December 2001Feature article: Exploring the capital markets universe: security and fund types reviewed

Security and fund types are the building blocks of the capital markets universe. It is easy to lose sight ofjust how many there are.

The feature article Exploring the Capital Markets Universe provides a 'helicopter' overview. There aresome very innovative products with lots of bells and whistles and then there are others that seem to havea cyclical revival. Dual listed securities would fit the first description and converting preference sharesthe latter. Take a look - it is quite illuminating.

Where a security type shows great innovation early consideration should be given to the possibility ofpatenting it as a financial product. At first glance, patents and financial products would appear to beincompatible concepts. However, recent developments suggest that a wide range of new financialproducts should be patentable in Australia. Andrew Christie, one of AAR's patent partners, explains howin his article.

HighlightsSecurities - HYENAs are not securitiesFSR policies statements - More than you can poke a stick atForeign exempt companies - Changes to ASX Listing RulesBurns, Philp - Restructuring of Burns, PhilpAuditors - Ensuring an independent audit watchdogActively managed ETFs - Uncle Sam wants your viewsInvestment advisers - Reforming the law in New Zealand

If you'd like to see other editions of In the Money, or you're interested in our other publications, pleasevisit our Capital Markets publications page.

If you enjoyed this publication and would like to be added to our Capital Markets mailing list or provideany feedback, please contact Susan McKendry.If you would be interested in our Finance and Tax bulletin and/ or related information please contact LilaWehbe.

Exploring the capital markets universe: securityand fund types reviewedby the Allens Arthur Robinson Capital Markets Group

There are many types of securities and funds which make up the capital markets universe. This issue of"In The Money" provides a helicopter overview of the range of these securities and fund types. AAR hasover 130 people who cover this broad field, in depth, through focussed teams which study not only thelegal and tax issues but also market practice and key market developments.

Security typesShares in dual listed companiesExchangeable sharesPreferred and hybrid securitiesTracking sharesTier one capital instrumentsStapled securitiesRetail debenturesConvertible debt securitiesPerpetual (income) securitiesPure debt securitiesCMBSStructured NotesCredit wrapped securitiesCredit linked notesWarrants

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Fund typesExchange traded fundsHedge fundsPrivate EquitySector fundsInfrastructure investment fundsSuperannuation fundsIDPSProperty trustsEnvirocredits funds

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Security types

Shares in dual listed companies (DLCs)

AAR has acted on the 2 recent Australian DLCs: representing Brambles on the Brambles/ GKN DLC andrepresenting BHP on the BHP/Billiton DLC. The shares in each DLC entity are generally speakingnormal ordinary shares but the DLC arrangement requires immensely complex structures to be put inplace which have the result that

shareholders in the two DLC entities do not sell their securities or buy any securities in order toform the DLC;

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the DLC entities do not dispose of assets to each other in order to form the DLC;●

the DLC entities enter into arrangements to equalise in agreed proportions the distributions on thesecurities which each has on issue;

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each DLC entity retains its own legal entity status, but the DLC companies are run as part of oneeconomic unit;

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there is some sort of capital reconstruction, such as a bonus issue, in relation to one of the DLCs sothat the proportionality of value between them and their shares is correct.

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Exchangeable shares

These are securities which are exchangeable for other securities by a different issuer in particularcircumstances. The initial security may, for example, be a share in a New Zealand company which inparticular circumstances can be put to an Australian company which in return issues shares in the listedAustralian company. There may be regulatory reasons for capital to be needed in a particular company ina particular jurisdiction on a temporary basis and it may make more sense for an entity in that jurisdictionto raise the capital, but to enhance liquidity and certainty for investors, investors may require the abilityto “flip” the security into a more liquid parent security upon the happening of various circumstances eg, atakeover for the parent. One of the challenges with this type of structure is to give investors the ability toinfluence the casting of the same number of votes as they would have been able to vote had they heldshares in the listed parent company from day 1. There are also other complex issues relating to dividendsupport and taxation.

Westpac's NZ Class Shares issued by a Westpac entity in New Zealand is an example. AAR acted forWestpac.

