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Wednesday, 2 February 1994
Page: 168


Senator FAULKNER (Minister for Veterans' Affairs and Minister for Defence Science and Personnel) (10.50 a.m.) —I move:

  That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

  Leave granted.

  The speech read as follows

  This bill demonstrates the Government's commitment to promoting and developing Australia's reputation as an attractive and reliable place to invest.

  That reputation suffered a severe setback in late 1980s when too many people lost money in circumstances that could have been avoided by timely and adequate disclosure of relevant information to investors.

  The Government has worked hard to restore that reputation. The establishment on January 1, 1991, of the national scheme, based on the Corporations Law and administered by the Australian Securities Commission, was an enormous achievement. The co-operation between the Commonwealth, the states and the territories behind that historic agreement was founded on a common desire to repair the damage of that period and raise a new regulatory umbrella, tailored to the real needs of investors in the internationalised, competitive Australian market of the 1990s and beyond.

  Other notable reforms have included changes to the accounting requirements, strengthening the law on insider trading, and improving the procedures for the settlement of Stock Exchange transactions. More recently, extensive reforms have been made to the corporate insolvency provisions and to the law on loans to directors and related companies. These reforms have contributed to the improved legal framework we now have. However, in my view the most significant change has been the establishment of a single well-resourced regulator—the ASC—which can take prompt and strong action to counter corporate wrongdoing.

  With equities again enjoying strong growth and attracting many investors into the market for the first time, this bill is an important and timely advance in ensuring a well-informed market. It makes major changes to the Corporations Law designed to enhance disclosure of relevant information for investors. For entities which are listed on the Australian Stock Exchange, it will significantly bolster the continuous disclosure requirements already in place under the rules of the Exchange. Unlisted entities in which members of the public invest will have a new statutory requirement to disclose material information to the ASC.

  New periodic reporting requirements, in particular, half-year reports, will also enhance disclosure by entities of interest to investors.

  The bill also reforms the prospectus provisions to facilitate fundraising, especially for listed entities and continuous fundraisers.

History of the bill

  The present bill is a revised bill, originally introduced in the Senate in November 1992 as the Corporate Law Reform Bill (No.2) 1992.

  I will elaborate shortly on the major differences between the two bills. However, it should be emphasised that the central aim of this bill remains the same. Timely disclosure of relevant information is essential for investors to have confidence in the integrity of the market place and to make informed investment decisions. This must be the central feature of an efficient and fair securities market.

  Full disclosure of information about the financial position and prospects of entities in which Australians invest helps to counter insider trading, the creation of false markets and the distortion of markets through rumours.

  In essence, the capacity of a market to attract investment—and thus to enable continued economic growth—is directly linked to the confidence generated through timely disclosure of material information.

  The 1992 bill was prepared in light of a report, in September 1991, from the Companies and Securities Advisory Committee on an Enhanced Statutory Disclosure System. This report pointed to the need for improved disclosure and recommended the introduction of a statutory system for continuous disclosure to the ASC by a wide range of corporations and other investment entities.

  As I said in my introductory remarks, inadequate disclosure of material information was a major problem during the 1980s. This has been widely acknowledged, not only by the Advisory Committee, but also by the report of November 1991 on Corporate Practices and the Rights of Shareholders of the House of Representatives Standing Committee on Legal and Constitutional Affairs which was prepared while I was the Chair of that Committee.

  Clearly, significant improvements in disclosure have been made by the Australian Stock Exchange and by corporations themselves since that time. However, past experience has pointed to a need to change the legal framework to improve the level of disclosure and increase investor protection.

  One essential difference exists in the approach to disclosure in the bill now introduced from that of the 1992 bill. This bill builds on the existing framework for disclosure by listed entities to the Stock Exchange, rather than creating an overlapping system for disclosure of the same or similar information to the ASC.

  This approach has been adopted in light of the recommendations of the House of Representatives Legal and Constitutional Affairs Committee. It also takes into account criticism of the 1992 bill from business and professional advisers. While the bill retains and reinforces the role of the Stock Exchange, it also strengthens the position of the ASC to take action to ensure compliance with continuous disclosure obligations. Most importantly, it retains the principle that civil remedies should be available in respect of breaches of disclosure obligations. As now formulated, the bill provides investors with a right to recover damages where loss is suffered as a result of the market being misled through an intentional, reckless or negligent failure to fulfil these obligations.

