an act as a representative of a dealer or investment adviser for a period of five years.
2. The hearing in this matter took place in Sydney from 21 November 2002 to 4 December 2002, 4 February 2003 to 6 February 2003, 18 and 19 March 2003, and 31 March 2003. At the hearing, the Applicants were represented by Tony Hartnell, Solicitor, of Atanaskovic Hartnell, Solicitors, and ASIC was represented by Rowan Darke, of Counsel. The evidence before the Tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (“the T Documents”) together with documents tendered by the parties. The following witnesses gave evidence for the Applicant – Jeffrey Braysich, Phillip Dally, Ian Pearson and Don Wiggins; for the Respondent – Stephen Albrecht, Mark Bell, Bill Dee, Andrew Duffy, Rashmi Mehrotra, Harry Sookias, and Max Weston. The Applicants also relied on the oral evidence of Steven Chadwick and Kalinda Cobby given at the ASIC hearing in 2001.
B. BACKGROUND
3. Saxby Bridge Pty Ltd was incorporated in late 1992 as a life insurance agency with a financial planning arm. As a result of restructuring, the financial planning business became Saxby Morgan Pty Ltd, incorporated on 7 May 1996, and finally, on 3 August 1998, as a result of a change of name, Saxby Bridge Financial Planning Pty Ltd (“SBFP”). SBFP held securities dealers licence first issued on 28 October 1996. Its financial planners were either directly employed or on contract with SBFP to provide investment advice. On 9 February 1998, Saxby Bridge Pty Ltd incorporated ABS Securities Pty Ltd (“ABS Securities”) as a licensed dealer for financial planners who conducted their own financial planning practices largely independently of the Saxby Bridge business but with its support. On 27 May 1998, ABS Securities obtained a securities dealers licence – its financial planners were self-employed but provided investment advice as proper authority holders under ABS Securities’ licence.
4. As the Saxby Bridge business grew, it also began to offer a range of other financial products and services in relation to property, home loans, corporate finance and general insurance. These services were offered by separate companies within the Saxby Bridge group of companies. By June 2001, the Saxby Bridge business, which when first established had less than a dozen advisers, had grown to a staff of about 250, with offices in Sydney, Melbourne, Brisbane and the Gold Coast. The head office is in Sydney.
5. Mr Braysich was one of the original founding members of the Saxby Bridge business. He was a director and secretary of Saxby Morgan Pty Ltd, now SBFP, and of ABS Securities from shortly after incorporation. SBFP and ABS Securities were wholly owned subsidiaries of Saxby Bridge Pty Ltd, of which he has been a director and the secretary since 10 May 1993. Mr Braysich told the Tribunal that Saxby Bridge Pty Ltd is wholly owned by Boulder Consolidated Pty Ltd, approximately 35% - 40% of whose shares are owned by Bestrall Pty Ltd which is the trustee of Mr Braysich’s family trust, JB Trust. Mr Braysich is a director of Bestrall Pty Ltd and also a beneficiary of JB Trust. Mr Braysich’s father owns another 15% - 18% of Saxby Bridge Pty Ltd through his superannuation fund. Essentially, Mr Braysich is the controlling director of the Saxby Bridge group of companies.
6. On 8 May 2001, a delegate of the Respondent issued Mr Braysich with a “Notice of Concerns” in respect of the securities dealers licence held by SBFP and invited Mr Braysich to appear at a preliminary hearing on 7 June 2001 and at a formal hearing to be conducted on 13 and 15 June 2001. The Notice stated that the delegate was concerned that SBFP:
as a licensed dealer in securities:
(1) may have contravened the requirements of s 849;
(2) may have contravened the requirements of s 851;
(3)may not have performed efficiently, honestly and fairly the duties of a holder of a securities dealer’s licence; and
(4) hereafter will not peform those duties efficiently, honestly and fairly.
7. A similar Notice of Concerns was issued to Mr Braysich in respect of ABS Securities. A third Notice of Concerns was issued to Mr Braysich personally stating that the delegate was concerned that Mr Braysich “will not perform efficiently, honestly and fairly the duties of a representative of a dealer or investment adviser”.
8. A hearing was conducted by the delegate of the Respondent in Sydney on 5, 6, 9, 10, 19, 20, 26, 27, 30 and 31 July 2001, and 8, 9, 13, 27 and 28 August 2001, and 3, 4, 5, 6 and 18 September 2001. On 30 October 2001, the delegate made decisions revoking the securities dealers licences of SBFP and ABS Securities and prohibiting Mr Braysich from doing an act as a representative of a dealer or investment adviser for a period of five years. On 20 November 2001, SBFP, ABS Securities and Mr Braysich lodged an application with the Tribunal for a review of these decisions..
C. APPLICABLE LEGISLATION
9. Division 1 of Part 7.3 of the Corporations Act 2001 (the Act) in effect at the time of the decisions sets out the requirements for the licensing of those carrying on a securities business or an investment advice business. Division 3 required representatives of a dealer or investment adviser to either themselves hold a dealers licence or investment advisers licence or hold “a proper authority” from the dealer or investment adviser. Relevantly, regulation 7.3.02(1) of the Corporations Regulations stated:
a licence is subject to the conditions that the holder of the licence must ensure that each representative of the holder:
(a)is adequately supervised in the performance of the duties that he or she is required by the holder to perform; and
(b)is sufficiently trained in relation to those duties before acting as a representative; and
(c)keeps up to date in relation to those duties by means of continuing training programs.
10. Division 5 contained provisions enabling the Respondent to exclude persons from the securities industry. Section 826 set out the Respondent’s powers to revoke a licence after holding a hearing. Section 826(1) stated relevantly that the Respondent may by written notice revoke a licence if:
(c) the licensee contravenes a securities law; or …
(j) the Commission has reason to believe that the licensee has not performed efficiently, honestly and fairly the duties of a holder of a dealers licence or an investment advisers licence, as the case requires; or
(k) the Commission has reason to believe that the licensee will not perform those duties efficiently, honestly and fairly.
11. Section 827 enabled the Respondent to suspend a licence rather than revoke it if the Respondent considers it desirable to do so. Section 829 empowered the Respondent to make a banning order against an unlicensed natural person if, relevantly:
(d) he or she contravenes a securities law; or …
(f) the Commission has reason to believe that he or she has not performed efficiently, honestly and fairly the duties of:
(i) a representative of a dealer; or
(ii) a representative of an investment adviser; or
(g) the Commission has reason to believe that he or she will not perform efficiently, honestly and fairly the duties of:
(i) a representative of a dealer; or
(ii) a representative of an investment adviser.
Section 830 provided for a banning order to prohibit a person, either permanently or for a specified period, from doing an act as a representative of a dealer or an investment adviser or both, as specified in the order.
12. Division 3 of Part 7.4 regulated the making of recommendations about securities. Section 849 stated:
(1) This section applies where a securities adviser makes a securities recommendation to a person (in this section called the client) who may reasonably be expected to rely on it.
(2) The securities adviser shall:
(a) if the recommendation is made orally—when making the recommendation, disclose to the client orally; or
(b) if the recommendation is made in writing—set out in that writing, in such a way as to be no less legible than the other material in that writing;
particulars of:
(c) any commission or fee, or any other benefit or advantage, whether pecuniary or not and whether direct or indirect, that the securities adviser or an associate has received, or will or may receive, in connection with the making of the recommendation or a dealing by the client in securities as a result of the recommendation; and
(d) any other pecuniary or other interest, whether direct or indirect, of the securities adviser or an associate, that may reasonably be expected to be capable of influencing the securities adviser in making the recommendation.
(3) Subsection (2) does not apply in relation to a commission or fee that the securities adviser has received, or will or may receive, from the client.
(4) If by making the recommendation the securities adviser does an act as a representative of another person, then:
(a) without limiting the generality of Division 2 of Part 1.2, the other person is an associate for the purposes of subsection (2); and
(b) subsection (2) does not apply in relation to a commission or fee that the other person has received, or will or may receive, from the client.
(5)For the purposes of Division 2 of Part 1.2, the making of securities recommendations is the matter to which a reference to an associate in subsection (2) relates.
(6) Despite Division 2 of Part 1.2 and subsection (5), a person (in this subsection called the alleged associate) is not an associate for the purposes of subsection (2) merely because of being:
(a) a partner of the securities adviser otherwise than because of carrying on a securities business in partnership with the securities adviser; or
(b) a director of a body corporate of which the securities adviser is also a director, whether or not the body carries on a securities business;
unless the securities adviser and the alleged associate act jointly, or otherwise act together, or under an arrangement between them, in relation to making securities recommendations.
13. Section 851 stated:
(1) A securities adviser who:
(a) makes a securities recommendation to a person who may reasonably be expected to rely on it; and
(b) does not have a reasonable basis for making the recommendation to the person;
contravenes this section.
(2) For the purposes of subsection (1), a securities adviser does not have a reasonable basis for making a securities recommendation to a person unless:
(a) in order to ascertain that the recommendation is appropriate having regard to the information the securities adviser has about the person's investment objectives, financial situation and particular needs, the securities adviser has given such consideration to, and conducted such investigation of, the subject matter of the recommendation as is reasonable in all the circumstances; and
(b) the recommendation is based on that consideration and investigation.
(3) A person who contravenes subsection (1) is not guilty of an offence.
14. The parties referred to a number of policy statements in the course of the hearing and in submissions. The Tribunal notes that in the case of relevant policy of a government agency, in the absence of a statutory obligation to do so, the Tribunal will ordinarily apply that policy unless it is unlawful or its application would cause injustice, or there are other cogent reasons for not applying it in the circumstances of the particular case: Re Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634 at 645. Those policies relevant in this matter will be referred to below in discussing more fully the relevant provisions of the law.
D. SUMMARY OF THE RESPONDENT’S CONTENTIONS
15. The Respondent’s contentions are as follows:
(1)SBFP and ABS Securities contravened s 849 by failing to adequately disclose fees, commissions and other benefits, in particular, associated with recommendations to place clients in tax effective, prescribed interest and managed investment schemes which include both Managed Business Investments (MBIs) and investments through Master Trusts.