Preferred and hybrid securities

This category comprises preferred equity, redeemable preferred equity, convertible preferred equity andconverting preferred equity. Each has the characteristics as described below.

Preferred equity

Preference shares or preference units are like debt instruments in a commercial sense in that they carry afixed dividend (payable only to the extent there are profits). In a winding up the preferred equity ranksahead of ordinary equity as regards return of capital.

Redeemable preferred equity

Preference shares or units can be made redeemable (but redemption of preference shares may only occurout of profits or out of the proceeds of a fresh issue of shares for the purpose of funding redemption). Aredemption right makes this type of security more like a loan. Redeemable preference shares used to be avery popular financing technique.

Convertible preferred equity

This is preferred equity which converts into ordinary equity at the option of the investor (ie typicallyconvertible preference shares). This gives the investor the comfort of a quasi-subordinated debt rankingwith some equity upside.

Converting preferred equity

This is preferred equity which converts into ordinary equity sooner or later whether the investor wants toor not (ie typically converting preference shares). Often the conversion formula protects the investor fromshare price drops to some extent.

Hybrid securities are popular when the outlook for “ordinary” shares is just that, rather ordinary. Thismeans now, since the economic climate is less than robust in many key economies. Profit growth is onthe cards for only a few lucky or extremely well managed companies.

AAR has worked on many innovative deals such as:

advising Burns, Philp on its renounceable rights offering of 355 million converting preferenceshares;

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St.George Bank's innovative $300 million offering of non-cumulative, resetting, non-redeemableconvertible preference shares (known as PRYMES);

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Amcor's $400 million offering of perpetual resetting convertible notes (called PACRS); and ●

QBE's offering of US$172.5 million mandatory converting securities (known as FELINEPRIDES).

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Tracking shares (also called Letterstock)

These are shares which are issued by a company which owns more than one business and where theterms of issue of the tracking shares are such that their capital and distribution rights relate to theperformance of one or more of those businesses, but not all of them. In other words, the shares “track”the performance of the relevant business or businesses. Such tracking shares are intended to facilitatecapital raising by a company which owns one or more businesses which are not attractive to the market atthat time. A number of problems with this type of share make it rare in Australia. For example, if the“tracked” businesses are profitable and would normally permit dividend distributions on the trackingshares, the legal ability to make such distributions may be impaired by losses made in the other“unattractive” businesses. Spin offs achieve the same objective but result in a loss of control of thebusiness spun off.

Tier one capital instruments

Tier one is a hybrid of debt and equity which counts as capital for bank capital purposes, but preferably istreated as debt for tax purposes.

Recent tax changes will put pressure on some existing hybrids, but will also clarify the ground rules fornew issues under different structures. Expect some new issues in the New Year.

Stapled securities

This is where securities of different types are linked together such that the linked securities cannot betraded or transferred alone but only together. A common combination is a unit in a trust combined with ashare in a company. This type of structure is usually in part intended to facilitate a sensible taxationoutcome. For example, in some cases it is best for a trust to own real property and for any active propertyrelated business to be carried out by a company. In this way the totality of the relevant business is ownedbetween the trust and the company and all profits/losses are distributed through the company and the trustto investors. Those investors do not need to concern themselves with the precise allocation of assetsbetween the two entities as the investor holds a security in each entity.

In some cases, a merger of entities is carried out using a stapled security structure. This generally avoidscrystallising taxable gains by the holders of securities in the entities which are to merge. If you aresecurity holder in Entity 1 which is to merge with Entity 2, then instead of selling your securities inEntity 1, you are issued securities in Entity 2. Security holders in Entity 2 are likewise issued securities inEntity 1. A number of mergers in the property trust sector have occurred using this mechanism.

AAR has acted for the lead managers on many capital raisings by issuers of such stapled securities.

Retail debentures

There is renewed interest in debentures aimed at the retail market now that many retail investors are moreinterested in yield than capital growth. Traditionally the market for debt instruments has been mostly awholesale one but signs are that this may change. Retail marketing of course requires a lodgedprospectus.

AAR acted on a recent debenture issue targeted to retail investors, with an attractive yield.

