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Tuesday, 1 February 1994
Page: 56

Mr ROCHER (8.00 p.m.) —The Corporate Law Reform Bill 1993 introduces a statutory based system of continuous disclosure of information for those in the business of issuing invitations to the public to invest in securities. The bill makes use of the federal Corporations Law to enhance the level of information disclosure to the market by market participants.

  The legislation further adds to the existing continuous disclosure requirements already in place for companies listed on the Australian Stock Exchange and applies the relevant principles to unlisted entities which are offered to the public for investment. Provision is also made for new periodic reporting requirements and changes are made to the prospectus provisions in the Corporations Law.

  This bill has its origins in what came to be known as the corporate extremes of the late 1980s. It is part of a wider effort to enhance regulatory frameworks to ensure that such excesses are not repeated in the future. During the 1980s it was found that there were some serious problems with the level of disclosure on the part of some companies under the listing rules of the Australian Stock Exchange, although this was far from being the most serious of the problems we then faced.

  These rules provide that a listed company is required to immediately notify the Australian Stock Exchange of any information that is likely to have a material effect on the price of the listed company's securities. Listed companies are also required under the Australian Stock Exchange listing rules to lodge with the ASX half-yearly reports in addition to the printed annual report.

  Because of the perceived inadequacies with these requirements, there has been increasing pressure on the authorities to move towards a system known as enhanced statutory disclosure. Under an enhanced statutory disclosure system, there is a compulsory obligation to provide creditors and investors with adequate and timely information on the part of those seeking to have others invest in their business enterprises. An enhanced statutory disclosure system was proposed not only for listed companies, but also for other forms of investment where the disclosure of information may be required. The enhanced statutory disclosure system was to be made additional to the existing Australian Stock Exchange listing rules.

  Failure to observe the obligations of the enhanced statutory disclosure system would open the way for civil and criminal sanctions to be brought to bear against any offender. To this end, the government originally introduced a bill into the Senate in November 1992 known as the Corporate Law Reform Bill (No. 2) 1992. The bill followed the recommendations of a report issued by the Companies and Securities Advisory Committee in September 1991 entitled Report on an enhanced statutory disclosure system. That bill lapsed with the calling of the March 1993 federal election and was subsequently restored to the Senate Notice Paper after that election.

  The earlier bill sought to introduce an enhanced statutory disclosure system which was to be administered by the Australian Securities Commission and which reflected the preferred approach of the then Attorney-General, the honourable member for Holt (Mr Duffy). At the time, the issue was also being examined by the House of Representatives Standing Committee on Legal and Constitutional Affairs. In November 1991, the com-

mittee issued a report entitled Corporate practices and the rights of shareholders. This report examined, amongst other things, the question of continuous disclosure. It recommended that there should be a system of continuous disclosure for listed companies, but that it should be enforced by the Australian Stock Exchange through changes to the listing rules rather than by the Australian Securities Commission, as was subsequently proposed by the honourable member for Holt in his legislation. The report also recommended that in these matters the Australian Stock Exchange should be given stronger statutory support under the Corporations Law.

  The legislation before us tonight reflects the approach taken by the House of Representatives committee in its 1991 report. This legislation replaces the legislation that was previously introduced into the Senate in 1992. I am sure that it also reflects the preferred approach of the new Attorney-General (Mr Lavarch), who not surprisingly was active on the committee that produced the 1991 report before he attained his present ministry.

  The bill before us gives the Australian Stock Exchange the task of primary monitoring of continuous disclosure by listed companies and, to that end, gives the ASX stronger statutory support under the Corporations Law. The new and present bill thus seeks to introduce a more self-regulatory approach to the question of enhanced disclosure through the existing framework under exchange listing rules. This is a more light-handed approach to that envisaged by the then Attorney-General, which would have seen enhanced disclosure the responsibility of the Australian Securities Commission, as the statutory regulator, in addition to the requirements imposed by the Australian Stock Exchange listing rules.

  This bill is thus a welcome improvement over that previously proposed, which would have resulted in massive duplication for listed companies as between the continuous disclosure obligations under the existing listing rules and the proposed statutory obligations of the Australian Securities Commission. The earlier bill would have resulted in companies providing much the same information to both the Australian Securities Commission and the Australian Stock Exchange—a quite unnecessary duplication.

  It would have created a discrepancy in the timing of the disclosure of information since the Australian Stock Exchange listing rules require immediate disclosure, whereas under the previous bill disclosure to the Australian Securities Commission was required within only three days. That would have actually resulted in a lesser standard of disclosure under the previously proposed legislation compared with that which exists at present and ran contrary to the overall purpose behind these legislative proposals. We would have had increased duplication and a greater burden of regulation but with a reduction in the standard of disclosure on this particular score.

  The previously proposed legislation also made provision for the withholding of disclosure in the case of confidential or commercially sensitive information, more commonly known as the carve-out provisions. These provisions again would have undermined the overall purposes of the legislation by providing considerable scope to circumvent the continuous disclosure requirements in the name of commercial confidentiality.

  This legislation leaves open the question of carve-outs. The matter will instead be dealt with by the Stock Exchange and the Securities Commission through their discretionary and regulatory powers, which is a more appropriate way of dealing with this difficult problem. The old bill thus threatened to greatly overregulate, with no appreciable gain in the disclosure standards that are currently applicable. Not surprisingly, it was the subject of strong criticism from business, accounting and legal communities alike.

  The new legislation has won much greater acceptance, including from bodies such as the Companies and Securities Advisory Committee that originally supported the previous approach of statutory disclosure to the Australian Securities Commission. As I have already mentioned, the bill also contains some major changes to the prospectus provisions of the Corporations Law. These changes largely follow the recommendations of another report by the Corporations and Securities Advisory Committee on prospectus law reform which was brought down in March 1992.