(2)SBFP and ABS Securities placed themselves in a position in which their interests conflicted with those of their clients.
(3)SBFP and ABS Securities contravened s 851 by making inappropriate recommendations for investments to clients. For a securities adviser to have “a reasonable basis for making a securities recommendation to a person” requires the adviser to have researched and given proper consideration to both
(a) the investment product recommended, and
(b)the client’s investment objectives, financial situation and particular needs.
(4)SBFP and ABS Securities breached the conditions of their licences, contrary to regulation 7.3.02 of the Corporations Regulations, by:
(a)failing to adequately supervise their representatives in the performance of their duties; and
(b)failing to provide sufficient initial and continuing training.
16. For these reasons and because of these contraventions of the Corporations Act and the Corporations Regulations, the Respondent contends that the Applicants have not performed and will not in the future perform their duties efficiently, honestly and fairly, thereby warranting a revocation of the securities dealers licences of SBFP and ABS Securities (s 826(1)) and the banning order made against Mr Braysich (s 829).
E. A PROTECTIVE/PREVENTATIVE APPROACH
17. The Applicants’ application for a review of ASIC’s decisions was made on the grounds:
that the Decision was an inappropriate exercise by the Delegate of his discretionary power having regard to established principles, was not supported by the evidence presented before the Delegate at the s837 hearing, was inappropriate having regard to the alternative enforcement steps that the ASIC is empowered to take and was excessive having regard to precedent decisions of this Tribunal and the courts. (Applicants’ Submissions para 1.4)
18. The Tribunal’s role in conducting a review is to stand in the shoes of the decision-maker and make its own decision. In doing so, if the Tribunal finds that the Applicants have failed to comply with the provisions of the Act, the Tribunal must decide whether the correct and/or preferable decision should involve enforcement action being taken against the Applicants, especially if it makes adverse findings as to their performing their duties efficiently, honestly and fairly. Further discussion of the relevant powers appears below.
19. The Tribunal considers it appropriate at this stage to consider the role of ASIC and, standing in its shoes, the Tribunal, in making such decisions, and the principles which underlie the exercise of ASIC’s powers. In Australian Securities Commission v Kippe (1996) 67 FCR 499 at 508, the Full Federal Court emphasised that the purpose of a proceeding which may result in a banning order is not penal in nature and designed to punish:
Rather, the grounds set out in s829 clearly point to the conclusion that it is properly described as protective …
The immediate and direct legal effect intended by a banning order is not to impose a penalty or punishment on the person concerned, but to be preventive in that it removes a perceived threat to the public interest and to public confidence in the securities and futures industry by removing that person from participation therein.
It seems clear that similar principles apply in respect of the exercise of ASIC’s other powers: for example, Nisicv Corporate Affairs Commission (1998) 8 ACLC 514 at 525; Re Donald and ASIC (2001) 38 ACSR 661 at 675. Thus, the exercise of ASIC’s powers should be protective of the public interest and preventative in nature.
20. The Tribunal notes that a range of powers are available to ASIC in the exercise of its regulatory functions ranging from accepting written undertakings (s 93AA(1) Australian Securities and Investments Commission Act 2001), imposing or varying conditions on a licence (s 786(1) and (2)), suspending (s 827) or revoking (s 826) a licence or making a banning order (ss 828 - 830). ASIC must determine which powers it should exercise in order to achieve an appropriate outcome.
21. More specifically, in relation to revocation and banning orders, in addition to the overriding principle that the powers are of a protective/preventive nature, such orders can be made even though no dishonesty is involved (Re Foster and ASIC (1999) 57 ALD 779 at 790; Re Campbell and ASIC (2001) 37 ACSR 238 at 324). However, it is also clear that banning orders should only be made in the most serious cases. In Donald v ASIC (2000) 35 ACSR 383, Heerey J said at para 28:
It should only be in an “extreme case” that a banning order should be made. There must be a finding that the contravener would repeat the conduct unless a banning order was made.
22. The Applicants cited a number of decisions where the Tribunal heard matters involving banning orders. In Kippe and ASC (1997) 16 ACLC 190, Deputy President Forgie, affirming a three year banning order, found that Mr Kippe had
at best a very vague and imprecise knowledge of the legislative provisions applicable to his acting as a dealers representative. At worst, he has had no knowledge at all on specific aspects at the relevant times… he has made no effort to ascertain the standards by which he is expected to operate. [para 209]
Mr Kippe had also operated an account in false names on two occasions. The breaches by Mr Kippe were not isolated or minor breaches but
breaches which indicate a continuing disregard for the standards expected of a dealers representative. [para 223]
F. THE EXPERT WITNESSES
23. The following expert witnesses gave evidence in these proceedings:
Don Wiggins
24. Mr Wiggins, who gave evidence for the Applicant, has been a self-employed “compliance consultant” since September 1999. Between February 1958 and March 1997, he was employed by the Lend Lease Group (including MLC) - from 1985 in senior managerial positions in respect of investment advisory services. At the time he left the company in March 1997, he was General Manager Operations and Company Secretary of Lend Lease Adviser Services and Lend Lease Financial Planning. From 4 September 1997 to August 1999, Mr Wiggins was employed by Perpetual Trustees as National Manager Operations and Compliance (Private Client Division) and Company Secretary (Perpetual Service Network). Mr Wiggins is a member of the Australian Compliance Institute, a body whose objectives include developing compliance training and providing a forum for the discussion of compliance issues among professionals. Mr Wiggins is a certified practicing accountant and chartered secretary and holds a Diploma of Financial Planning.
25. Mr Wiggins was first approached by Mr Braysich to prepare a report in late April/early May 2001 when he was given verbal instructions on the issues he should address. He had not previously met Mr Braysich. Initially, Mr Wiggins was provided with 13 files to review. Subsequently, a further 29 files were reviewed, randomly selected by Mr Wiggins from 70 files provided by SBFP in July 2001 which, in turn, had been randomly selected on the instructions of Judge Downes, the Chair of the Saxby Bridge Compliance Executive Management Committee (SB 3A p51). On 23 July 2001, Mr Wiggins received formal instructions on conducting the review. He completed his Compliance Report for SBFP (SB 12 p1) in August/September 2001. By letter dated 5 September 2001 (SB 12 p17), he clarified a comment in his report at the request of Mr Braysich. He subsequently gave evidence at the ASIC hearing in September 2002. On 15 November 2002, he completed a further report on this matter (A5).
Max Weston
26. Mr Weston, who gave evidence for the Respondent, is now manager of Ord Minnett Financial Planning. He had previously been the Principal of the Max Weston Consultancy since July 2000. Between May 1989 and July 2000, he was National Chairman, St George Wealth Management Pty Ltd (formerly KPMG Financial Services Pty Ltd). He has extensive experience in the securities and financial advisory industry including 14 years in stockbroking and eight years as executive director of an investment and financial advisory company. He recently served as a panel assessor for a survey conducted by the Australian Consumers Association (ACA) and the Respondent of financial planners in 2002. Mr Weston has a Certificate in Financial Markets (1961), is a Fellow of the Securities Institute of Australia (1968) and of the Australian Institute of Company Directors (1991), and is a Senior Associate of the Financial Planning Association (1992). He is a Practitioner Member (Stockbroking) of the Securities and Derivatives Association (2002) and has Financial Services Reform Act PS 146 Compliance (Stockbroking and Financial Planning) Certification (2002) (R7).
27. Mr Weston received instructions from the Respondent by engagement letters dated 31 January 2001 and 2 March 2001. He was asked to report, in particular, on whether SBFP and ABS Securities complied with s 849 and s 851 of the Act and the conditions of their respective licenses.
Bill Dee
28. Mr Dee, the Principal of Compliance Solutions, has a broad experience in dispute management, especially in complaints handling and compliance over many years. He has Bachelor of Laws and Bachelor of Arts degrees; he worked for the Australian Competition and Consumer Commission and Trade Practices Commission for 20 years, and has extensive experience in the drafting and implementation of standards of complaints handling and compliance. The Respondent engaged Mr Dee to conduct a review and report on whether SBFP and ABS Securities had complied with the requirements of the Corporations Act and Regulations in relation to the training and supervision of representatives and their internal complaints resolution procedures, identifying any relevant breaches of the Act and Regulations. Mr Dee prepared a report dated 23 March 2001 (R11). At the hearing, Mr Dee agreed that in addition to the terms of reference cited in his report, he had also been asked to review the files supplied to him – but this was for the purpose of addressing the written terms of reference.
Rashmi Mehrotra
29. Ms Mehrotra is an Associate Director of van Eyk Research Ltd and was the author of a report commissioned by the Respondent titled “Review of the Symetry Investment Fund”, dated March 2001 (ASIC 5 p1710). Van Eyk was asked to comment on the performance of Symetry compared to “industry benchmarks”. Ms Mehrotra interpreted “benchmarks” as meaning industry peers.
Harry Sookias
30. Mr Sookias is a director of van Eyk Capital, an independent research firm specialising in the agribusiness sector. In April 2001, van Eyk completed three reports for the Respondent on the following MBIs: (1) Diamond Ridge Wine Grape Project 1998 (“Diamond Ridge”) (ASIC 5 p1651); (2) Preston Vale Wine Grape Project 1991 (“Preston Vale”) (ASIC 5 p1672); and (3) Australian Eucalypt Project 1999 (“APT”) (ASIC 5 p1693). These reports were prepared by Mr Sookias, who was then a senior research analyst with van Eyk, and his colleague, Mr Marshall.
G. SBFP AND ABS SECURITIES
31. The following evidence is relevant to the structure and organisation of the SBFP and ABS Securities businesses.
Jeffrey Braysich
32. Mr Braysich provided a sworn affidavit dated 30 August 2002 (A1). He said that although he did not hold the formal title of Managing Director of the Saxby Bridge group of companies, essentially this was the nature of his position – he was the key director. Until 1999, he managed the business in conjunction with the Executive Management Committee. Then it became necessary to establish a number of Executive Management Committees to manage different parts of the group’s business.