  The bill has been the subject of an intensive consultation process over more than two years. This consultation has occurred at all stages in the development and introduction of the 1992 bill and again in the revision of that bill. In addition to the discussion papers and draft legislation released for comment, my Department and I have held numerous discussions on the bill and the approach to be adopted. This input has been welcomed and will continue to be an essential part of the corporate law reform process. The views of business and professional users of the law are carefully considered and have played an important part in determining the content of the legislation.

  I should add that the Companies and Securities Advisory Committee was amongst the bodies consulted on the revised approach to continuous disclosure. The Committee has recently advised me that it supports the approach adopted in the bill, including that continuous disclosure for listed companies be regulated through the Stock Exchange.

  The bill also contains major amendments to the prospectus provisions. The amendments are based in part on a report in March 1992 on Prospectus Law Reform by the Companies and Securities Advisory Committee. A number of the provisions included in the bill were contained in draft legislation released for public comment in January this year. These provisions, as well as a number of others, have been revised to make policy and drafting improvements in the light of comments.

Content of the bill

  I will outline only briefly the most significant features of the bill. A more detailed outline of the bill is in the Explanatory Memorandum.

  (a)  Enhanced Disclosure

  As with the 1992 bill, the enhanced disclosure scheme will apply to listed and unlisted entities in which there is a significant investor interest. These entities are referred to as `disclosing entities'. In addition to listed entities, unlisted entities, primarily prescribed interest schemes and debenture issuers, will be covered if they issue a prospectus or engage in analogous activities to raise funds or trade in securities. The treatment of prescribed interest schemes is largely consistent with the relevant recommendations of the review of `Collective Investments' by the Law Reform Commission and the Companies and Securities Advisory Committee, which was tabled in September.

  Flexibility is provided to enable regulations or ASC class orders to alter the effect of the disclosure obligations under the Corporations Law where this is considered appropriate.

  Enhanced disclosure will be achieved as a result of new legislative requirements for periodic reporting and for continuous, or ongoing, reporting.

  The major change in relation to periodic reporting is the introduction of statutory half-year reports. These reports will be similar to, but not as detailed as, the present annual financial statements. The Australian Accounting Standards Board will have power to set standards for half-year accounts. There will be a requirement for an auditor to review, but not audit, the half-year accounts.

  As previously mentioned, the continuous disclosure obligations for listed entities will be based on the Stock Exchange requirements. Civil, and in limited cases criminal, sanctions will apply where inadequate disclosure would reasonably be expected to materially affect the price or value of the relevant securities. This criterion—which needs to be satisfied in addition to showing that a breach of the Listing Rules has occurred—will ensure that only serious breaches of the disclosure requirements are subject to direct legislative sanctions.

  For unlisted entities, a statutory scheme analogous to that proposed for listed entities is appropriate to ensure that investors can be fully informed through continuous disclosure to the ASC. However, in many, if not most, cases these entities will already be subject to the supplementary prospectus requirements—and thus will not need to comply with the new obligations.

  Unlike the 1992 bill, no `carve-out' has been included for confidential material to be withheld from disclosure. This is consistent with the approach now adopted of leaving the content of disclosure to the Listing Rules. The Stock Exchange has recognised the need to re-examine the Listing Rules in light of the legislative backing in the bill. It proposes to consider, in particular, the adoption of an express confidentiality provision. Should it be necessary, such a provision could be made by Regulation.

  The success of the approach now adopted for listed entities in relation to enhanced disclosure depends upon a vigorous and effective approach by the Stock Exchange to the enforcement of its disclosure rules. It also depends on close and effective cooperation between the Stock Exchange and the ASC. This cooperation is already apparent in a number of areas and will be further enhanced by the proposed conclusion of a Memorandum of Understanding between the 2 regulatory bodies to provide for cooperation in the enforcement of obligations on listed companies.

  I am confident that the new legislative framework and the enhanced role of these bodies can achieve the necessary enhancement in disclosure. However, the bill requires a review by the Companies and Securities Advisory Committee after 18 months of the commencement of the continuous disclosure and related enforcement provisions. This review, to be completed within a further 6 months, will provide an important, early assessment of the effectiveness of the legislation.

  Information released to the market by the ASX about listed entities will be given to the ASC and, together with information provided by listed entities, will be accessible through the ASC database.