Convertible debt securities

These are debt securities which convert to equity at the option of the investor (typically convertiblenotes). Convertible debt securities typically have a fixed coupon thereby providing yield certainty andgive the holder the right to participate in share price growth through a mechanism which allows the debt/investment to be converted to ordinary shares.

Convertible notes are part of a growing section of the corporate securities market described as hybrids. Inthe last 2 or 3 years, there has been a growing demand for fixed and floating income investments fromthe retail market, especially as share-market uncertainty has focussed investors on yields.

The key legal issues to be considered include the tax aspects of both domestic and cross-borderconvertible debt securities and accounting issues eg: whether the convertibles will be treated as equity oras debt? New tax legislation makes it reasonably clear which hybrid structures will be classified as debtand which will be counted as equity for taxation purposes so they should continue to be a popular capitalmanagement tool.

AAR has advised on a number of large issues of convertible debt.

Perpetual (income) securities

These are debt securities which are not repayable or are only repayable in very limited circumstances oronly if a particular regulator does not object. In and around 1999 a great deal of capital was raised by anumber of issuers issuing this type of security. However, many of these securities are now trading at adiscount to their issue price and tax changes have made them less attractive. They aim to provide tax

deductible interest and superior capital rating with banking authorities.

AAR acted for the lead managers in the first such issue in Australia.

Pure debt securities

This are debt instruments issued by corporates, some of which may be traded in the stock market or overthe counter (OTC). Among the more common forms of instruments are:

medium term notes (MTNs)●

Kangaroo bonds●

commercial paper●

Eurobonds●

CPI indexed debt securities●

The basic features of all these instruments is an obligation to repay together with periodic interest (ifany). The major differences between the securities relate to the term of maturity, whether any interest ispayable and if so how it is calculated, and the offer structure used to issue and distribute the securities.

AAR has a very substantial track record in this area.

CMBS

CMBS is short for Commercial Mortgage Backed Securities. It takes 2 forms, with the most commonform not really being a true securitisation, but rather a structured form of property finance.

The first form involves a financial institution selling its interests in commercial property based loans andmortgages. Another form involves a substantial corporation leasing its properties, and then sub-leasingthem back. The sub-lease payments are then securitised. These deals are like an MBS deal, whichinvolves the securitisation of residential mortgages. They may be called a “true securitisation”. Not manyof these have been done, primarily because of the cost of the credit enhancement.

The second form involves a financial institution, often a listed property trust, issuing notes that arebacked by mortgages over commercial properties. This form draws on AAR's experiences both inproperty finance and securitisation.

AAR has acted on many CMBS deals.

Structured Notes

These are debt securities with lots of bells and whistles, which vary from one type to another.

Under one structure, notes are issued as 'Structured Notes' and remain as Structured Notes until aparticular Conversion Date (which has a discretionary element, allowing either party to nominate aconversion date once an initial period expires). At the Conversion Date, the Structured Notes convert intonormal floating rate notes. The general purpose of Structured Notes is to allow the holders of such notes,for so long as they are structured notes, to match returns on the notes to the performance of a nominatedindex or pool of bonds (especially government bonds).

Credit wrapped securities

Credit wrapped capital markets issues involve the issue by highly rated financial organisations of afinancial guarantee in respect of note issues or other capital markets products. In a standard creditwrapped MTN deal, the financial guarantee covers the payment of scheduled principal and interest on the

notes and certain amounts in respect of some withholdings. Rating agencies rate the notes (or otherproduct) on the basis of the credit rating of the financial guarantor, resulting in a AAA rating for the noteissue where the financial guarantor is AAA.

AAR’s experience in credit wrapped capital markets issues is second to none in Australia. We representboth MBIA Insurance Corporation and AMBAC Assurance Corporation here and have acted on 10 of thecredit wrapped note issues so far sold into the primary market here.

Early credit wrapped transactions in Australia focussed on refinancings - particularly of privatisation debtin the utilities and infrastructure sectors. Likely future developments of the credit wrapped productinclude kangaroo bond issues (such as the Scottish power deal), securitisations (for example the recentSamsung transaction), PFIs, credit default swaps and other derivatives. Credit wrapped issues are likelyto be used more in initial financings, rather than just refinancings, as has been the case in the UK.