33. Mr Braysich said both SBFP and ABS Securities relied on the resources of the Saxby Bridge group. Of the 250 staff employed in the Saxby Bridge group in early 2001, about 40 staff were employed in SBFP of whom more than 15 were property authority holders. ABS Securities was run by the same support staff as SBFP with approximately 15 proper authority holders.
34. On 29 June 2000, Stephen Albrecht, an officer with the Respondent, phoned Mr Braysich and, soon after, the Respondent commenced surveillance of the group’s business. A couple of months later, this was leaked to the press. Early in 2001, Saxby Bridge began to receive adverse publicity – Investor Adviser magazine wrote an article about the group and then an article appeared in the Australian Financial Review about March/April/May 2001. Such adverse publicity worried some of the investment advisers who began leaving. Mr Braysich was approached by a Western Australian business with a view to purchasing the SBFP business but, ultimately, this came to nothing. Eventually, on 2 July 2001, agreement was reached for the purchase of SBFP’s business by a Melbourne based company, Adams Securities Pty Ltd, for a mixture of cash and equity, and most of SBFP’s personnel transferred to Adams Securities from that date.
35. On 8 August 2001, the remainder of Saxby Bridge’s financial advisory businesses were sold to a subsidiary of Adams Securities Pty Ltd called ParkesSec Pty Ltd, for a small amount of cash and royalties. However, a few of ABS Securities financial advisers stayed with Saxby Bridge until the revocation of ABS Securities’ dealers licence in October 2001. Mr Braysich acknowledged that he did not disclose the sale of the business at the hearing before a delegate of the Respondent in July - September 2001. He contended that the two companies were retained by Saxby Bridge and remained operational.
36. Mr Braysich said that SBFP would need to start again if the cancellation of its dealers licence is set aside. However, there are no contractual restraints on its doing so other than a five year period from 8 August 2001 in respect of the clients for whom payment was received. In order to restart the business, he would need to get SBFP’s documents out of storage but, otherwise, he has the necessary infrastructure in place, including premises, computer systems etc. Mr Braysich estimated that he could reopen the doors of the business within a few weeks. If he is able to do so, he would like to run a smaller business with more hands on control.
37. Mr Braysich said one of the other arms of the Saxby Bridge business, Boulder Enterprises Pty Ltd, which dealt in property, was sold to existing shareholders of Saxby Bridge Pty Ltd in about March 2001 but with 25% of the shares being purchased by Mr A Stoicos. In late 1999/early 2000, Boulder Enterprises had subscribed for between 16% - 20% of the shares in Quaestus Pty Ltd. SBFP paid Quaestus for its research services in undertaking “due diligence” on proposed investment projects by paying it part of its marketing allowance. Mr Braysich was a director of Quaestus for the first six weeks after incorporation but then resigned. After Quaestus obtained a dealers licence, Quaestus itself would often negotiate with the managers of a proposed project and then offer SBFP or ABS Securities a share of its fee when selling the product. SBFP or ABS Securities generally disclosed the full Quaestus commission even though Saxby Bridge’s interest in Quaestus was only in relation to about 16% of Quaestus’ shares (A1 para 10.16.20). Boulder Enterprises has subsequently changed its name to Blueprint Consolidated.
38. Mr Braysich said that Saxby Bridge Pty Ltd was placed in administration on 29 May 2002 following a demand from the Australian Taxation Office for $2.3m in unpaid monthly group tax. On 18 November 2002, Saxby Bridge Pty Ltd entered into a Deed of Company Arrangement and is forecasting payment of all its creditors in full by about November 2003. He noted that Boulder Consolidated Pty Ltd and, in particular, Boulder Securities Pty Ltd have both assets and cash flow.
39. Mr Braysich acknowledged that ABS Securities’ proper authority holders needed greater supervision because they ran their own businesses from geographically diverse locations external to Saxby Bridge’s four offices. By June 2001, Saxby Bridge had decided to wind down ABS Securities because of concerns over the adequacy of supervision and training and the difficulty of ensuring compliance. For example, not all the ABS Securities advisers used the Investment Data Technologies (IDT) software and Saxby Bridge’s standard documentation. Saxby Bridge planned to reduce the number of proper authority holders from about 12 to six. Mr Braysich acknowledged that he had concerns about several ABS Securities proper authority holders which were addressed (for example, Dennis Cardakaris (ASIC 10B pp3522, 3525)).
40. ABS Securities’ proper authority holders were provided with the same support and facilities as SBFP’s proper authority holders, for example in relation to compliance, research, technical support, and training, but because they ran their own businesses, with attendant costs, they were typically paid between 80% - 90% of the gross prime commission received by ABS Securities.
Phil Dally
41. Mr Dally said he has been employed in the financial services sector since 1986 when, while working as Branch Manager of the State Building Society in Orange, he was selected to undertake a financial planning course. In October 1988, he moved to the ANZ Bank as a financial planner where he later became District Manager for Financial Planning. In March 1998, he was recruited by Saxby Bridge as their Technical Services Manager and, in July 1999, was appointed General Manager of the Financial Planning Division. He recalled a conversation with Mr Braysich at the time he was first appointed General Manager, when Mr Braysich asked him to oversee the "conservatising” of Saxby Bridge to ensure that all financial advice given was appropriate, to upgrade the skills of its representatives, and to establish Saxby Bridge as a high quality financial services provider. Mr Braysich did not identify particular problems in their discussion.
42. With the sale of SBFP’s business to Adams Securities Pty Ltd in July 2001, Mr Dally moved to work for Adams Securities but left in December 2001. One of the reasons for his leaving was the way their business was conducted and his concern that, as a result, his standards and ethics would be compromised. In January 2002, he commenced his present position as Business Practice Manager with AMP Financial Planning. His duties include sitting on their Compliance Review Committee. Mr Dally is not a shareholder in the Saxby Bridge group.
43. Mr Dally said that as Technical Services Manager for Saxby Bridge he was responsible for training the proper authority holders and ran about 70% of the in-house training programs. He also acted as a senior planning adviser in more technical matters including, for example, in superannuation. As General Manager, Mr Dally had a broader role including compliance, auditing and planning. He established the paraplanning section of SBFP to facilitate the preparation of Recommendation Reports by financial planners, and the hotline providing more complex advice for planners. He was also responsible for operational and technical support and for purchasing external research. He said he was at all times adequately resourced for performing his role and, in late 2000/early 2001, perhaps over-resourced given the amount of business generated at the time.
44. SBFP moved to greater reliance on external research after Ian Pearson left their employment. At the time Mr Dally joined Saxby Bridge, it had just begun purchasing external research from van Eyk. However, this was expensive and not always appropriate. Van Eyk did not research “boutique” investment houses. About 12 months after Ian Pearson left Saxby Bridge, it therefore began using Investorweb which could be accessed remotely from Saxby Bridge’s interstate offices. Mr Dally said Saxby Bridge was adequately resourced for purchasing research.
45. Mr Dally said that the level of remuneration for ANZ financial advisers depended on what threshold of business written they achieved. Advisers had to achieve a certain target within a period and, if they failed to do so, they could be terminated. At AMP, remuneration is based on two components: first, the experience, qualifications and characteristics of the particular office in which the adviser works; second, on income generated. At Saxby Bridge, remuneration was based on qualifications and income generated. However, Mr Dally acknowledged that when he first joined Saxby Bridge, remuneration was based on commission only. As at July 2001, four senior financial planners – one placed in each office to provide additional support to the advisers – were salaried. The other advisers were still remunerated on a commission only basis (Transcript 28 November 2002 p55).
Ian Pearson
46. Mr Pearson said he graduated with a Bachelor of Commerce (Economics and Finance), is a Certified Financial Planner and an Associate of the Securities Institute of Australia. He has been employed in a variety of positions in the finance and securities industry since 1985 and joined the Saxby Bridge group of companies in September 1996. He left Saxby Bridge to join Quaestus Securities Pty Ltd in January 2000. During the period he worked for Saxby Bridge, the business underwent significant growth, particularly through 1996 and 1997. It was an evolving business, in the younger sector of the client market.
47. Mr Pearson holds 1% - 11/2% of Saxby Bridge Pty Ltd’s shares which, currently, have no real value. In the current proceedings, he was paid a small amount for reviewing the evidence in preparation for the hearing, but was not paid for giving evidence. He feels strongly about the allegations made by the Respondent involving him.
48. Mr Pearson acknowledged that his wife invested $60,000 in the Towerside Debentures (associated with the Preston Vale project) and their superannuation fund invested $40,000 (Transcript 27 November 2002 p72). As at today, $1,200 is still owing to their superannuation fund. The original capital plus some interest was returned in April 2001. The $60,000 invested by his wife was transferred for equity in Saxby Bridge about September/December 2000.
Don Wiggins
49. Mr Wiggins said he has no real issue with financial advisers being paid by commission. The majority of advisers operate on this basis.
Max Weston
50. Mr Weston was asked about financial advisers being paid by commission. He said it is not fair to say that he is opposed to their being paid by commission. However, payment by commission is less than desirable for an industry trying to establish its professional status. It would be preferable if remuneration was by way of fee for service. He said at least 50% of advisers receive some form of fee income. He estimated that 10% - 20% are remunerated solely from fee income while 70% - 80% receive a combination of fee income and commission. In his opinion, an adviser remunerated by commission is not perceived as being as professional as one remunerated by fees.
H. SECTION 849 COMPLIANCE (DISCLOSURE)
(a) Relevant Law and Policy
51. Subsection 849(1) states that the section applies where a securities adviser makes a securities recommendation to a client who may reasonably be expected to rely on it. Subsections 849(2)(c) and (d) require the securities adviser to disclose particulars of:
(c)any commission or fee, or any other benefit or advantage, whether pecuniary or not and whether direct or indirect, that the securities adviser or an associate has received, or will or may receive, in connection with the making of the recommendation or a dealing by the client in securities as a result of the recommendation; and
(d)any other pecuniary or other interest, whether direct or indirect, of the securities adviser or an associate, that may reasonably be expected to be capable of influencing the securities adviser in making the recommendation.
