Commonwealth Numbered Regulations - Explanatory Statements

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Statutory Rules 2002 No. 126

Issued by the Parliamentary Secretary to the Treasurer

Corporations Act 2001

Corporations Amendment Regulations 2002 (No. 5)

Section 1364 of the Corporations Act 2001 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed by regulations or necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Act.

The purpose of the Regulations is to support the reforms to the regulation of the financial services industry, which were included in the Financial Services Reform Act 2001 (FSRA) and associated legislation.

The Financial Services Reform Act 2001 amended the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, and provides:

       a single licensing regime for financial sales, advice and dealings in relation to financial products;

       consistent and comparable financial product disclosure; and

       a single authorisation procedure for financial exchanges and clearing and settlement facilities.

The Regulations relate to such matters as:

       telephone monitoring during takeover bids;

-       addressing concerns regarding the inappropriate recording of telephone conversations of participants in the wholesale takeovers market who are acting in their professional capacity; and

-       making technical amendments to transitional arrangements;

       minor technical amendments relating to:

:       the prescribed period for spot foreign exchange contracts exempted from the definition of derivative;

:       the prescription of additional agencies to which compliance assessments can be passed;

:       exclusions from the list of things declared to be derivatives;

:       the Australian Securities and Investments Commission's (ASIC's) role in supervising compliance with the listing rules where the market licensee is in competition with the listed entity;

:       the correction of a duplicate phrase;

:       the means by which information may be given for a range of disclosure obligations to financial product holders under Part 7.9 of the FSRA;

:       re-establish a mechanism for the funding of Australian Stock Exchange Limited's (ASX's) compensation arrangements; and

:       the operation of transitional arrangements for Australian Financial Services Licenses.

Details of the Regulations are set out in the Attachment, ordered according to appearance in the Schedules of the Regulations.

Regulations 1, 2 and 3, and Schedule 1 of the Regulations, which clarify the need to obtain a licence and correct a referencing error and provides transitional arrangements in relation to telephone monitoring, commence at 12:02 am on 11 March 2002.

Schedule 2 of the Regulations, which refer to telephone monitoring by a wholesale holder, commence at 12:03 am on 11 March 2002.

Schedule 3 of the Regulations, concerning remaining issues such as the clarification of the derivative definition and potential conflict situations, commence on gazettal.

Regulations 1, 2 and 3, and Schedules 1 and 2 of the Regulations commence on 11 March 2002 to clarify the operation of the regulations from the date they initially commenced.

Item 4 of Schedule 1 is made under section 1444 of the Act. Subsection 1444(6) of the Act states that despite subsection 48(2) of the Acts Interpretation Act 1901, regulations made for the purposes of section 1444 may be expressed to take effect from a date before the regulations are notified in the Gazette.

The items 1, 2 and 3 of Schedule 1 and the proposed item 1 of Schedule 2 are not made under section 1444 of the Act. These regulations do not disadvantage the rights of a person as at the date of notification or impose liabilities on a person in respect of anything done or omitted to be done before the date of notification (subsection 48(2) Acts Interpretation Act 1901).



1. Need for an Australian financial services licence - sub regulation 10.2.40A(3)

Sub regulation 10.2.40A(3) has been removed. This sub regulation has created confusion and appears to contradict the intention of the regulation more generally.

2. Telephone monitoring during takeovers - regulations 10.2.201 and 10.2.201A

These amendments to regulation 10.2.201 correct a referencing error that affected the operation of the transitional provisions applying to telephone monitoring.

Regulation 10.2.201A provides a transitional mechanism to cater for references to financial services licensee under Part 6.5 of the Act and associated regulations. The effect of the regulation is to include holders of a licence of any type granted under the old Corporations Act in references to professional investors in paragraph 648J(4)(c) of the Act or financial services licensees in sub regulation 6.5.01(3).


3. Wholesale holder of securities - telephone monitoring during bid period - regulation 6.5.01

Amendments to regulation 6.5.01 broaden the definition of wholesale holder to apply to anyone who is in the employ of or acting on behalf of a bidder or target where the telephone conversation relates to the discharging of their duties to the bidder or target as a wholesale holder.

These amendments remove potential restrictions on the flow of information between parties who are otherwise acting on a professional basis in a wholesale market. It is not the intent of the telephone monitoring provisions to capture the telephone conversations of a person acting in a professional capacity on the behalf of the bidder or target, merely because that person held a relevant amount of securities in either the bidder or target.


4.       Exemption of spot foreign exchange contracts from the definition of derivative

Regulation 7.1.04(1)(a) is intended to exclude spot foreign exchange contracts from the definition of derivative in section 761D.

Currently, regulation 7.1.04(1)(a) would exclude spot foreign exchange contracts that are arranged on day 1 and settled less than 2 days later.

