Takeovers and Securities Industry Law - Essay Example

TAKEOVERS AND SECURITIES INDUSTRY LAW TAKEOVERS AND SECURITIES INDUSTRY LAW Insert name Insert grade course Insert instructor’s name September 23, 2011. Introduction In 2001, the Corporations Act was amended by the FSRA to include the revised regulatory arrangements for the financial services sector. The FSRA combined into one piece of legislation regulations for consumer protection and market integrity in the financial service sector. FSRA brought in new regime that is contained in Chapter 7 of the Corporations Act. Prior to FSRA, the rules controlling how the financial services industry behaved were scattered across several Acts and were based upon the institutional form of the service provider. The Financial Services reform Act 2001 (Cth) (FSRA) brought about a comprehensive overhaul of the Australian regime for controlling the provision of financial services. The FSRA amended a number of Commonwealth legislation so as to effect the new regulatory regime. Particularly, the FSR Act replaced chapters 7 and 8 of the Corporations Act 2001 (Cth) (Corporations Act) dealing respectively with the securities industry as well as the futures industry, with a new chapter, Chapter &. Chapter 7 of the Corporations Act is currently the principal source of all regulations regarding the licensing of financial services providers, clearing and settlement systems as well as financial markets, the rules of conduct to be observed by those providers along with the laws requiring the disclosure to be provided concerning financial services and financial products (Parliament of Australia). There are three main reasons as to why it was necessary to introduce a new regime: To move away from the institutional based regulation to a functional mode of regulation. This is regulating on the basis of a specific activity embarked on by an entity and not on the nature of the entity itself. To improve retail client protection by ensuring that people who fall within the definition of a retail client, as opposed to the description of a wholesale customer, have a higher level of protection provided through particular regulatory provisions. To overcome gaps, overlaps and anomalies in regulation. Since new products and methods of delivering services are constantly emerging and evolving in the financial services industry, the former system of regulation was found to be too static. The new licensing regime is intended to be more flexible (Bergman. & Nicolaievsky 2). Before the rise of the need to regulate the provision of financial advice, finance companies that had been established in Australia operated under the Companies Act 1955. Prior to deregulation in the 1980s, financial institutions were not permitted to borrow overseas. In 1970, there were 28 large finance companies and at least 500 small ones. Subsequent growth of finance companies was rapid, as they were more aggressive lenders than the trading banks at that time. During this time, there were share price rallies linked with mineral booms with the most famous being the Poseidon Boom in 1969-70 when the discovery of nickel ore resulted in the Poseidon share price climbing from 80 cents to $ 280 before collapsing. During this time, the need to regulate the provision of financial advice arose. This paper will discuss the investor protection issues and state which is and should be the underlying rationale for the regime regulating the provision of financial advice in Chapter 7 of the Corporations Act 2001 (Bergman & Nicolaievsky 2). Rationales Providing investor protection Investor protection is among the most significant rationales or elements of a thriving securities market or other financial investment institution. Investor protection is the effort to ensure that those who invest their money in regulated financial products are not defrauded by brokers or other parties. The Australian government maintains a number of regulatory agencies and operations aimed at providing investor protection for those who buy into various investment opportunities. Unlike government insurance for monetary deposits, investor and customer protection do not extend to covering losses when the securities or products decrease in value (The treasury 5). Investors have to assume the existence of risk as part of their opportunity for gains. Investor protection focuses on making sure that investors are fully informed concerning their purchases that insider activity does not threaten the worth of some portfolios for the enrichment of others, and that holdings are not simply lost in instances of brokerage failure. The investor protection is regarded as a regime through licensing since it is designed to improve market integrity, which is reflected in the need for both retail and wholesale providers to be licensed. The regime acts as a gate-keeping mechanism and sets a threshold for entry into the financial services industry (Leverkuhn). Promoting investor confidence Investor confidence is another rationale which can be enhanced by improving the integrity of financial markets so as to aid in detecting fraud or malpractice. The regulatory regime for financial markets and products requires being flexible and providing an efficient regulatory structure which will allow market participants to meet challenges presented by technological developments, innovation as well as integration with world markets. This will promote the investor confidence in business transactions. Investor