52. ASIC Policy Statement PS 122.44 notes that the subsection 849(2) obligation requires a securities adviser to disclose both actual and potential material conflicts of interest when making securities recommendations. This assists investors making well-informed investment decisions and “minimises the opportunity for advisers to place their self-interest ahead of the interests of the client”. While subparagraph (d) only requires other interests to be disclosed where they “may reasonably be expected to be capable of influencing the securities adviser in making the recommendation”, ASIC recognises in PS 122.49 that materiality is also relevant in relation to benefits falling under subparagraph (c): some benefits “may be so insignificant” that they would not reasonably be capable of influencing the securities adviser in making a recommendation. It is a question of fact for the adviser to assess in each case.
53. The Tribunal notes that the obligations under s 849(2) also apply in respect of benefits received or other interests of “an associate” of the securities adviser. Section 15(1) of the Act defined a reference to “associate” as including:
(a)a person in concert with whom the primary person is acting, or proposes to act; and…
(b)a person with whom the primary person is, or proposes to become, associated, whether formally or informally, in any other way;…
54. In Bank of Western Australia v Ocean Trawlers Pty Ltd (1995) 16 ACSR 501, Owen J stated (at 524) that “‘Acting in concert’ involves at least an understanding between the parties as to a common purpose or object”. At 459, Owen J recognises that “something more than the mere entry into a transaction is involved”. In the Tribunal’s view, the context in which the phrase is used in s 849 of the Act suggests some element of continuity in the relationship between the primary person and the associate.
55. ASIC provides examples in PS 122.70:
Some of the more obvious associates whose benefits, advantages and interests must be disclosed under s 849 include:
(a) if the securities adviser is a body corporate:
(i) any directors and secretaries of the securities adviser;
(ii) any related body corporate of the adviser;
(iii) the directors and secretaries of a related body corporate (s 11);
(b)the securities adviser’s partners in a firm carrying on a securities business (s 13(a));
(c)the trustee of a trust in relation to which the securities adviser benefits or is capable of benefiting other than by reason of transactions entered into in the ordinary course of business in connection with the lending of money (s 13(c));
(d)when a securities adviser acts as a representative of another person when making a recommendation, that other person (s 84(4));
(e)any other person who acts jointly, or otherwise acts together, or under an arrangement, with a securities adviser in relation to making securities recommendations.
56. As to the level of detail required for disclosure of the “particulars” of such a benefit or interest, PS 122.78 states that the disclosure should be “in a manner that is clear and easy to understand for the client”. PS 122.79 states “if the client is unlikely to be familiar with the concept of percentages, it is advisable to disclose information in dollar terms”.. PS 122.83 states that if a securities adviser makes a written securities recommendation, the disclosure must be made in the same document.
(b) The Respondent’s Contentions
57. The Respondent contends that the evidence discloses a serious failure on the part of SBFP and ABS Securities to meet the disclosure obligations imposed on them by s 849. Their failures were numerous and ranged from relatively minor to very substantial breaches, involving both contraventions of s 849(2)(c) – failure to disclose benefits, and s 849(2)(d) – failure to disclose other interests. The Respondent identified four classes of contravention of s 849(2)(c) - in relation to:
(a)marketing allowances,
(b)quantitatively inaccurate disclosures,
(c)non-disclosure of benefits to associates, and
(d)the Compliance Consultancy Deed in respect of the Preston Vale Vineyards project.
58. The Respondent identified four classes of contravention of s 849(2)(d) - in relation to:
(a)benefits dependent upon the volume of sales,
(b)obligations to promote,
(c)relationships with product promoters, and
(d)underwriting agreements.
59. In its submissions, the Respondent prepared a Table of Non-Disclosures/Inadequate Disclosures. The Tribunal has sought to address this below. Before doing so, however, the use of the description “marketing allowance” requires comment and whether disclosure of a dollar amount rather than a percentage figure breached s 849. The Respondent contends that the marketing allowances disclosed by SBFP and ABS Securities were benefits which did not relate solely or substantially to marketing.
60. In evidence (Transcript 25 November 2002 pp29 - 31), Mr Braysich said marketing allowances covered various costs associated with the promotion and marketing of the product. He agreed that some associated costs, for example infrastructure costs, were only fairly loosely connected with marketing. An element of profit was also included although the size or proportion of the element that this represented was never specifically quantified.
61. When asked about the use of the description “marketing allowance”, Mr Wiggins said in making a disclosure one should convey to the client, as far as is practicable, what the allowance covers. He agreed that the cardinal principles are accuracy and clarity (Transcript 29 November 2002 p10).
62. In relation to whether a percentage figure or dollar amount should be stated, Mr Wiggins said the Financial Planning Association (FPA) rule requires as a minimum the disclosure of a percentage figure, and a dollar figure where practicable (Transcript 29 November 2002 p15). The FPA Practice Guideline No 3 (dated 1 July 2000 – A9) state at para 4.30:
The disclosure of particulars must be expressed as a minimum in percentage terms and included in the recommendation prepared by the member. Particulars should be exposed in dollar terms where practicable. The onus of proof is on the member to demonstrate why it was impracticable to determine a dollar amount if called upon to do so.
The Tribunal notes that at the time this Guideline was published, ASIC’s surveillance of the Applicants had already commenced.
63. However, ASIC PS 122 Investment Advisory Services: the conduct of business rules (s 849 and s 851), issued 31 March 1997, states relevantly:
[PS 122.78] The adviser should disclose material benefits, advantages and interests in a manner that is clear and easy to understand for the client. The securities adviser must take into account the level of sophistication of the client when deciding on an appropriate level of detail and a suitable format.
[PS 122.79] For example, if the client is unlikely to be familiar with the concept of percentages, it is advisable to disclose information in dollar terms. The following types of information may not meet the disclosure requirements under s.849 and will also amount to a failure to conduct business efficiently and fairly under the licence:
(a)giving a complex formula or process for calculating commissions or fees to a less sophisticated client; or
(b)overwhelming a client with unnecessary detail which detracts from the key information.
64. Where the costs intended to be covered by a marketing allowance are reasonably closely related to marketing, even if indirectly, the Tribunal considers that there is no contravention of the s 849 disclosure requirements. As to whether disclosure of an allowance in percentage terms rather than a dollar amount is acceptable, the Tribunal notes that the majority of the client file documents examined by the experts relate to the period before 1 July 2000 when the FPA Practice Guideline No 3 was published. In any event, a disclosure in percentage terms meets the minimum requirement of the FPA and PS 122.78. In the Tribunal’s view, a disclosure in percentage terms does not, in this case, constitute a breach of s 849 unless the client is unlikely to be familiar with the concept of percentages.
(c) Table of Investment Products
65. The investment products recommended by SBFP and ABS Securities were the subject of oral and/or written evidence. This was extremely complex and involved an examination of many volumes of material. The evidence discussed below has, therefore, necessarily been selective and its treatment in less depth because of the practicalities of decision-writing and the need to be accessible to the reader. Part I comprises the 16 Managed Business Investments (MBIs) which were the subject of examination by ASIC; Part II comprises the two Master Trusts examined by ASIC. Tables are used to assist in the presentation of the material in as concise a form as possible.
66. With a MBI, the investor enters into a management agreement for their interest in the enterprise to be managed on their behalf. From 1998, an investor might have both a defined interest in the enterprise and also an equity interest in the land used by the enterprise or in the enterprise management company, with the equity interest being “stapled” to the defined interest.
67. A Master Trust is an administrative platform facilitating investments in a range of different products through a single entity. For example, a client investing $100,000 in a Master Trust will also select a number of different products offered by the Trust across which the $100,000 invested will be distributed. A Master Trust is beneficial to a client because it offers investors the opportunity to receive a single statement showing their overall asset position.
PART A – MBIs
68. Most of the MBIs marketed by Saxby Bridge were in agribusinesses. The exceptions in the list of MBIs which were the subject of oral and/or written evidence in these proceedings are No Regrets I and No Regrets II which involved clients investing in the No Regrets Virtual Store e-commerce business. Each of the 16 MBIs is considered in the Table below.
TABLE OF MBIs
1. Budplan No 3
Date of Prospectus: 30 October 1996
Description of investment: An investment in an enterprise involved in the research, development and potential commercialisation of new products derived from celery seed oil, including anti-inflammatory products for the treatment of arthritis.
Due diligence/research conducted by SBFP:
Undertaken by Ian Pearson consisting of:
· reviewing the prospectus;
· reviewing the due diligence checklist undertaken by Sue Price on behalf of Monpro in 1996;
· investigations into the taxation position of the project;
· consultations with the ATO;
· investigating other projects being offered in the market place at the same time.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997 (ASIC 1A Tab 26).
Actual commissions/allowances in Marketing Agreement:
Base commission (appears to be referred to by the parties as a Volume Bonus)
Units Commission
250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit)
Co-ordination allowance
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to clients of commissions/allowances/brokerage:
Client - Wayne Haynes (ASIC 1A Tab 31) Adviser - W Chin
Amount invested - $25,000 Date of Acknowledgment by client – 27 April 1997
· brokerage - $1,000 with the Authorised Representative receiving a share of $675.
· establishment fees - $916.25 comprising
- business application fee $200
- loan application fee $300
- first monthly payment $416.25
Other interests disclosed to client: Nil
Omitted from disclosure to client:
· The marketing agreement obliges SBFP and ABS Securities “to promote, market and sell” the product, and “comply with all reasonable and lawful directions” of Monpro. However, Saxby Bridge notes that its sales of this product pre-date the agreement, and in any event the obligation is qualified by another provision in the Agreement that requires the Sub-Agent to “comply with all laws and regulations from time to time in force that applied to the promotion and marketing” (ASIC 1A p311).
· The Respondent contends that a volume override bonus may be payable to the adviser in respect of sales of the product. The Applicants deny this.
Other relevant evidence:
· Client acknowledged by signing the Recommendation Form that the “investment … is very speculative by nature” (ASIC 1A Tab 31).
Tribunal’s Findings:
· The Tribunal is not satisfied on the evidence of any non-disclosure constituting a breach of s 849;
· The evidence does not lead the Tribunal to conclude that Monpro Ltd is an “associate” of SBFP and ABS Securities.
2. Native Foods – Lemon Myrtle No 1
Date of Prospectus: 5 February 1997
Description of investment: An investment in the primary production of lemon essence from the native Lemon Myrtle leaf, which is used primarily as flavouring for cooking.