Credit linked notes

This is a true synthetic securitisation. It involves a financial institution identifying a pool of financialassets and entering into a credit risk swap or obtaining a financial guarantee from a special purpose trust.The swap or guarantee covers the financial institution against agreed losses on the underlying pool ofassets. The special purpose trust then issues some notes (eg 15%-20% of the nominal amount of thecredit swap or financial guarantee) to investors. The proceeds of those notes are then placed on depositand form the first source of funds if a claim is made under the credit swap or financial guarantee.

The second form of support is a back up credit swap or financial guarantee from a highly rated party (eg,an OECD bank).

The main issue to deal with in these type of structures is whether the credit swap or so called financialguarantee constitutes insurance for any of the Insurance Act, GST, tax or stamp duty.

Warrants

Warrants are at the most simple level, derivative option contracts. They are traded on ASX, and aregoverned by a combination of the Corporations Law and the ASX Business Rules. However, warrantsdiffer from traditional exchange traded options in that they trade on the ASX equities board (not thederivatives exchange) and are far more of a retail product than ETOs. It is the retail focus of warrants thatmake them particularly popular. This focus has resulted in significant growth in the number of players inthe market in the last 2-3 years.

As derivatives, warrants are listed "over" certain instruments, such as shares, currencies, stock marketindices or commodities. Warrants range from simple "vanilla" product listed over Australian listedcompanies to highly structured "instalment warrants" that involve funding for investors and truststructures that offer advantageous tax positions.

AAR acts for many of the warrant issuers in the Australian market.

Fund types

Exchange traded funds

Exchange traded funds (or ETFs) are pooled investment products. So, in essence, it is a fund (trust)which issues units and those units are traded on the Stock Exchange. But beyond this, true ETFs areusually index-linked ie, they invest in stocks included in a particular stock market index in theproportions in which they are included in that index so that the performance of the fund replicates the

performance of the index eg the top ASX 50 industrials or top 100 etc.

ETFs combine characteristics of unlisted managed funds and shares - they are structured as open-endedtrusts which are divided into units and have a responsible entity (trustee) but have additional liquiditybecause they are traded on a stock exchange like shares. ETFs generally have lower management feesthan other managed funds because administration costs are lower. This is, in part, because ETFs typicallytrack a market index or a pre-determined portfolio of shares and therefore have none of the usual costsassociated with active investment. Traditional ETFs have two simultaneous markets:

a primary market in which the creation and redemption of units occurs; and●

a secondary market in which existing units are actively traded.●

The primary market consists of professional investors for whom large parcels of units in the fund arecreated or redeemed; transactions are settled in kind, rather than in cash. The secondary market iscash-settled, takes place on a stock exchange and makes the units available to retail investors. ETFs arerequired to be registered as managed investment schemes under the Corporations Act 2001 (Cth).Because they are traded on the ASX, ETFs are also required to comply with the relevant ASX ListingRules.

In the US, the SEC is seeking public views on actively managed ETFs. To read more about this clickhere.

Hedge funds

Hedge funds are usually structured as trusts or companies. What distinguishes hedge funds is not theirlegal form but the investment strategy and the risk profile attaching to such strategy. Now that the returnson ordinary shares are much less attractive than during the bull market, those investors with an appetitefor continuing to receive higher returns, are attracted to hedge funds where the hoped for returns are high.Hedge funds often cater to wealthier individuals who have substantial amounts to invest, but are nowbeing marketed more widely.

Hedge fund investments in the US and Europe have grown to now exceed US$500 billion. Some fundsare, “merger-arbitrage” funds which seek to make money out of changes in share prices of companies thesubject of takeover announcements. Many hedge funds are “long-short equity” funds which seek to beton rising or falling share prices.

Few hedge funds are listed on stock exchanges. Attempts to establish hedge fund indices as benchmarkshave met with difficulties as it would be most relevant to compare one hedge fund with a particularinvestment strategy with other hedge funds having a similar strategy, but the strategies are so varied thatsuch comparisons are difficult.

