EXPLANATORY STATEMENT
STATUTORY RULES 1987 NO. 48
ISSUED BY AUTHORITY OF THE ATTORNEY-GENERAL SECURITIES INDUSTRY REGULATIONS (AMENDMENT)
Section 150 of the Securities Industry Act 1980 (‘the Act’) provides in sub-section (1) that the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act. Paragraph 150(2)(d) of the Act provides that the regulations may provide that the provisions of the Act or any of those provisions do not have effect in relation to a specified transaction or class of transactions entered into by a specified person or class of persons. Sub-section 150(5) of the Act provides that the power of the Governor-General to make regulations shall be exercised only in accordance with advice that is consistent with resolutions of the Ministerial Council for Companies and Securities (‘the Council’).
2. The Council was established under an agreement between the Commonwealth and the States, executed on 22 December 1978, (‘the agreement’) that provides the framework for a co-operative Commonwealth-State scheme for a uniform system of law and administration in relation to company law and the regulation of the securities industry in the six States and the Australian Capital Territory. The Northern Territory became a party to the agreement in 1986.
3. Under sub-clause 45(1) of the agreement, the Council may consider a proposal for the amendment of regulations made under the Commonwealth Acts enacted for the purpose of the co-operative companies and securities scheme. Should the Council approve any draft amending regulation which gives effect to such a proposal, the Commonwealth is then required, under sub-clause 45(2) of the agreement, to submit the draft regulation to the Federal Executive Council for making by the Governor-General.
4. The Council has resolved that the regulation be made under the Act.
5. The purpose of the regulation is to insert a new regulation, Regulation 46A, into the Securities Industry Regulations. Sub-section 131(1) of the Act prohibits a securities dealer entering into securities transactions as a principal or on behalf of an associate, if that dealer has been given buy or sell instructions from a client in respect of the same class of securities and those instructions have not been complied with. Regulation 46A provides that sub-section 131(1) of the Act does not have effect in relation to transactions entered into by a member of a stock exchange which accord with the business rules of the stock exchange. The proposed business rules of the Australian Stock Exchange Ltd, which has been created under the Australian Stock Exchange and National Guarantee Fund Act 1987, provide that a member of the exchange must give priority to client orders over its own principal transactions (in accordance with the requirements of sub-section 131(1) of the Act) except where the member deals exclusively in professional investor business, as defined in the business rules, and where each transaction is executed to the best advantage of the professional investor. Examples of professional investors included in this category are banks, merchant banks, investment companies, insurance companies and superannuation funds.
6. The rationale for the regulation is that it is often in the interests of a professional investor client of a securities dealer for the dealer to enter into securities transactions as a principal. This can enable immediate consummation of a transaction involving the securities between the securities dealer and the professional investor. Sub-section 131(1) of the Act, by requiring the securities dealer to give effect to smaller agency orders before engaging in principal trades, can prejudice this process which is of potential benefit to all professional investors. The regulation, in effect, exempts members of a stock exchange who deal exclusively in professional investor business and execute each transaction to the best advantage of the professional investor from the requirements of sub-section 131(1) of the Act.
Overview
The Securities Industry Regulations (Amendment) Statutory Rules 1987 were enacted to address the potential conflict between the Securities Industry Act 1980 and the business practices of professional investors. This legislation was issued under the authority of the Attorney-General and is based on advice consistent with the resolutions of the Ministerial Council for Companies and Securities, established under an agreement between the Commonwealth and the states. The primary objective of this amendment is to exempt members of a stock exchange who exclusively deal in professional investor business and execute transactions to the best advantage of these investors from the constraints imposed by sub-section 131(1) of the Securities Industry Act 1980. This exemption aims to facilitate more efficient transactions for professional investors, ensuring that securities dealers can enter into principal trades without being unduly restricted by the need to prioritise client orders first, where it is in the best interest of the professional investor to do so.
Scope and Application
The Securities Industry Regulations (Amendment) Statutory Rules 1987 No. 48, issued under the authority of the Attorney-General, concern the Securities Industry Act 1980 and are designed to modify certain regulatory aspects of securities transactions. This legislation applies to securities dealers and members of stock exchanges, specifically those who engage in securities transactions as a principal or on behalf of an associate, in line with the overarching provisions of the Securities Industry Act 1980. It is noteworthy that the Act extends its jurisdiction across the Commonwealth, including all states and territories, thereby ensuring a uniform regulatory framework for securities transactions nationwide. The regulation introduces an exemption, whereby sub-section 131(1) of the Act, which mandates that securities dealers prioritise client buy or sell instructions before engaging in principal trades, does not apply to transactions conducted by stock exchange members that adhere to the business rules of their respective stock exchange. This exemption is particularly relevant for members who exclusively deal in professional investor business, where each transaction is executed to the best advantage of the professional investor, such as banks, merchant banks, investment companies, insurance companies, and superannuation funds. The regulation thus allows for a more flexible approach to securities trading, catering to the needs of professional investors, while still operating within the broader legislative framework established by the Securities Industry Act 1980.
Key Provisions
The Securities Industry Regulations (Amendment) primarily introduces a new regulation, Regulation 46A, under the Securities Industry Act 1980 (hereafter referred to as the Act). This regulation modifies the scope of sub-section 131(1) of the Act, which prohibits securities dealers from entering into transactions as a principal or on behalf of an associate if they have received buy or sell instructions from a client for the same class of securities that have not been complied with (subsection 131(1)). Regulation 46A specifically exempts members of a stock exchange from this prohibition if their transactions adhere to the business rules of the stock exchange (Regulation 46A).
The obligations imposed by the Act on the parties it governs, particularly securities dealers and stock exchanges, are to ensure compliance with the business rules of the exchange. Members of a stock exchange who deal exclusively in professional investor business and execute each transaction to the best advantage of the professional investor are exempt from the general prohibition under sub-section 131(1) of the Act. This exemption is conditional on their adherence to the business rules, which mandate prioritising client orders over principal transactions, except under specific circumstances outlined in the business rules.
The Act does not explicitly outline offences, penalties, or consequences for breaches of Regulation 46A or other provisions in the Securities Industry Regulations. However, breaches of the Act or the regulations may lead to civil or criminal liabilities, depending on the nature and severity of the breach. For instance, if a securities dealer fails to comply with the business rules and thereby violates Regulation 46A, they may face legal action from affected parties, including clients. The potential penalties for breaches of the Act generally include fines and imprisonment, although the specific penalties would depend on the jurisdiction and the nature of the breach. It is essential for securities dealers and stock exchanges to understand and comply with the regulations to avoid these consequences.
In summary, Regulation 46A provides an exemption from the general prohibition on securities dealers entering into transactions as a principal if they adhere to the business rules of the stock exchange. This exemption is designed to accommodate the needs of professional investor clients, who may benefit from immediate transaction consummation. The Act imposes obligations on securities dealers and stock exchanges to comply with the business rules, and breaches may result in civil or criminal liabilities. While the Act does not specify the penalties for breaches of Regulation 46A, the potential consequences include fines and imprisonment, depending on the jurisdiction and the nature of the breach.