Due diligence/research conducted by SBFP:
Undertaken by Ian Pearson consisting of:
· conducting site visits and meetings with the Directors and Managers of Australian Native Foods;
· reviewing the prospectus in conjunction with the due diligence checklist undertaken by Sue Price on behalf of Monpro in 1996;
· consultations with the ATO;
· investigating other projects being offered in the market place at the same time.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997 (ASIC 1A Tab 26)
Actual commissions/allowances in Marketing Agreement:
Base commission (appears to be referred to by the parties as a Volume Bonus) Units Commission
250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit)
Co-ordination allowance
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to clients of commissions/allowances/brokerage:
Client - Mark Bell (ASIC 1A Tab 35) Adviser – D Steer
Amounted invested - $25,000 Date of Acknowledgment by client – 13 June 1997
· brokerage - $1,100 with the Authorised Representative to receive 60%. Initial brokerage on loan appears to be $1,200 but this is not clear.
· establishment fees – not disclosed on Client Authority and Acknowledgment Form – query whether this is all the relevant documentation.
Other interests disclosed to client: Nil
Omitted from disclosure to client:
· It is not clear whether all the relevant papers are in evidence.
· The marketing agreement obliges SBFP and ABS Securities “to promote, market and sell” the product, and “comply with all reasonable and lawful directions” of Monpro. However, Saxby Bridge notes that its sales of this product pre-date the agreement, and in any event the obligation is qualified by another provision in the Agreement that requires the Sub-Agent to “comply with all laws and regulations from time to time in force that applied to the promotion and marketing” (ASIC 1A p311).
· The Respondent contends that a volume override bonus may be payable to the adviser in respect of sales of the product. The Applicants deny this.
Other relevant evidence:
· Client acknowledged by signing the Recommendation Form that the investment is “speculative in nature”.
Tribunal’s Findings:
· The evidence does not lead the Tribunal to conclude that Monpro Ltd is an “associate” of SBFP and ABS Securities;
· The Tribunal is not satisfied on the evidence of any non-disclosure.
3. Budplan “A” Series No 1
Date of Prospectus: 27 February 1997
Description of Investment: Investment in research and development on the growing, sale and licensing of the intellectual property of specified table grapes for the export market, including research into pest and disease resistance and fruit size.
Due diligence/research conducted by SBFP:
Undertaken by Ian Pearson consisting of:
· reviewing the prospectus;
· examining the due diligence checklist undertaken by Sue Price on behalf of Monpro in 1996;
· examination of the commercial viability and marketing plans;
· investigations into the taxation position of the project;
· consultations with the ATO;
· investigating other projects being offered in the market place at the same time.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997
Actual commissions/allowances in Marketing Agreement:
Base Commission (appears to be referred to by the parties as a Volume Bonus) Units Commission
250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit)
Co-ordination allowance
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to clients of commissions/allowances/brokerage:
Client - Branislav Bodulic (ASIC 1A Tab 34) Adviser - S El Shammaa
Amount invested - $25,000 Date of Acknowledgment by client – 27 June 1997
· brokerage - $1,000 with the Authorised Representative receiving a share of up to 60% per unit.
· establishment fees - $3,500 comprising
- business establishment fee $200
-loan establishment fee $300
-first year’s interest $3,000
Other interests disclosed to clients:
· “Commission will be ‘clawed back’ where any payment due is not made by the Participant or where there is a default in the first 12 months of the project.”
Omitted from disclosure to client:
· The marketing agreement obliges SBFP and ABS Securities “to promote, market and sell” the product, and “comply with all reasonable and lawful directions” of Monpro. However, Saxby Bridge notes that its sales of this product pre-date the agreement, and in any event the obligation is qualified by another provision in the Agreement that requires the Sub-Agent to “comply with all laws and regulations from time to time in force that applied to the promotion and marketing” (ASIC 1A p311).
· The Respondent contends that a volume override bonus may be payable to the adviser in respect of sales of the product. The Applicants deny this.
Other relevant evidence:
· Client acknowledged by signing the Recommendation Form that the investment is “speculative by nature”.
Tribunal’s Findings:
· The evidence does not lead the Tribunal to conclude that Monpro Ltd is an “associate” of SBFP and ABS Securities;
· The Tribunal is not satisfied on the evidence of any non-disclosure.
4. Budplan No 4
Date of Prospectus: 16 April 1997
Description of investment: Investment in the development production and sale of diagnostic kits for the purpose of measuring general bio-energy levels in humans and the prescription of Coenzyme Q10 products, and the licensing of technology and intellectual property in relation to same.
Due Diligence/Research conducted by SBFP:
Undertaken by Ian Pearson, consisting of:
· examining the material provided on the research into Coenzyme Q10, being a compound found within cells which is necessary for the production of energy within the cell – this is important in cloning because of the necessity to keep cells re-energised;
· attending presentations by Professor Lenay who was in control of the research for the project;
· examining the due diligence checklist carried out by Philip McDonald on behalf of Monpro Ltd in May 1997;
· examination of the commercial viability and marketing plans.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997 (ASIC 1A Tab 26)
Actual commissions/allowances in Marketing Agreement:
Base Commission (appears to be referred to by the parties as a Volume Bonus)
Units Commission
250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit)
Co-ordination allowance
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to clients of commissions/allowances/brokerage:
Client - Mike Frogbrook (ASIC 1A Tab 32) Adviser – D Steer
Amounted invested - $62,500 Date of Acknowledgment by client – 26 May 1997
· brokerage – appears to be $1,000 per unit of $25,000 with the Authorised Representative receiving a share of up to 67.5% per unit. Unclear as to amount for $62,500 investment.
· establishment fees - $916.25 per $25,000 unit comprising:
- business establishment fee $200
- loan application fee $300
- first monthly payment $416.25
Other interests disclosed to client: Nil
Omitted from disclosure:
· The marketing agreement obliges SBFP and ABS Securities “to promote, market and sell” the product, and “comply with all reasonable and lawful directions” of Monpro. However, Saxby Bridge notes that its sales of this product pre-date the agreement, and in any event the obligation is qualified by another provision in the Agreement that requires the Sub-Agent to “comply with all laws and regulations from time to time in force that applied to the promotion and marketing” (ASIC 1A p311).
· The Respondent contends that a volume override bonus may be payable to the adviser in respect of sales of the product. The Applicants deny this.
· Commission in dollars not clearly evident to the Tribunal.
Other relevant evidence:
· Client acknowledged by signing the Recommendation Form that investment was “speculative by nature”.
Tribunal’s Findings:
· The Tribunal finds that the disclosure of brokerage was unclear;
· The evidence does not lead the Tribunal to conclude that Monpro Ltd is an “associate” of SBFP and ABS Securities.
5. Budplan No 5
Date of Prospectus: 16 June 1997
Description of investment: Investment in research and development on the production and sale of cultivars and genetically improved cultivars and rootstock of selected wine varieties, including cloning existing varieties of wines for example Chardonnay, or such varieties as the manager determines for cloning.
Due diligence/research conducted by SBFP:
Undertaken by Ian Pearson, consisting of:
· examining the material provided on the research into Coenzyme Q10, being a compound found within cells which is necessary for the production of energy within the cell – this is important in cloning because of the necessity to keep cells re-energised;
· attending presentations by Professor Lenay who was in control of the research for the project;
· examining the due diligence checklist carried out by Philip McDonald on behalf of Monpro Ltd in May 1997;
· examination of the commercial viability and marketing plans.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997 (ASIC 1A Tab 26)
Actual commissions/allowances in Marketing Agreement:
Base Commission (appears to be referred to by the parties as a Volume Bonus)
Units Commission
250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit)
Co-ordination allowance
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to clients of commissions/allowances/brokerage:
Client - Jason King (ASIC 1A Tab 33) Adviser – S El Shammaa
Amount invested - $37,500 (1.5 units of $25,000)
Date of Acknowledgment by client – 1 July 1997
· brokerage - $1,500 with the Authorised Representative receiving a share of up to 60% per unit.
· establishment fees - $1,224 equivalent to 1.5 x $916.25 comprising:
- business establishment fee $200
- loan application fee $300
- first monthly payment $416.25 (ASIC 1A p365)
Other interests disclosed to client: Nil
Omitted from disclosure to client:
· The marketing agreement obliges SBFP and ABS Securities “to promote, market and sell” the product, and “comply with all reasonable and lawful directions” of Monpro. However, Saxby Bridge notes that its sales of this product pre-date the agreement, and in any event the obligation is qualified by another provision in the Agreement that requires the Sub-Agent to “comply with all laws and regulations from time to time in force that applied to the promotion and marketing” (ASIC 1A p311).
· The Respondent contends that a volume override bonus may be payable to the adviser in respect of sales of the product. The Applicants deny this.
Other relevant evidence:
· Client acknowledged by signing the Recommendation Form that the investment was “speculative by nature”.
Tribunal’s Findings:
· The evidence does not lead theTribunal to conclude that Monpro Ltd is an “associate” of SBFP and ABS Securities.
6. Central Highlands Wine Grape Project No 4
Date of Prospectuses: 24 September 1997, 4 November 1997 (Supplementary Prospectus)
Description of investment: An investment in the growing and harvesting of grapes and their processing into wine.
Due diligence /research conducted by SBFP:
Undertaken by Ian Pearson consisting of:
· examining the Due Diligence checklist prepared by Monpro dated November 1997;
· analysing the budget for the project;
· conducting site inspections and discussions with the Project Managers and Chief Executive Officer;
· analysing the draft tax ruling provided on the project;
· examination of the commercial viability and marketing plans.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997 (ASIC 1A Tab 26)
Actual commissions/allowances in Marketing Agreement:
Base Commission (appears to be referred to by the parties as a Volume Bonus)
Units Commission250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit)
Co-ordination allowance
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to clients of commissions/allowances/brokerage:
Client - Mark Bell (ASIC 1A Tab 36) Adviser - D Steer
Amount invested - $56,100 Date of Acknowledgment by client – 17 December 1997
· initial commission – 3.9% ie $2,200
· establishment fees - $6,600 comprising:
- rootstock 600 vines $600
- year 1 interest $6000
· Saxby Morgan may also receive a marketing allowance of up to a further 1.75% of the investment amount.
