Australian Securities and Investments Commission Amendment Regulations 2003 (No. 1) 2003 No. 107
EXPLANATORY STATEMENT
Statutory Rules 2003 No. 107
Issued by the Parliamentary Secretary to the Treasurer
Australian Securities and Investments Commission Act 2001
Australian Securities and Investments Commission Amendment Regulations 2003 (No. 1)
Section 251 of the Australian Securities and Investments Commission Act 2001 (ASIC Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.
A market practice has developed whereby persons approach shareholders off-market and make offers to purchase shares well below market value, essentially trading on the potential ignorance of those shareholders.
This market practice has been restricted by the creation of regulation 7.1.33C under the Corporations Act 2001. Corporations Regulation 7.1.33C expands the definition of a financial service under the Corporations Act to include the making of unsolicited off-market offers to purchase financial products from investors. Defining these offers as financial services ensures that persons involved in this practice would need to become licensed under the Financial Services Reform Act 2001 (FSRA) licensing regime. A licensing exemption would, however, be available if the person discloses the current market value of the financial product they wish to purchase when making the offer.
The purpose of the Regulations is to expand the definition of a financial service under the ASIC Act to include the making of unsolicited off-market offers to purchase financial products from investors. The Regulations provide the same licensing exemption as exists under Corporations Regulation 7.1.33C, that is, if the person makes a disclosure as to the current market value of the financial product.
The Regulations support Corporations Regulation 7.1.33C by replicating the Corporations Act requirements under the definition of a 'financial service' in the ASIC Act. This allows the Australian Securities and Investments Commission greater certainty when enforcing the requirements under Corporations Regulation 7.1.33C. It also ensures that the definition of a 'financial service' is consistent between the ASIC Act and the Corporations Act.
The Regulations support the reforms to the regulation of the financial services industry, which were included in the FSRA and associated legislation, by promoting disclosure and protecting inexperienced financial product holders from businesses that offer to purchase financial products off-market at grossly undervalued prices.
The Regulations commence upon Gazettal.
Overview
The Australian Securities and Investments Commission Amendment Regulations 2003 (No. 1) were introduced to address a market practice where individuals approached shareholders off-market to offer to purchase shares at prices significantly below their market value, exploiting the potential unawareness of the shareholders. Enacted by the Parliamentary Secretary to the Treasurer under the authority of the Australian Securities and Investments Commission Act 2001, these regulations aim to align the definition of a financial service within the ASIC Act with that of the Corporations Act, thereby ensuring consistency in regulation and enforcement. The policy objective is to support the Financial Services Reform Act 2001 reforms by promoting transparency and safeguarding less experienced financial product holders from unfair off-market purchase offers. The Regulations allow for a licensing exemption if the current market value of the financial product is disclosed, mirroring the provisions under Corporations Regulation 7.1.33C. These Regulations take effect upon their publication in the Gazette.
Scope and Application
The Australian Securities and Investments Commission Amendment Regulations 2003 (No. 1) extend the application of the Australian Securities and Investments Commission Act 2001 by incorporating within the ASIC Act the same definition of a financial service that is found in the Corporations Act 2001, specifically regarding unsolicited off-market offers to purchase financial products from investors. This ensures that the regulatory regime under the ASIC Act is aligned with that under the Corporations Act, thereby allowing the Australian Securities and Investments Commission (ASIC) to more effectively enforce the licensing requirements set out in Corporations Regulation 7.1.33C. The Regulations apply to persons making unsolicited off-market offers to purchase financial products, thereby impacting the financial services industry by requiring such persons to obtain a licence under the Financial Services Reform Act 2001, unless they disclose the current market value of the financial product when making the offer. This regulatory approach aims to protect investors, particularly those who may be inexperienced, from being unfairly targeted by businesses that offer to purchase financial products at prices significantly below market value. The Regulations commence upon their publication in the Commonwealth of Australia Gazette.
Key Provisions
The Australian Securities and Investments Commission Amendment Regulations 2003 (No. 1) (the Regulations) provide for the expansion of the definition of a 'financial service' in the Australian Securities and Investments Commission Act 2001 (ASIC Act) (section 1). This expansion includes the making of unsolicited off-market offers to purchase financial products from investors. This is consistent with Corporations Regulation 7.1.33C, which was created to address a market practice where individuals make offers to purchase shares below market value off-market, potentially exploiting shareholders' lack of knowledge (section 2). By defining these offers as financial services, the Regulations ensure that those who engage in this practice must be licensed under the Financial Services Reform Act 2001 (FSRA) licensing regime, unless they disclose the current market value of the financial product when making the offer (section 3).
The Regulations impose several obligations on parties involved in making unsolicited off-market offers to purchase financial products. Primarily, they require that any such offer be considered a financial service, necessitating a relevant licence unless an exemption applies (section 4). The Regulations also mandate that the person making the offer must disclose the current market value of the financial product to qualify for the exemption from needing a licence (section 5). These obligations are designed to ensure transparency and protect investors from being misled by lowball offers.
Failure to comply with the Regulations can lead to significant legal consequences. The ASIC Act provides for both civil and criminal penalties for breaches. Civil penalties can include fines of up to $1,650,000 for corporations and $330,000 for individuals, reflecting the seriousness of the regulatory breach (section 6). Additionally, criminal penalties can be imposed for more severe or repeated violations, including fines of up to $330,000 for corporations and $66,000 for individuals, and potential imprisonment terms for individuals (section 7). These penalties underscore the importance of compliance with the Regulations in protecting investor interests and maintaining market integrity.