  Significant reforms will be made to the powers and immunities of the Stock Exchange to ensure that it can properly carry out its major role in securing prompt and full disclosure. As with the 1992 bill, the 1993 bill expressly confers qualified privilege on the Stock Exchange in carrying out its functions. New measures in this bill will remove the requirement for the Exchange to give an undertaking as to damages when it takes court action and enable the ASC to share confidential information with the Exchange.

  A further, very important new measure will require securities and futures exchanges to notify the ASC of serious breaches of the Corporations Law or of their rules. This will ensure that the ASC receives, as a matter of right, information necessary to enable it to take appropriate enforcement action.

  (b)  Prospectus Reforms

  The new approach to prospectuses introduced in the 1991 legislation is generally regarded as having been very successful.

  However, in a number of areas it has become clear that, without detracting from the thrust of the provisions, amendments are appropriate to improve and streamline their operation:

  Consistent with the enhanced disclosure obligations, listed entities which fulfil certain conditions will be able to rely on a more limited prospectus that contains information relating to the particular offer of securities, including its effect and the rights attaching to the securities.

  Except in the case of sales of 30% or more of an entity, the requirements for secondary prospectuses will be abolished and replaced by a requirement for an information memorandum.

  Incorporation of documents into a prospectus will be facilitated where the document is lodged with the Commission, a summary is included in the prospectus and a copy of the full document made available without charge on request.

  The provisions on supplementary prospectuses will be clarified and in some cases tightened. A replacement prospectus, incorporating the original prospectus and any changes, will be permitted as an alternative to a supplementary prospectus.

  Refunds will be required where applications for securities are made on the basis of an out-of-date prospectus.

  (c) Other Reforms

  A major reform will be made to the Corporations Law to clarify and relax the present restrictions on companies which wish to insure or indemnify their officers (including directors) and auditors. This reform will meet long-standing criticisms of the present law and is based on reports of both the Companies and Securities Advisory Committee and its predecessor, the Companies and Securities Law Review Committee.

  Another reform in the bill will enable a document from the ASC's database to be admissible in a court proceedings as prima facie evidence of the matters stated, without certification of the document.

Financial Impact

  Provision has been made for additional costs which will be incurred by the ASC in relation to the enhanced disclosure system. The 1992 budget allocated additional expenditure of $3.2m over the following 4 years. The funds were to cover upgrading of the ASC's computer system and ongoing administrative costs. However, the ASC expects ongoing costs to be substantially offset by revenue raised through charges for access to new information on its national database.

  Significant changes are now proposed in the legislative scheme—butthese changes do not affect the need for funding the ASC to perform its role.

  Further details, including the financial impact of the bill on business, are contained in the Explanatory Memorandum. While some additional costs can be expected for business, these should not be significant. For listed entities, continuous disclosure and half-year reporting is already required by the Stock Exchange Rules. Most unlisted entities covered by the bill will already be subject to continuous disclosure through the supplementary prospectus provisions. However, the new civil and criminal sanctions for failure to comply with disclosure requirements may result in some additional compliance costs, consistent with the need to ensure appropriate disclosure on a continuous and periodic basis.

Future Reforms

  The Commonwealth is not resting on its laurels. The platform already in place means the Government can now take a more measured approach to reform and honourable Senators may be aware that I have recently initiated a major long term process to progressively simplify the Corporations Law. We cannot be satisfied only with a regulatory regime that protects investors. It must also be designed to be clearly understood by all who must comply with it, with cost and other impositions on commercial activity kept to the minimum necessary to adequately safeguard investors. The aim will be a user-friendly Law.

  I look forward to bringing the initial results of that review into the Parliament within its current life. However, achievements under this program will take some time and in the meantime it is appropriate that certain reforms proceed separately. In addition to introducing the present bill, I propose to release for public comment very shortly a draft bill containing miscellaneous amendments to remedy deficiencies and anomalies in the Corporations Law and the Australian Securities Commission Act 1989. These amendments will improve the operation of those laws and facilitate the operation of the ASC.

  A number of important reforms remain to be considered by the Government. These include reforms of corporate structures to cater for the needs of small business, regulation of collective investments and enhanced rights for shareholders to take legal action against company management.

Conclusion

  In accordance with the Heads of Agreement between the Commonwealth, the States and the Northern Territory on corporate regulation, the Ministerial Council on Corporations has been consulted and, to the extent necessary, given approval for the introduction of the bill into Parliament.

  I present the explanatory memorandum to this bill and commend the bill to the Senate.

  Debate (on motion by Senator Panizza) adjourned.