Other interests disclosed to client:
· Saxby Morgan retains 40% of the total commissions received. The balance is paid to the adviser as gross income to his financial planning practice.
· “The above commissions are the maximum levels payable to Saxby Morgan. Please note that these are not an additional fee to you as the investor, but are paid by the Project Manager.”
Omitted from disclosure to client:
· The marketing agreement obliges SBFP and ABS Securities “to promote, market and sell” the product, and “comply with all reasonable and lawful directions” of Monpro. However, Saxby Bridge notes that its sales of this product pre-date the agreement, and in any event the obligation is qualified by another provision in the Agreement that requires the Sub-Agent to “comply with all laws and regulations from time to time in force that applied to the promotion and marketing” (ASIC 1A p311).
· The Respondent contends that a volume override bonus may be payable to the adviser in respect of sales of the product. The Applicants deny this.
· Marketing allowance not disclosed in dollars, but the Applicants contend it was not practicable to do so.
Other relevant evidence:
Tribunal’s Findings:
· The evidence does not lead the Tribunal to conclude that Monpro Ltd is an “associate” of SBFP and ABS Securities;
· The Tribunal is not satisfied on the evidence of any non-disclosure.
7. Tentas Project
Date of Prospectus: 12 March 1998
Description of Investment: An investment in Telemedical Network and Systems Limited, a company involved in the provision of health care services using information technology. In particular, it involved the commercialisation of medical imaging and hospital and health Internet delivery systems.
Due Diligence/Research conducted by SBFP:
Undertaken by Ian Pearson consisting of:
· examining the Due Diligence folders that had been prepared by MJH Nightingale & Co on the project;
· examining the draft tax ruling and legal advice obtained in support of the tax ruling.
Date of Distribution Agreement between ABS Securities Pty Ltd and MJH Nightingale & Co Ltd: undated but appears to be May 1998 (ASIC 1A Tab 38).
Actual commissions/allowances/brokerage in Distribution Agreement:
ABS Securities’ remuneration as a distributor:
(a)A Marketing allowance calculated at 3% of amounts raised under the TENTAS prospectus, payable as to 50% within 60 – 90 days and the remaining 50% within 30 days of the first anniversary of the notification in writing.
(b)A Brokerage calculated at 4% of amounts raised under the TENTAS prospectus, payable as to 50% within 60 – 90 days and the remaining 50% within 30 days of the first anniversary of the notification in writing.
Disclosure to clients of commissions/allowances/brokerage:
Client - Yvonne Falzon (ASIC 1A Tab 39) Adviser - D Steer
Amount invested - $78,000 Date of Acknowledgment by client – 29 April 1998
· initial commission – 4% ie $3,120
· initial application fees – $5,880
· Saxby Morgan may also receive a marketing allowance of up to a further 3% of the total investment amount.
Other interests disclosed to client:
· Saxby Morgan retains 40% of the total commissions received. The balance is paid to the adviser as gross income to his financial planning practice.
· “The above commissions are the maximum levels payable to Saxby Morgan. Please note these are not an additional fee to you as the investor, but are paid by the Project Manager.”
· Saxby Morgan is part of the broader Saxby Bridge Group that has an established relationship with MJH Nightingale & Co Limited.
Omitted from disclosure to client:
· Marketing allowance not stated in dollars.
· The Distribution Agreement provided that ABS Securities had an obligation to promote, market and sell the TENTAS project and to use its expertise to persuade property authority holders of the attractiveness of the project.
· The Respondent notes that the marketing allowance was an “absolute entitlement” as the agreement stated “Nightingale & Co will pay to ABS Securities …” and not “may also receive …” as disclosed to client.
Other relevant evidence:
Tribunal’s findings:
· The Tribunal notes that the Respondent’s allegation relates to a sale of the product pre-dating the Distribution Agreement.
8. Diamond Ridge Wine Grape Project No 1
Date of Prospectus: 1 June 1998
Description of investment: An investment in the cultivating, harvesting and processing of wine grapes over a 20 year period.
Due Diligence/Research conducted by SBFP:
Undertaken by Ian Pearson consisting of:
· examining the due diligence report prepared by Monpro;
· undertaking site visits;
· consulting with the project managers.
Date of Saxby Bridge Marketing Agreement with Monpro: 24 September 1997 (ASIC 1A Tab 26). However, the Applicants contend that this Agreement does not cover Diamond Ridge which is the subject of a separate Agreement made in May/June 1998 (Applicants’ submissions para 2.3.8.24).
Actual commissions/allowances in Market Agreement:
Base Commission (appears to be referred to by the parties as a Volume Bonus)
Units Commission
250 – 500 0.50% ($125 per unit)
501 – 1000 0.75% ($187 per unit)
1,001 – 2,000 1.00% ($250 per unit)
2,001 – 5,000 1.25% ($312.50 per unit)
5,001 plus 1.50% ($375 per unit) (ASIC 1A Tab 26)
Co-ordination allowance in Marketing Agreement
On achieving a minimum sale of 250 units, a further payment of a co-ordination allowance of 0.25% of the total amount invested in Nominated Products by a client of the Sub-agent is payable on all units sold.
Disclosure to client of commissions/allowances/brokerage:
Client - Andrew Blades (ASIC 1A Tab 37) Adviser – D Steer
Amount invested - $37,500 Date of Acknowledgment by client – 30 June 1998
· Initial commission – 4% ie $1,500
· Initial application fee – $4,900
· Saxby Morgan may receive an additional marketing allowance of up to 1.5% of the total investment amount based upon the total number of completed applications.
287. At the hearing, Mr Dee was shown a Saxby Bridge document on the implementation of IPS 146 which he conceded was evidence of preparation for its implementation (SB 1B p219ff). Mr Dee was asked whether completion of units one and five of the Diploma would satisfy the IPS 146 educational requirements. When shown a copy of the course outline for the units, Mr Dee agreed that Saxby Bridge’s requirements that its advisers should, as a minimum, have completed DFP units one and five, was evidence of an attempt to ensure its staff were trained.
288. With regard to ongoing training, Mr Dee was shown further evidence which he accepted as evidence of ongoing training within the Saxby Bridge group, and follow up for non-attendance at the required training sessions. However, his general scepticism about the training was not satisfied by, what the Tribunal considered to be, significant supporting evidence of a kind that could reasonably be produced at a hearing.
289. Mr Dee said there was no evidence based on his file review of a Saxby Bridge training program or person nominated as responsible for training. He was shown evidence at the hearing of an ongoing training program and of the appointment of Terry Alchin in March 2000 as full-time training manager. Previously training had been conducted by Ian Pearson, Phil Dally and others.
Don Wiggins
290. In his comments on Mr Dee’s report to ASIC, Mr Wiggins said, contrary to Mr Dee’s statement, that he considered relevant compliance training was being conducted by Saxby Bridge. With regard to Mr Dee’s comment that there was a lack of effort in applying ASIC’s guidelines on training, Mr Wiggins said at the relevant time, IPS 146 was an interim statement, with some issues still being clarified by ASIC. The deadline was for dealers to be properly trained by 30 June 2002. SBFP had already put procedures in place to identify knowledge and skills requirements and where individual advisers required additional training. To say that Saxby Bridge were non-compliant in March 2001 would be totally wrong. The procedures were put in place in early 2001 and additional resources were allocated to permit more focus on training.
(g)Findings on Training
291. On the basis of the evidence, Tribunal finds that Saxby Bridge took the provision of both induction and ongoing training seriously. In March 2000, it appointed a person who appears to have been an experienced academic and trainer to head its Training Department. The training material to which Mr Dee was referred in evidence during the hearing appeared to be of reasonable quality and included reference to compliance obligations. The Tribunal was not satisfied that any breach of regulation 7.3.02(1) paragraphs (b) and (c) was indicated by the evidence.
292. The Tribunal found Mr Dee’s evidence to be of little value given that he was given only a small number of reports from which to prepare his report. Moreover, even though, apparently, Saxby Bridge offered him access to their files, he did not take up this offer. At the hearing, the Applicants were able to produce a significant amount of additional documentary evidence to counter many of Mr Dee’s criticisms. Despite this, he continued to be sceptical about some matters - for example in relation to training – when, in the Tribunal’s view, it was unreasonable to expect the Applicants to produce more than the evidence they produced given the limitations imposed by the hearing. Nevertheless, in cross-examination, Mr Dee conceded that many of his criticisms – which were based on his finding no evidence of particular matters in the files he examined – were unfounded, or, when this was shown to him, that there was evidence to the contrary.
K. Performance Of Duties – Efficiently, Honestly and Fairly
(a) Relevant Law
293. Section 826(1) and s 829 empower ASIC respectively to revoke a licence or make a banning order if ASIC has reason to believe that the licensee or an unlicensed natural person has not performed or will not perform their duties “efficiently, honestly and fairly”. In their written submissions, both parties referred the Tribunal to Justice Young’s interpretation of those words in Story v National Companies and Securities Commission (1988) 13 NSWLR 661 at 672:
Thus I turn to the phrase “efficiently, honestly and fairly”.. In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, trying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words “efficiently, honestly and fairly” must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty…
So far as “efficient” is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate: see, eg, Spotts v Baltimore & Ohio Railroad Co 102 F(2d) 160 at 162 (1939). Although that definition comes from a case dealing with handbrakes on railways cars, it seems to me that it can be applied to the word used in the current statute.
Later in Story (supra), Young J explains the test of efficiency (at 679), as follows:
does the relevant conduct show that the performance by the plaintiff of his functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect: cf Boyd v Carah Coaches Pty Ltd (at 99)?
294. His Honour’s interpretation has been followed in a number of court and tribunal decisions. The Applicants referred the Tribunal to some of these, including Re Kippe and ASIC (1997) 16 ACLC 190 at paragraph 209 where Deputy President Forgie said:
A person cannot be said to operate efficiently if he or she has no knowledge, or only a very limited knowledge of the laws which must be followed and which may circumscribe his or her actions.
