By Ian Ramsay and Miranda Webster
The following post provides an overview of the key findings from our research on the enforcement outcomes of the Australian Securities and Investments Commission (ASIC) for the five-year period from 1 July 2011 to 30 June 2016. The full journal article can be accessed here.
ASIC is Australia’s corporate, markets, financial services and consumer credit regulator. This government organization regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. ASIC dedicates a significant amount of resources (around 70%) to surveillance and enforcement activity, reflecting its view that enforcement is an important part of its regulatory role.
In 2012, ASIC began publishing two ASIC Enforcement Outcomes reports (Reports) each year on the enforcement outcomes achieved over a six-month period. An ‘enforcement outcome’ refers to ‘any formal action taken to secure compliance, about which ASIC has made a public announcement’ — with the exception of the ‘Small business compliance and deterrence’ outcomes, which are generally not the subject of a public announcement. The outcomes include court determinations (civil and criminal), administrative remedies, public warning notices and the acceptance of enforceable undertakings.
The enforcement outcome data is recorded with reference to ASIC’s enforcement teams: that is, ‘Market Integrity’, ‘Corporate Governance’, ‘Financial Services’ and ‘Small Business Compliance and Deterrence’ (‘Small Business’). The results are divided by enforcement method (‘criminal’, ‘civil’, ‘administrative remedies’, ‘enforceable undertakings/negotiated outcomes’ and ‘public warning notice’), and they are also divided into several categories of misconduct. For example, the enforcement results of the Market Integrity enforcement team are categorised as ‘insider trading’, ‘continuous disclosure’, ‘market integrity rules’, and ‘other market misconduct’.
Using the quantitative data provided in ASIC’s first ten Reports as well as enforcement media releases published by ASIC, we have analysed ASIC’s enforcement outcomes from 1 July 2011 to 30 June 2016. We have made a number of findings regarding ASIC’s enforcement action over this five-year period.
First, ASIC had much higher numbers of criminal enforcement outcomes overall, as well as in each six-month reporting period, than other types of enforcement outcomes. Over the five-year period, 67% of all enforcement outcomes were criminal. This was followed by administrative outcomes (23%), enforceable undertakings and other negotiated outcomes (6%) and civil outcomes (4%). However, this high percentage of criminal outcomes was due to the high number of criminal outcomes obtained by ASIC’s Small Business team. When Small Business outcomes are excluded, the results are very different. Over the five-year period, 48% of all enforcement outcomes were administrative outcomes, followed by enforceable undertakings and other negotiated outcomes (20%), criminal outcomes (18%), civil outcomes (12%) and public warning notices (1%).
Second, there were significant differences in the number of enforcement outcomes that were obtained by each of ASIC’s enforcement teams. ASIC’s Small Business team was responsible for nearly 70% of ASIC’s total enforcement outcomes. The reason for such high enforcement outcomes in the Small Business area is that ASIC obtains a high number of successful prosecutions in relation to strict liability offences committed by directors in the context of insolvency. These offences for failure to assist external administrators are summary offences and can generally be prosecuted by ASIC’s own lawyers rather than requiring referral to the Commonwealth Director of Public Prosecutions.
Third, there were some clear differences in the number of times that the different enforcement teams used certain types of enforcement methods. ASIC’s Small Business team generally applied criminal sanctions (approximately 89% of their enforcement outcomes were criminal outcomes), whereas overall the other enforcement teams were more likely to use administrative remedies (approximately 48% of Market Integrity outcomes, 38% of Corporate Governance outcomes and 52% of Financial Services outcomes). Additionally, the Market Integrity and Corporate Governance teams also had a focus on criminal sanctions (40% and 29% of their respective aggregate enforcement outcomes), whereas the Financial Services team obtained many enforceable undertakings and negotiated outcomes (24% of that team’s outcomes) and only 11% of the Financial Services team’s outcomes were criminal.
The differences in the use of enforcement methods between ASIC’s regulatory areas are a result of different enforcement approaches taken towards certain categories of misconduct. For example, when ASIC uses formal enforcement action to respond to market integrity issues, it generally takes a criminal enforcement approach to insider trading and market manipulation, whereas it generally uses administrative remedies to respond to breaches of continuous disclosure obligations and market integrity rules. In comparison, ASIC’s Corporate Governance enforcement team is more likely to take criminal action against directors (with some use of civil actions and administrative remedies), but enforcement action against liquidators or auditors is more likely to result in administrative remedies or enforceable undertakings.
In deciding which enforcement tools to use, ASIC considers the circumstances of each case and ASIC’s decision will be heavily influenced by the evidence that is available to establish the facts of a matter. Other factors that will influence ASIC’s enforcement action include the seriousness of the misconduct (e.g. whether the misconduct was dishonest or deliberate, or whether it caused widespread public harm), the time since the misconduct occurred, and whether it was an isolated instance of misconduct or whether it is continuing.
One reason for the differences in the types of enforcement methods used by the enforcement teams may be the seriousness of the kinds of misconduct that particular regulatory areas are responsible for regulating. For example, ASIC has stated a preference for pursuing criminal proceedings for alleged insider trading and market manipulation misconduct, and this clearly impacts the ‘Market Integrity’ outcomes. Another factor that may influence the type of enforcement methods used by an enforcement team is whether the misconduct is committed by a well-resourced individual or company. In 2014, the Senate Economics References Committee, in its report on the performance of ASIC, noted a perception (disputed by ASIC) that ASIC is reluctant to investigate and take action against large companies and wealthy individuals. The Committee highlighted concerns that: ‘ASIC is reluctant to take complex court cases, and instead prefers easier targets; ASIC does not have the resources to take on well-resourced firms or individuals; and/or where ASIC does pursue enforcement action against large businesses, the result achieved generally relies on less severe remedies such as an enforceable undertaking, rather than court action.’ It was suggested that ASIC may generally avoid court action (with the exception of prosecuting summary offences) due to the expense and time involved.
Ian Ramsay is the Harold Ford Professor of Commercial Law at the Melbourne Law School (University of Melbourne) and Miranda Webster is a Research Fellow at Melbourne Law School, University of Melbourne.
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