Private Equity

Private Equity is a general term that is used to describe a variety of different types and stages of equityinvestments in rapidly growing companies. Expressions such as venture capital, angel investments, seedcapital, development capital, mezzanine investments and many others can be categorised as PrivateEquity. The common theme is that the funds for such investments come from "private" sources ratherthan from public fundraising sourced from stock exchange based equity capital markets. The entitiesinvolved in providing this funding are as many and varied as the types of investment they make. Theyinclude pure venture capitalists, high net worth individuals, private equity funds or divisions withininvestment banks, high-tech or other research concerns seeking to reinvest in new technology and superfunds with a private equity focus.

While the concept of Private Equity is not new, it is an expression that has gained profile as a result of

the massive growth in emerging technologies in the last 10-15 years, especially in the United States.Venture capital has been a key driver in the development of Silicon Valley high tech and biotech start-upcompanies and is a strong and expanding industry within Australia.

Private Equity is regarded as a high risk, high return investment strategy and investors seek to protecttheir investment with certain control rights. By way of example, a venture capitalist may seek a boardseat and actively partner an emerging company, helping it to grow, with a view to exiting from theinvestment (for instance, via a trade sale or initial public offering). The timing of such an exit can beanywhere from 3 to 10 years from the date of investment. In contrast, a high net worth individual (oftenreferred to as an "angel investor") may simply take a stake in a company (anywhere between $50,000 and$500,000) without too many rights of control and where the company may have little more than an ideaand a business plan. At the other end of the spectrum, private equity investors may provide developmentcapital to established but expanding businesses or seek to fund a management team in a managementbuyout (MBO) of an existing business and would seek board representation and veto rights.

AAR has a substantial track record in working in the private equity sector in all its forms. Our PrivateEquity team is also able to leverage off our knowledge and experience in the biotechnology andinformation technology practice areas and more generally, our broad equity/ hybrid/ debt capital marketsexperience. The recent announcement of the first "public to private" private equity transaction and theproposed implementation of a favourable taxation regime for Venture Capital Limited Partnerships showthat Private Equity in Australia is a strong industry sector.

Sector funds

Sector funds are managed investment schemes which specialise in investing within a particular assetclass, such as direct property, property securities, international equities, Australian equities, bonds, cashand so on.

Subject to any restrictions contained in its constitution and to its risk/return profile, this type of fund willtypically invest in a range of securities which are available within the sector in which it specialises.Depending on the sector in question, this may include shares, units in other managed funds, derivativesand fixed income securities. These funds may be leveraged through borrowing. The fund will typically bestructured so that its performance can be assessed against a relevant benchmark index. Depending on theunderlying investments, the fund may provide tax-free or tax-deferred income. They are available towholesale and retail investors.

Infrastructure investment funds

Infrastructure funds are commonly established as unit trusts although other structures such as companystructures may be used. They may be retail or wholesale and listed or unlisted. Infrastructure funds ofteninvolve investment in an asset which operates in a low competition environment such as a tunnel or tollway.

AAR recently acted in the establishment of a Bermudan based airports infrastructure fund. It took theform of an open ended mutual fund company.

Superannuation funds

Superannuation funds are required to comply with the Superannuation Industry (Supervision) Act 1993(Cth) (SIS) in order that they are able to accept compulsory superannuation contributions (SG), receiveconcessional tax treatment on their income, and provide benefits that are concessionally taxed.Superannuation funds are subject to various statutory restrictions in relation to investments under the SISAct (they generally cannot borrow, trustees cannot grant a charge over fund assets, trustees cannot

acquire assets from fund members or their associates and the in-house asset rules limit investments in theemployer sponsor and other associates).

AAR has a team of superannuation experts who can provide advice on all aspects of superannuation law.This includes working with trustees and fund managers on fund offer documentation. We also advisesuperannuation fund trustees as to their obligations under the SIS Act in relation to fund investments.

Superannuation fund trustees are increasing in maturity and sophistication and there is a gradual increasein their willingness to be more adventurous in the investments they might consider. Recently, ethicalinvestments and venture capital funds are focussing on superannuation funds as potential investors.