However, in general spot foreign exchange contracts are settled up to day of trade plus 2 days. Given that 2 days is not less than the number of days currently prescribed in regulation 7.1.04(1)(a) (rather, 2 days is equal to the number of days prescribed) these provisions have the effect of including spot foreign exchange contracts in the definition of derivative.

To capture foreign exchange contracts that are settled up to day of trade plus 2 days, paragraph 7.1.04(1)(a) has been amended to 3 business days.

5.       Arrangements declared not to be derivatives - sub regulation 7.1.04(4)

Sub regulation 7.1.04(2) declares certain arrangements to be derivatives for the purposes of subsection 761D(2). A thing so declared under section 761D(2) is a derivative despite anything in subsections 761D(3) and 761D(4).

The consequence of this regulation is that arrangements currently declared not to be a derivative under section 761D(3) and section 761D(4) are overridden by sub regulation 7.1.04(2), including those arrangements in section 761D(3)(c). This is not the intended outcome.

The amendment gives effect to those arrangements declared not to be derivatives under sections 761D(3) and (4).

6.       Potential conflict situations - regulation 7.2.16

Subsection 798E(1) of the Corporations Act 2001, as amended by the Financial Services Reform Act 2001, provides that the regulations may make provision in relation to the rules and procedures that are to apply in the case of conflicts, or potential conflicts, between the commercial interests of the licensee and the need for the licensee to ensure that the market operates in the way mentioned in paragraph 792A(a).

The primary obligation to supervise its market, and to address conflicts and potential conflicts between the commercial interests of the licensee and the need for the licensee to ensure that it operates a fair, orderly and transparent market, is on the market licensee (paragraph 792A(c)). Thus the power in section 798E is only appropriately used in cases where a specific and significant conflict or potential conflict has arisen.

Regulation 7.2.16 identifies when such a conflict, or potential conflict is taken to arise and, following a request by the competitor, empowers ASIC, instead of the licensee (the Australian Stock Exchange), to make decisions and to take action under the market's operating rules in relation to such a conflict or potential conflict. In addition, subregulations 7.2.16(14) and (15) allow the competitor to request that ASIC no longer take this role and that, instead, the Australian Stock Exchange oversee the competitor's compliance with the listing rules.

These amendments, omitting subregulation 7.2.16(15) and substituting subregulations 7.2.16(15) to (17), clarifies this procedure and requires ASIC's approval for such a change.

7.       Use of excess money from fidelity fund - sub regulation 7.5.92

A duplicated phrase 'market licensee' has been removed.

8.       Agencies for compliance assessment - regulations 7.2.09, 7.3.07 and 7.3.08

Section 823CA of the Corporations Act 2001, as amended by the Financial Services Reform Act 2001, empowers the Reserve Bank to assess how well a CS (clearing and settlement) facility licensee is complying with its obligation to comply with the financial stability standards applying to it and to do all other things necessary to reduce systemic risk.

Similarly, section 823C empowers ASIC to assess how well a CS facility licensee is complying with any or all of its other obligations as a CS facility licensee under the new Chapter 7, and section 794C makes a comparable provision in relation to market licensees.

Subsections 794C(5), 823C(5) and 823CA(4) provide that if an assessment, or part of an assessment, relates to a serious contravention of a law of the Commonwealth or of a State or Territory, ASIC or the Reserve Bank, as appropriate, may give a copy of the written report, or the relevant part of the report to the Australian Federal Police, certain other nominated agencies and those agencies prescribed by regulations for the purpose of new paragraph 794C(5)(d), 823C(5)(d) or 823CA(4)(d), as appropriate.

These amendments to regulations 7.2.09, 7.3.07 and 7.3.08 prescribes further State agencies for these purposes.

9.       Ways of giving information - regulations 7.9.631, 7.9.75A and 7.9.75B

Regulations 7.9.631, 7.9.75A and 7.9.75B provide a consistent basis for the method of giving information under various product disclosure obligations. The regulations provides the means by which information for the disclosure of material and significant events (section 1017B of the Act), periodic statements to retail clients (section 1017D of the Act), and confirmation of transactions (section 1017F of the Act) may be provided. The means of providing information under the regulations are generally consistent with the means of providing information under the Product Disclosure Statement provisions.

Regulations 7.9.75A and 7.9.75B also detail the means by which information under section 1017DA of the Act, including 'fund information' (as described by subdivision 5.5. of the Corporations Regulations 2001) can be provided.

10.       Funding for ASX National Guarantee Fund - regulation 10.2.20B

Regulation 10.2.20B has been prepared to provide for the payment of interest on Australian Stock Exchange Limited (ASX) participants' accounts to the Securities Exchange Guarantee Corporation Limited (SEGC). The regulation imposes a requirement on ASX participants who have not transitioned to licensing requirements under the Financial Services Reform Act 2001 to pay interest to the SEGC until they opt into the new regime. The process under which interest is earned, calculated and paid to the SEGC under this regulation differs from that set up under repealed Corporations Act provisions. However, the outcome is much the same.

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