confidence is brought about by proper use of disclosure provisions. The disclosure requirements generate investor confidence through two main ways: supporting the price discovery process in financial markets. This is the effective allocation of resources through the financial markets and is significantly dependent on pricing decisions made by investors; and establishing a suitable level of investor protection by making sure that investors have access to all information they require to make an informed decision on whether or not to acquire a given financial product. Investor confidence produced by disclosure permits investors to make better informed choices based on a full understanding of the characteristics of a product, as well as by allowing the comparison of products. Investor confidence rationale has more to offer than the investor protection rationale. Promoting confidence is a rationale in new regime since it is enabling investors to reach reliable conclusions by relying upon shareholders, brokers as well as financial experts and having access to full and reliable information concerning the affairs of companies (Bottomley 102). Informing investor self-reliance Self-reliance is created by generating adaptive strategies concerning self-empowerment, the ability of both retail and wholesale clients to make decision issues that affect business transactions. There are many risks that are involved when transacting business deals and investors are required to be informed about being self-reliant so that they can adapt to various situations in financial markets. The underlying rationale Providing investor protection is the underlying rationale offered through licensing regime. The regime is as well designed to improve market integrity, which is reflected in the need for both retail and wholesale providers to be licensed. The licensing regime acts as a gate-keeping mechanism and sets a threshold for entry into the financial services industry. Thus, this licensing regime is the one that gives that rationale for providing investors with the desired protection when transacting business. The Corporations Act 2001 (Corporations Act) generally requires anyone conducting a financial business in Australia to acquire an Australian Financial Services License (AFSL) from Australian Securities and Investments Commission (ASIC). The underlying rationale for the regime regulating the provision of financial advice in Chapter 7 of the Corporations Act 2001is providing investor protection, since a person who conducts a financial services business ought to acquire an Australian Financial Services License (AFSL), unless the individual is exempt. Providing investor protection is taken to be the underlying rationale since it is about the significance of protecting investors from financial fraud in the process of transaction. It is premised on ideas of investor susceptibility and lack of expertise. The assumption is that potential victims of corporate misconduct will be able to take note of the publicly available and professionally verified information, provided by licensed providers, and take suitable steps to protect themselves, or to seek their own remedies (Howells 444). What should be the underlying rationale Promoting investor confidence should be the underlying rationale. Since the mid 1980s there has been a sea-change. There have been two significant changes that have muddied the relatively clear policy of investor protection. The first change is the dramatic extension of participation of ordinary individuals in investing, accompanied by the use of the language of consumer law and policy in financial services regulation. The second is a greater reliance on disclosure in financial regulation. This has made the regulatory changes to turn from investor protection to investor confidence. It should be the underlying rationale since regulators have decided to rely more and more on disclosure, rather than more substantive protections in the style of merit regulation. This is despite the increase in the range and complexity of all aspects of retail investing, and despite the reliance on investments to fund basic personal needs such as retirement income, education and health. This increased the use of disclosure is the central plank of ‘investor confidence’ and thus it should be the underlying rationale. Providing investor protection is highly related to the anti-fraud provisions (Longo 3). It is universally accepted that market integrity offences, related to investor protection, are difficult to supervise and even more difficult to enforce. So while market integrity on the books might be tightening up, market integrity in action lags behind. Investor confidence should therefore be the underlying rationale since is the idea of giving investors more information, and doing so in a market that aims at a higher level of integrity (Howells 444). These rationales are not mutually inclusive rather than exclusive. There cannot be investor confidence without the investor protection. It is important to note that all these rationales are mutually dependent on one another to guarantee the security of the investor. Thus, according to section 791 A of Chapter 7 of Corporations Act, a person can operate a financial market if he has an Australian market license that authorizes the person to operate the market in this jurisdiction (Regulatory Guide 175). They depend on one another to bring out the expected optimal conditions to conduction