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Reforms to push compliance staff into ASIC agents

Reforms to push compliance staff into ASIC agents

COMPLIANCE OFFICERS should be required to report directly to the corporate watchdog in a range of reforms to head off a rise in insider trading recommended by a corporate adviser.Peter Hunt,…

COMPLIANCE OFFICERS should be required to report directly to the corporate watchdog in a range of reforms to head off a rise in insider trading recommended by a corporate adviser.

Peter Hunt, chief executive of Caliburn Partnership, an independent corporate advisory firm in Australasia, suggested the only way to get around a “culture of spin” in corporate reporting was to make each compliance officer have a “positive duty” to report suspicions of insider trading directly to the Australian Securities and Investments Commission (ASIC).

Hunt also said these reports should be used by ASIC to form a “league table” of compliance at Australian companies, which should then be followed up by spot audits to verify the compliance reports.

“We need to use compliance officers working in financial institutions far more aggressively. Let’s put compliance officers [under] a positive statutory duty to report directly to ASIC if they suspect insider trading in their organisation,” he told the ASIC Summer School held in Melbourne last month.

He said this would help to redress what he said was the poor record of successful prosecutions for insider trading in Australia, amounting to around one a year, despite some evidence that there was a lot more going undetected and unprosecuted.

Evidence from studies done by the UK financial regulator, the Financial Services Authority, showed that insider trading was commonplace, and Hunt predicted the incidence of breaches would rise for mergers and acquisitions due to several factors, including the rise in the number of “intermediaries” such as lawyers and accountants involved in more and more complex deals.

“It’s hard to see why in Australia it would be any better,” Hunt said. In his experience, he said it was frustratingly common to see what he could only put down to “informed price movements” ahead of company announcements on M&A deals that he had been involved in.

These movements appeared to become more pronounced the more that third parties became involved in negotiations.

Some of the contributors to this apparent increase in insider trading included greater sophistication of markets, the greater speed with which transactions could be made on a global basis, a “greater ability to arbitrage, [and] hide [transactions]” and the complexity of financial markets, encouraging more to take “undue risks for short-term gain”.

Hunt also suggested that there needed to be part-time or full-time compliance officers also required to report directly to the corporate regulator in every intermediary involved in deals and “in the business of receiving price sensitive information”, including lawyers and accountants.

He said the current focus on prosecuting insider trading via criminal litigation was “cumbersome” and unable to provide deterrents quickly enough to deal with these developments, although he stressed the system was not broken, just “getting left behind”.

Hunt also proposed that there needed to be more experts within ASIC that understood the markets, and a way to more quickly respond to potential breaches, including a shift to more civil actions.

To increase the market experience within ASIC, he said there should be more secondments of ASIC staff in private business, and vice versa.

ASIC chairman, Tony D’Aloisio, agreed with Hunt that market expertise needed to be improved within ASIC, and said it was critical it had the ability to have a “real-time understanding of the market”.

But he defended the regulator’s record on insider trading. “I believe ASIC has done a reasonably good job on insider trading issues. What we are seeking to do at the moment is to put more resources into it to increase our efforts,” he later told a Senate estimates committee meeting in Canberra.

Australasian Compliance Institute CEO, Martin Tolar, said it was unlikely that companies would pay to employ someone who had a requirement to report on their compliance outside their organisation.

“To have firms pay money to employ what are basically ASIC officers, that’s not going to happen. Plus those people would become quite distrusted within the organisation, so those people would not be given any information whatsoever.”

He said it would also be difficult to know where to draw the line. For instance, would they be required to report every minor misdemeanour when it might be better to report it internally, and then rectify the problem.

Others at the ASIC conference felt requiring compliance officers to report directly to ASIC would in the end be counterproductive, and hinder the fostering of a compliance culture within companies, as well as ultimately hobbling the effectiveness of compliance staff as they would be excluded from sensitive discussions.

“To put a positive reporting obligation on to an individual, when you already have a reporting obligation for the company, [means it is unnecessary],” said Chum Darvall, CEO of Deutsche Bank Australia.

“If you do impose this kind of obligation, you will soon find that their access to information is dramatically lowered.”

Hunt, however, claimed a “culture of spin” in Australia meant compliance officers’ reports to the board could often be distorted when they were passed on to the regulator and the market.

Allens Arthur Robinson partner, Jon Webster, also noted there is already a whistleblowing provision in legislation that “permits” individuals to raise issues directly with ASIC.

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Reforms to push compliance staff into ASIC agents
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