23 June, 2014

In late 2013, ASIC announced it had commenced operation of its new AUD 43.7m Market Analysis Intelligence (MAI) system. The system, taking advantage of algorithmic trading technology, allows analysis of trade data for patterns and relationships in real time.

Policing insider trading represents a key challenge for regulators and is generally seen as an important objective in ensuring market integrity and fairness.

The key provision prohibiting insider trading is found in s 1043A of the Corporations Act 2001 (Cth) which requires three elements to be proven:

1. the insider possesses inside information;
2. the insider knows, or ought reasonably to know that the information was inside information; and
3. the insider (whether as principal or agent) applied for, acquired, or disposed of financial products, or entered into an agreement to apply for, acquire, or dispose of financial products; or procured another person to do the same.

While MAI will be able to provide evidence with respect to element (3) above, ASIC will still need to prove elements (1) and (2) above by either (i) beyond reasonable doubt for criminal liability or (ii) on the balance of probabilities for civil penalties. It will also turn on the resources available to the regulator in pursuing such prosecutions with the usual evidentiary burdens.

The new MAI system is but one of four federal government deliverables. Others deliverables include advanced analytic and investigative capabilities, a new portal to boost collaboration and communication with market participants, and the development of a workflow system that will assist ASIC to improve the management of its cases from the moment ASIC receives an alert, complaint or enquiry, to the end of an enforcement action. It is expected that these deliverables will assist in the enforcement process.

In the global context of financial system regulation, arguably ASIC is playing catch up with the US. While the US is a larger market and the government is set to make significant revenues from penalties and sanctions, the Financial Industry Regulatory Authority, uses a consolidated surveillance system, called Sonar, which in addition to monitoring stock-price fluctuations or spikes in volume, reads all news that is published or circulated about any stock on the exchanges it oversees. At any given time, the Financial Industry Regulatory Authority investigates between 200 to 400 insider trading matters, and while not all investigations are referred to the Securities Exchange Commission (SEC), unlike ASIC, the regulator collects information (chronologies and investment bankers and trading data) to be stored in a database for use in future investigations.

The introduction of ASIC’s MAI system comes on the back of the increasing political pressure placed on ASIC to prosecute white collar crime. Recently, ASIC was criticised by some commentators for refusing to reopen its investigation into the purchase of 32,500 shares by David Jones non-executive directors Steve Vamos and Leigh Clapham on 29 October 2013. The purchase was made three days before David Jones’ shares soared on news Myer made a confidential AUD 3bn scrip merger proposal to David Jones.

ASIC Focus Areas For 2014

31 December 2013 Financial Reports

ASIC has signalled that it will focus on, among other things, effective disclosure in operating and financial reviews, revenue recognition and expense deferral policies, asset values and impairment testing, and going concern assessments when reviewing 31 December 2013 financial reports of listed entities.

Chairman’s Speech On Focus Areas For 2014 And Expected Regulatory Changes

• On 31 October 2013, the Chairman of ASIC, Mr Greg Medcraft noted structural changes, financial innovation-driven complexity and globalisation as three emerging challenges for ASIC.
• Regarding financial complexity, Mr Medcraft focused on concerns about the sale of hybrid securities, the emergence of dark liquidity and automated trading, and the risks posed by cybercrime.

For further information, please contact:

Ashley Wharton, Partner, Ashurst 
[email protected]

 
Andrew Carter, Partner, Ashurst
[email protected]

 
Sonia Tame, Partner, Ashurst
[email protected]

 
Mark Elvy, Partner, Ashurst
[email protected]

 
Adrian Chai, Partner, Ashurst
[email protected]

 
Chris Goddard, Partner, Ashurst 
[email protected]

 
Jonathan Gordon, Partner, Ashurst
[email protected]

 
Gareth Hughes, Partner, Ashurst
[email protected]

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