  Some of the proposed changes were also included in draft legislation that was released for public comment in January of last year. The new provisions reflect some of the debate that followed these consultative measures during the previous year. The new provisions build on those contained in the new Corporations Law that came into effect in 1991. They are designed to streamline the operation of the existing prospectus provisions.

  Listed entities which meet certain conditions will be able to make use of a more limited prospectus that contains information relating to the particular offer of securities, including the rights attaching to those securities. These new prospectus arrangements will obviously have to be consistent with the enhanced disclosure obligations contained in the rest of the bill. These requirements for secondary prospectuses are abolished and replaced by the requirement for an information memorandum, except in the case of sales of 30 per cent or more of an entity.

  The bill will facilitate the incorporation of documents where the document is lodged with the Australian Securities Commission, where a summary is included in the prospectus and copies of the full document are made available on request and without charge. A number of changes are made to the provisions dealing with supplementary prospectuses. A replacement prospectus, incorporating the original prospectus on any changes, will be permitted as an alternative to a supplementary prospectus.

  Refunds are required where applications for securities are made on the basis of an out-of-date prospectus. The bill comes in the context of the government's stated intention to simplify the Corporations Law, which is widely recognised as being exceedingly complex. The government is continually making claims to the effect that it intends to simplify certain areas of law, tax law being a noted example. So far, the stated intentions have not amounted to a row of beans, to be precise, and we are waiting for progress in simplifying the Corporations Law. Perhaps that can be achieved under the new Attorney-General.

  The Attorney-General, in his second reading speech, described the simplification of the Corporations Law as a `long-term process'. That is not as hopeful as we would have liked and is not in tune with the rhetoric of his predecessors. We can only hope that it is not too long term because action is required now to simplify the existing legislation for the benefit of the thousands of people who must meet its requirements on a daily basis. In the meantime, we have before us this evening this amending legislation, which will serve to add even more bulk and complexity to the Corporations Law. We should remember that since the Corporations Law came into effect in 1991 the government has added something like 1,500 pages to its original legislation. Now we have this legislation, and we are also waiting on a bill or bills dealing with a wide range of other matters.

  The government, through the Attorney-General, has signalled its intention to introduce legislation to address a range of deficiencies and anomalies in the Corporations Law and the Australian Securities Commission Act 1989. We are also waiting on proposals in relation to the regulation of collective investments, the rights of shareholders and the needs of small businesses. Some of these initiatives may well serve to simplify the existing law, but they may also serve to add even more complexity to the existing legislation if they fail to dovetail with the long-term simplification processes that the Attorney-General referred to in his speech. What we need to hear from this government is exactly how it proposes to simplify the Corporations Law and to what timetable. Vague reassurances about the government's intentions really do little to indicate the direction the government will be taking in these matters. This is a problem we observe in the area of tax law as well, so it is a general problem that the government needs to come to grips with in its legislative processes.

  The principal purpose of this legislation is to ensure a better informed and, therefore, a more efficient market. Full disclosure of information is an important part of this process of ensuring that financial markets operate efficiently and fairly. It should be noted, however, that the market is necessarily an uncertain place. If there were no uncertainty, then there would be no profit opportunities in trading financial instruments or investing in new business ventures. The enhanced disclosure provisions contained in this legislation should not be seen as an excuse for market participants to fail to exercise due caution in their activities and in their business affairs. It is incumbent upon the individual investor to obtain all the necessary information he or she needs to make informed investment decisions.

  The Corporations Law can facilitate the process of obtaining this information, but the responsibility for any subsequent investment decisions rests squarely with the individual investor. Whatever the prevailing disclosure requirements, investors will still make mistakes and they will still sometimes be led astray by imperfect information in the marketplace.

  So we should not kid ourselves that legislation such as this will eliminate all of the problems that we saw in the 1980s. While we can put in place the necessary regulatory framework, the onus is still on the individual investor to use that framework to best effect. We cannot go on blaming regulatory frameworks for the mistakes made by individuals and companies. If we do, we risk putting in place a regulatory framework that will be too onerous and too burdensome and which will reduce market efficiency. To the extent that such over-regulation causes investors to fail to exercise due diligence, then such over-regulation will compound its own mistakes leading to calls for even more regulation as people seek to shift the blame back onto the authorities.

  The legislation before us provides for a review of the operation of the disclosure and enforcement provisions by the Companies and Securities Advisory Committee 18 months after its commencement. The review will provide the government with an opportunity to assess this legislation to see whether it has got the balance right in terms of promoting full disclosure, while ensuring that market efficiency is not compromised. It will be interesting to hear from the government exactly what the nature of this review will be since there is little or no indication from the legislation or the second reading speech.

  The point needs to be made that the consultative processes that brought this bill into being should not be considered to be complete just because this legislation has passed into law. The consultative process will need to be an ongoing one which takes into account the views of the Australian Stock Exchange, the Australian Securities Commission, and the corporate and investment communities. This will allow for any necessary finetuning of the legislation. It should also serve to facilitate the corporate law simplification process if regular consultative processes can be instituted between the government and interested parties.

  It will also be interesting to examine what effect, if any, the legislation has on securities prices. A lot of research has been done to see how quickly markets take into account new information in the pricing of securities. This is obviously an important measure of market efficiency and so any assessment of this legislation will need to include an assessment of its impact on securities pricing.

  The bill has the support of the coalition. The coalition was sharply critical of the previously proposed legislation. We were pleased when the government came out with this new bill. We have a number of reservations about the progress that the government is making on the simplification of the Corporations Law and the way in which the government plans to monitor the implementation of this legislation. (Time expired)