business transactions. The licensing regime also improves ASIC’s capability to supervise the financial services industry. In certain situations, ASIC can suspend or cancel an AFSL, on a temporary or permanent basis. The licensing regime and the conduct and disclosure provisions for financial service providers are set out in Chapter 7 of the Corporations Act, as well as the some of powers of ASIC (Australian Prudential Regulation Authority 5). Other rationales There are other rationales such as the rationale for the prohibition against insider trading and the legislative history under the disclosure regime. Financial goods are normally multifaceted in terms of their distinctiveness. Issues that investors may require to think about include risk return profile, fee and benefit structures, early exit penalties and taxation penalty. For the investor, the array of facts and information with which they are confronted can be daunting. This is generally characterized as a difficulty caused by information irregularity between the product provider and the investor, where product providers have a clear advantage in terms of their familiarity and understanding of the product they are offering to investors. Market integrity and investor confidence are considered to be essential for the proper and efficient functioning of Australia’s securities markets. Insider trading is acknowledged as a major threat to the competence and reliability of securities markets, with the potential to significantly decrease investor confidence and, as a result, involvement. Indeed, this is the major legislative rationale for the prevention of insider trading in Australia (Overland, 3). The legislative history is another rationale that comes into play when there are substantive changes made through disclosure such as those that have muddied the relatively clear policy of investor protection. Disclosure is the choice made by the Congress in 1933—a choice to force substantive corporate change only indirectly and thus away from direct substantive or merit-based securities regulation; a choice away from too much interference in state corporate law. Despite 70 years of such lawmaking, the papers on this panel address, again, whether and how the securities laws should address disclosure, and whether issuers should have a choice in the disclosure regime that regulates them (Sale 406). Legislative history states that the law was deliberately cast in terms which differentiate between corrupt payments and facilitating payments and that FCPA (Foreign Corrupt Practices Act) would not reach payments made to secure permits, licenses, or even the expeditious performance of similar duties of an important ministerial or clerical nature. References: Australian Financial Markets Association, 2004. Australian Financial Markets Report, January 2005, p. 44. September 23, 2011 at http://www.afma.com.au/afmawr/pdf/2004afmr_overview.pdf Bergman Nittai K. & Nicolaievsky Daniel. Investor Protection and the Coasian View. September 24, 2011: http://nbergman.scripts.mit.edu/docs/Coasian-View.pdf Bottomley Stephen. The constitutional corporation: rethinking corporate governance. Ashgate Publishing, Ltd., 2007. September 24, 2011: http://books.google.com/books?id=BjW8Cfwn8FEC&pg=PA102&lpg=PA102&dq Corporations Act 2001 Howells Author Geraint G. Handbook of research on international consumer law: Research handbooks in international law series. Edward Elgar Publishing, 2010. September 24, 2011: http://books.google.com/books?id=qLtG8JPs0w4C&pg=PA444&lpg=PA444&dq J. Perkins. The Wallis Report and the Australian Financial System, Melbourne University Press, Melbourne, 1998, p. 18. The Financial System Inquiry is available at http://fsi.treasury.gov.au/content/FinalReport.asp Leverkuhn A. wise Geek. What is investor protection? 2003. September 24, 2011: http://www.wisegeek.com/what-is-investor-protection.htm Longo Joe. MARKET MISCONDUCT PROVISIONS OF THE FINANCIAL SERVICES REFORM ACT: CHALLENGES FOR MARKET REGULATION. Sydney, 2011. September 23, 2011: http://cclsr.law.unimelb.edu.au/research-papers/mkt-misconduct.pdf Overland Justin. The Past, Present and Future Regulation of Insider Trading, 2011. September 21, 2011: http://www.clta.edu.au/professional/papers/conference2011/Article%20-%20CLTA%202011%20Past%20Present%20and%20Future%20Regulation%20Insider%20Trading%20Final.pdf Parliament of Australia. Financial Services Reform Amendment Bill 2003. Bills Digest No. 39 2003-04. September 24, 2011: http://www.aph.gov.au/library/pubs/BD/2003-04/04bd039.htm Parliament of the Commonwealth of Australia. REPORT ON THE REGULATIONS AND ASIC POLICY STATEMENTS MADE UNDER THE FINANCIAL SERVICES REFORM ACT 2001, 2002. ISBN 0 642 71185 2. September 23, 2011: http://cclsr.law.unimelb.edu.au/files/Report_of_Parlimentary_Joint_Committee_on_Corporations_and_Financial_Services_on_the_Regulations__and__ASIC_Policy.pdf Regulatory Guide 175. Licensing: Financial product advisers—Conduct and disclosure, 2007. September 23, 2011: http://www.smartcomparitor.com.au/articles/RG175.pdf Sale Hilary. GATEKEEPERS, DISCLOSURE, AND ISSUER CHOICE. September 24, 2011: http://lawreview.wustl.edu/inprint/81-2/Sale.pdf The Treasury. Submission to the Parliamentary Joint Committee on Corporations and Financial Services‘ inquiry into Financial Products and Services in Australia, 2009. Australian Government. September 23, 2011: http://www.aph.gov.au/senate/committee/corporations_ctte/fps/submissions/sub388.pdf Read More