And at paragraph 213:
Whether or not a dealers representative had a dishonest intent would be relevant but so too is an objective assessment of whether or not his or her conduct satisfies the standard of propriety which may be expected of a dealers representative.
295. In Re Campbell and ASIC [2001] 37 ACSR 238 at para 117, the Tribunal found that “notwithstanding the absence of any finding of dishonesty”, the applicant’s inefficiency – “demonstrably inadequate securities advice practices” – and contravention of the law were sufficiently serious to warrant the making of a banning order.
(b) The Respondent’s Contentions
296. The Respondent notes that Mr Braysich was the holder of a Proper Authority from SBFP although he had not in fact acted as the representative of a securities dealer for many years. SBFP did not require him to attend training and did not in other respects treat him as a proper authority holder. Nevertheless, the Respondent contends that a banning order against Mr Braysich is justified, principally because SBFP and ABS Securities are effectively under his control:
However, the making of such an order can also be justified, and is indeed almost compelled, by the fact that SBFP and ABS, which were effectively under Mr Braysich’s control, have shown themselves unable to comply with their obligations under the Corporations Law in substantial respects and over a lengthy period. Mr Braysich accepted that he had overall responsibility for the conduct of the securities businesses operated by those companies (see T Day 2 pages 91-92). (Respondents Submissions p 129, para 4).
297. The Respondent contends that further grounds for the making of a banning order emerge from Mr Braysich’s evidence which:
reveals a person who is not well attuned to the relevant requirements of the Corporations Law, and someone who lacked an appreciation of the need to avoid conflicts between interest and duty and the importance of not letting the interests of clients be overridden by considerations of personal interest. Moreover, some aspects of Mr Braysich’s evidence suggests that he is prepared to provide misleading information, or withhold the entire truth, where such a course suits his own interests. (Respondent’s Submissions p129, para 5)
298. The Respondent pointed, in particular, to Mr Braysich’s conduct in relation to the Towerside debenture issue and the conflict between his personal interests and those of potential investors. The Respondent also pointed to Mr Braysich’s failure to give consideration to disclosure requirements in relation to alleged breaches of subsection 849(2). The Respondent contended that the conduct referred to reflects poorly on Mr Braysich’s character and that it would be open to the Tribunal to conclude that he is not of good fame and character so that a permanent banning order could be justified. However, the Respondent said that it does not seek to have a banning order imposed on Mr Braysich for more than five years.
(c) The Applicant’s Contentions
299. The Applicants strongly reject these contentions. They state that the evidence suggests that Mr Braysich’s management involvement was in terms of a general overview ensuring appropriate standards of competency and that, at all times, appropriate advice was given to the client. So for example, he did not direct what was included on the Saxby Bridge list of recommended products: the decision to approve a product was made by the Research Commmittee. Similarly, Mr Braysich emphasised the importance of training within the organisation and made the necessary resources available to support this.
300. While accepting that Mr Braysich was centrally involved in the business, the Applicants dispute that any deficiencies can be attributed to Mr Braysich. As a principal and chief executive, he engaged numerous experts to ensure the Applicants had the necessary resources and competence to conduct a successful and compliant financial advisory business. Although Mr Braysich held a Proper Authority from SBFP, he did not make securities recommendations nor provide such advice. His was a supervisory role to ensure that all key departments of the business were operating appropriately and he had input into these key aspects of the business through the Executive Management Committees.
301. In relation to the Towerside debenture issue, Mr Braysich engaged Lane and Lane, Solicitors, to prepare the loan and charge documentation and he also took steps to advise the Saxby Bridge Compliance Department of his loan. Any failure to disclose his loan and charge was a mistake by either Lane and Lane or the Saxby Bridge Compliance Department. Mr Braysich never acted to conceal his loan. He took steps to ensure it was known about.
302. The Applicants emphasised that no allegations of dishonesty or fraud or blatant disregard for the law have been made against Mr Braysich, unlike in other cases where banning orders have been made. It would, therefore, be inappropriate for a banning order to be imposed “as there is no aspect of the conduct of Mr Braysich that it can reasonably be said the public is in need of protection from” (Applicants Submissions para 2.4.9).
303. With regard to the Applicants’ conduct more generally, the Applicants submit:
4.3.2There is no evidence before this Tribunal indicating any fraudulent conduct, gross dereliction of duties, or total disregard for the law or failure to appreciate the regulatory environment in which the Applicants operated and the ASIC has not made any allegations of such conduct. What the evidence before the Tribunal does show is that, over a period up to 6 years and in relation to a business that had approximately 30,000 group clients and carried out approximately 72,000 transactions, there were some minor, inadvertent disclosure inaccuracies offered, and some of those inaccuracies were actually over-disclosures. The systems and procedures in place were adequate and the inaccuracies referred to were unintentional oversights. There was clearly no deliberate conduct of a dishonest nature nor any blatant disregard for the law or relevant standards.
304. The Applicants submit that having regard to their conduct as a whole, their conduct was efficient, honest and fair, and the Respondent’s contention that the Applicants failed to perform their duties in such a manner, and that they would fail to do so in the future, cannot be supported.
(d)Findings
305. The Tribunal notes that over the period of nearly six years to June 2001 relevant in this case, the financial planning industry was undergoing significant change. Moreover, even minimal familiarity with recent media reports suggests that it is still doing so, in particular, with a view to achieving higher standards in the industry and greater protection for private investors.
306. This was an extremely complex matter factually and the large amount of evidence filed made it difficult to prepare a comprehensive statement of reasons within a reasonable timeframe. The Tribunal considers that a realistic approach must be taken when examining a financial advisory business involving 250 employees in four offices in three States together with proper authority holders conducting business on their own account. The size of the Saxby Bridge business was probably not large when compared with the financial advisory businesses conducted by larger financial institutions such as banks. Nevertheless, the Saxby Bridge business was large enough to expect that close examination of its operation would inevitably reveal some contraventions of the law among the many thousands of transactions – the Applicants estimate approximately 72,000 – over the six year period to June 2001. Thus, in the Tribunal’s view, any contraventions of the law must be considered in the context of the operation of the business as a whole.
307. The Tribunal also notes most of the contraventions of the law alleged by ASIC relate to the action of SBFP and ABS Securities in recommending certain MBIs to clients. For a while in the 1990s, MBIs were a popular form of investment until the Australian Taxation Office apparently began taking a harder line on tax deductibility. Enthusiasm for such investments does not, of course, excuse conduct that contravened the Corporations Act. Nevertheless, it should be understood as the context in which the relevant events took place.
308. Mr Braysich gave evidence over a number of days in the course of the hearing and the Tribunal has before it a large volume of material concerning Mr Braysich’s personal involvement in the Saxby Bridge business. The overwhelming impression formed by the Tribunal is that Mr Braysich sought to run a business which complied with its obligations under the Corporations Act and offered a quality service to its clients. There was no evidence of fraud or dishonesty, nor is the Tribunal satisfied that there was any intention by Mr Braysich, SBFP or ABS Securities to mislead. The Tribunal finds that Mr Braysich intended and made substantial efforts to comply with his obligations under the Act. Undoubtedly, there were substantial improvements in compliance over the six year period. Mr Braysich sought to be in the vanguard of securities dealers taking their compliance obligations seriously and, according to Mr Dally, committed appropriate resources to achieving this.
309. The Tribunal has, nevertheless, found a number of minor contraventions of s 849 which largely involved mistakes or systemic failures. The Tribunal also found a significant breach of the s 849(2)(c) and (d) disclosure requirements in relation to the Preston Vale project. That breach appears to be largely attributable to Mr Braysich’s conduct and arose from his personal relationship with the promoters of the project. He failed to declare a clear conflict of interest. It should be noted, however, that Mr Braysich engaged his solicitors, Lane and Lane, to prepare loan and charge documentation with respect to his loan to Towerside Corporation and he states he informed the Saxby Bridge Compliance Department of this.
310. The Preston Vale breach is not sufficient to persuade the Tribunal that either Mr Braysich or SBFP or ABS Securities have not performed or will not perform in the future their duties “efficiently, honestly or fairly”.. Apart from the breaches of s 849, the Tribunal finds the SBFP and ABS Securities businesses were generally conducted efficiently, and with honesty and fairness. Proper systems were in place to achieve compliance with their obligations under the Corporations Act in accordance with accepted industry norms. The evidence before the Tribunal does not support a finding that the businesses were run incompetently or inefficiently.
L. Enforcement Action
(a) Relevant Law and Practice
311. A range of enforcement action is open to ASIC once it has given the licensee or person an opportunity to appear at a private hearing before ASIC and to make submissions and give evidence in relation to the matter (s 837(2)). First, s 786(1)(b) permits ASIC to impose conditions or restrictions on a licence which is in force. Pursuant to s 786(2), “without limiting the generality of subsection (1)”, such conditions and restrictions may include:
(e)conditions about what the holder of a licence is to do, by way of supervision or otherwise, in order to prevent the holder’s representative from contravening:
(i) a securities law; or
(ii) another condition of the licence; or
(f)conditions about what the holder of a licence is to do to ensure that each representative of the holder has adequate qualifications and experience having regard to what the representative will do on the holder’s behalf in connection with a securities business or investment advice business carried on by the holder.
Section 786(7) permits ASIC, at any time, to revoke or vary such conditions or restrictions.
312. Second, pursuant to s 826(1), ASIC may revoke, or, pursuant to s 827, suspend a licence. Third, pursuant to s 830, ASIC can make a banning order against a person either permanently or for a specified period. Subsection 831(1) states that such an order may include a provision that permits the person, subject to such conditions (if any) as are specified, to do, or to do in specified circumstances, specified acts that the order would otherwise prohibit the person from doing. Subsection 831(2) permits the varying of a banning order.
313. An additional power open to ASIC, not subject to the requirement for a private hearing, is that authorised by s 93AA(1) of the Australian Securities and Investments Commission Act 2001 which states that “ASIC may accept a written undertaking by a person in connection with a matter in relation to which ASIC has a function or power under the Act”.. The Federal Court decision in Australian Securities and Investment Commission v Donald [2002] FCA 1174 confirms that the AAT, standing in the shoes of ASIC, has power to utilise this power.
314. Finally, s 788(1) of the Corporations Act states that ASIC can require the holder of a dealers licence “to lodge such written information or statements in relation to the securities business carried on … as the ASIC from time to time directs”.
315. As stated above, it is clear that the exercise of ASIC’s powers should be protective of the public interest and preventative in nature. They are not intended to be punitive: Story (supra) at 685; Australian SecuritiesCommission v Kippe (1996) 137 ALR 423 at 431.
316. With regard to when a banning order is appropriate, Heerey J stated in Donald v ASIC [2000] FCA 1142 at paragraph 29 that:
Obviously Parliament contemplated that a single contravention [of a securities law – s 829(d)] could be sufficient to trigger the power to make such an order. It is not permissible to read into the statute some further requirement such as the necessity for threatened continuance of the conduct.
317. In Campbell (supra), the Tribunal stated at para 117:
notwithstanding the absence of any finding of dishonesty on the part of the applicant, the Tribunal is of the opinion that the above-mentioned findings of inefficiency and contraventions of the Law on the part of the applicant are sufficiently serious to warrant the making of a banning order against him in the interests of protecting members of the public from potential adverse financial consequences of his demonstrably inadequate securities advice practices, and of maintaining public confidence in the securities industry.
318. In Re Donald and ASIC (2001) 38 ACSR 661 at 674, the Tribunal said:
We are mindful that we must have as our objects only those of achieving public protection and the maintenance of proper professional standards. Although any decision may involve great deprivation for Mr Donald, the object of the order is not to punish or to extract retribution. The protection of the public requires that persons operating in the market as dealers understand that their behaviour must be such that it protects the integrity of the market.
319. With regard to the duration of any banning order, in the Tribunal’s view it is appropriate to consider any relevant ASIC policy (Kippe v Australian Securities Commission (1997) 16 ACLC 190 at 229) and the duration of banning orders imposed in other cases and the circumstances in which they were imposed (see for example, Re Foster and ASIC (1999) 57 ALD 779 at 791). The Tribunal has not been directed to and is not aware of any relevant policy on this issue, although the Applicants referred the Tribunal to a recent article in the Independent Financial Adviser magazine (10 March 2003 p13) in which Sean Hughes, ASIC Director of FSR Regulatory Operations is quoted as saying (A20):
Before we take an action like revoking a licence we first have to be satisfied that an entity has breached the law and they do not intend to comply…revoking a licence is a big step.
320. The article refers to steps taken against securities dealers Lifespan and RetireInvest whom ASIC found to have “poor disclosure and compliance standards” and, in the case of RetireInvest, authorised representatives who
failed to fully disclose fees, commissions and benefits payable, or omitted to obtain the necessary information to match clients with appropriate investments.
An additional condition was imposed on Lifespan’s dealers licence requiring Lifespan to appoint an independent compliance consultant to conduct reviews of the compliance, monitoring and reporting systems for advisers at six monthly intervals over a period of 18 months.
321. In the case of RetireInvest, ASIC accepted enforceable undertakings from RetireInvest to engage an external independent compliance consultant to review and assess RetireInvest’s compliance systems and procedures, the supervision of its authorised representatives, its complaints resolution procedures and any measures taken to address ASIC’s concerns. The consultant will also identify concerns and make recommendations for change, review and assess measures taken to redress complaints by clients, conduct a random review of RetireInvest’s internal audit reports for 2001 and 2002 to identify clients affected by contraventions, and report to ASIC and conduct periodic follow up reviews of RetireInvest until 31 March 2004.
322. The Applicants also referred the Tribunal to an ASIC Media Release dated 27 November 2002 (A7) concerning additional conditions attached to the dealers licence of two other companies. The Media Release reports that in the case of Pacific General Securities Ltd, ASIC were concerned that advisers were not adequately determining or considering clients’ risk tolerance when making investment recommendations, that advisers were not adequately disclosing commission to clients, and that the company’s supervision of advisers was inadequate. The licence conditions required the appointment of an independent professional consultant “to conduct reviews of the compliance monitoring and reporting systems for advisers” and to report to ASIC six monthly on the effectiveness of the systems over a period of two years.
323. While such media releases may be indicative of the range of enforcement action ASIC is prepared to utilise in order to fulfil its protective and preventive functions, nevertheless, in the absence of an understanding of the circumstances of a particular case and ASIC’s reasons for utilising one form of enforcement action rather than another, media release examples are only of limited assistance.
324. Turning to the duration of banning orders in other cases, in Kippe (1997) (supra), the Tribunal affirmed a banning order imposed on a proper authority holder for three years where the applicant had used assumed names for transactions and was found not to have acted honestly. He was found to have no current understanding of his need to follow the standards set by the Act or by Morgans from whom he held a Proper Authority. There had been ongoing breaches of the law and “a continuing pattern of disregard for the standards expected of a dealers representative” (at para 223).
325. In Farley and Australian Securities Commission (1998) 16 ACLR 1502, the Tribunal affirmed a four year banning order where the applicant did not appreciate the seriousness of the conduct alleged against him and gave explanations deliberately designed to disguise the age of certain transactions. Moreover, his evidence did not indicate any recognition of what his duties were. The Tribunal took into account the length of the investigation, the effect on the applicant and the seriousness of a permanent banning order (at para 158):
One can understand the appropriateness of a permanent ban in the case of a person who is not of good fame and character. Having regard to the same purpose [the protection of the public], it seems to me that a permanent ban ought not to be otherwise ordered except in the worst case…if, for example, a representative embarked on a systematic course of defrauding vulnerable members of the community…
326. In Foster (supra), the Tribunal reduced a banning order from three years to 18 months. The need to protect the public had to be balanced (para 33):
with the fact that the applicant’s transgressions were at all times unintentional and inadvertent, arising as they did from a clouding of his judgment as opposed to a deliberate course of deception or dishonesty on his part.
327. In Campbell (supra), the Tribunal affirmed a two year banning order where there was no dishonesty but the applicant had made recommendations without having a reasonable basis for doing so, had not disclosed particulars of the commission he was to receive and had not performed efficiently, honestly and fairly the duties of a representative of a dealer.
(b) Conclusion
328. In summary, the Tribunal made the following findings on the alleged contraventions of the law:
(a)a number of minor and one significant breach of the s 849(2) disclosure requirements, the latter being in relation to the Preston Vale project;
(b)no breach of s 851;
(c)no breach of regulation 7.3.02.
Moreover, the Tribunal is not satisfied that either SBFP, ABS Securities or Mr Braysich had not performed their duties efficiently, honestly and fairly, or will not do so in the future. The Tribunal must therefore determine whether it is appropriate to take enforcement action against the Applicants in respect of the breaches of s 849.
329. As noted above, a range of enforcement action is open to ASIC and to the Tribunal standing in its shoes. The exercise of those powers should be protective of the public interest and preventative in nature and not punitive.
330. First, because the Tribunal is not satisfied that SBFP, ABS Securities and Mr Braysich have not performed their duties efficiently, honestly and fairly and will not do so in the future, the power to revoke SBFP’s and ABS Securities’ securities dealers licences pursuant to s 826(1) and to impose a banning order on Mr Braysich pursuant to s 827 is not open to the Tribunal. Moreover, the Tribunal does not, in any event, consider such an order necessary for the protection of the public interest in this case.
331. The effect of this is that the securities dealers licenses of SBFP and ABS Securities must be reinstated and the banning order on Mr Braysich must be lifted. However, in the Tribunal’s view it is appropriate to impose conditions on the licenses of SBFP and ABS Securities with a view to securing more effective compliance with the s 849(2) disclosure requirements. The only evidence before the Tribunal as to such alternative enforcement action was that cited by the Applicants in the Adviser magazine referred to above. The relevant article refers to two securities dealers, Lifespan and RetireInvest, against whom ASIC has recently taken enforcement action. In the case of Lifespan, conditions were imposed on its dealers licence pursuant to s 786 of the Act and, in the case of RetireInvest, ASIC accepted enforceable undertakings pursuant to s 93AA(1) of the Australian Securities and Investments Commission Act 2001.
332. Further details of these matters can be obtained from the media releases on the ASIC website. A copy of the enforceable undertaking given by RetireInvest and accepted by ASIC can also be accessed there and refers to the breaches of s 849, s 851 and regulation 7.3.02 alleged by ASIC. Both the conditions imposed and the enforceable undertaking accepted address concerns over the dealers’ compliance by, amongst other things, including a requirement that an external and independent professional compliance consultant be appointed, with the consultant’s appointment and terms of reference to be approved by ASIC. In the case of Lifespan, the consultant is required to conduct regular six monthly reviews over a period of 18 months reporting to ASIC and to the Lifespan board. Lifespan is required to take appropriate action in response to any adverse findings. In the Tribunal’s view, it is appropriate that conditions along similar lines be imposed on the licenses of SBFP and ABS Securities, with the exact terms to be determined by ASIC.
333. In conclusion, the Tribunal sets aside the decisions under review and remits the matter to the Respondent with directions, first, that the securities dealers licences of SBFP and ABS Securities be reinstated subject to appropriate conditions, pursuant to s 786(1), with a view to achieving more effective compliance with s 849(2) of the Act; and, second, that the banning order on Mr Braysich should not have been imposed.
I certify that the preceding 333 paragraphs are a true copy of the reasons for the decision herein of Mr RP Handley, Deputy President
Signed: .......................................................................................
AssociateDate/s of Hearing 21, 22, 25, 26, 27, 28, and 29 November 2002; 2, 3 and 4 December 2002; 4, 5 and 6 February 2003; 18 and 19 March 2003; and 31 March 2003
Date of Decision 28 May 2003
Solicitor for the Applicant Mr T Hartnell
Counsel for the Respondent Mr R Darke SC
Solicitor for the Respondent Ms C Dearing
Key Legal Topics
Areas of Law
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Corporate Law & Governance
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Financial Law
Legal Concepts
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Contract Formation
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Breach of Contract
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Unconscionable Conduct
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Regulatory Compliance
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Corporate Governance
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Enforcement Actions
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