Investor Directed Portfolio Services (IDPS)

IDPS are essentially services for acquiring and holding investments. They are becoming increasinglypopular with investors because of the centralised reporting and administration they provide. There willgenerally be a menu of investment options associated with an IDPS. A crucial feature of an IDPS is thatthe investor makes all the investment decisions (although some of these investment decisions mayinvolve investment into particular managed funds). Arrangements marketed as master trusts or wrapaccounts are normally IDPS. In January of last year ASIC issued a new policy statement on IDPS whichrequired existing IDPS to transition to a new regime.

AAR acted for one of the first fund managers to transition a master trust to the new IDPS regime midway through last year.

Property trusts

These are well known and well established vehicles investing in real property (office buildings and/ orshopping centres and/ or industrial sites). They are sometimes called REITS (Real Estate InvestmentTrusts). Some listed property trusts have moved into issuing medium term notes as an alternative totraditional bank borrowings. This trend should continue after the current economic uncertainties havesubsided. Recently we have seen more activity in wholesale closed end funds and property syndicates.We anticipate that this will continue with heightened interest in suburban office buildings.

Lease renegotiations possibly affecting income streams will start to loom as a significant issue dependingon the lease expiry profile if the economy enters a downturn.

AAR has a dedicated national property funds management group with experience ranging from majorlisted property trusts to single property wholesale funds. We can provide a comprehensive serviceincluding helping with property acquisition, establishing the fund and fundraising (both debt and equity).

Envirocredits funds

This is an emerging sector. It involves the transformation of environment credits (eg carbon credits orwater rights) into property rights, the vesting of those rights in a fund vehicle and the creation oftradeable securities in that vehicle.

Regulatory watch$2 billion net asset for 'foreign exempt' companies under ASX Listing Rules●

New class order for continuously quoted securities●

ASIC calls for relief for investment funds●

ASX and SGX cross border trading arrangement●

Co-tradeable shares●

Ensuring an independent audit watchdog●

Transaction processing for unlisted managed funds ASX style●

Mullets and corporate collapses - are the 80s back?●

ASIC on what directors need to know about disclosure●

Protecting research integrity●

Prospectus advertisement clarification obtained●

Effect of recent amendments to ASX Listing Rules●

$2 billion net asset for 'foreign exempt' companies under ASX ListingRules

ASX is proposing to amend the threshold for admission to the stock exchange for 'foreign exempt'companies. The proposed amendment will see the increase in the quantum for the net tangible assets andprofit tests for a company seeking listing as a 'foreign exempt' company. Currently, foreign companiesmay be listed as 'foreign exempt' if they have net tangible assets of $50 million, or profit before tax ineach of the 3 previous years of $10 million. The proposed changes will see the net tangible assetsrequirement increased to $2 billion and profit before tax requirement to $200 million in each of theprevious 3 years. A moratorium has also been placed on the admission of "foreign exempt" companies.ASX anticipates that the changes will come into effect on 30 June 2002. This may have an impact on anumber of New Zealand companies in particular.

(Source: ASX Media Release, 3/10/01. Click here for copy of media release)

New class order for continuously quoted securities

ASIC has released a new class order (CO 01/1455) which enables a disclosing entity with quotedsecurities to continue to issue a "transaction specific prospectus". This class order applies to entities thatwould otherwise be unable to issue a transaction specific prospectus following recent amendments to thedefinition of "continuously quoted securities" in the Corporations Act 2001 (Cth) as a result of theFinancial Services Reform Act 2001 (Cth).

(Source: ASIC Information Release, IR 01/13, 27/11/01. Click here for copy of press release)

ASIC calls for relief for investment funds

In an attempt to generate discussion on whether investment funds should be granted relief from thetakeover threshold of 20% and the substantial holding disclosure requirements, ASIC has released adiscussion paper on this topic. Although the discussion paper does not set out any firm ASIC proposals,ASIC has identified several options to address concerns raised by investment funds in relation to the 20%threshold and substantial holding disclosure requirement.

Takeover threshold

It has been argued by some investment funds that the takeovers threshold prevents funds from acquiringsecurities where related but operationally independent funds have large holdings in aggregate.

Substantial shareholding disclosure requirements

Some investment funds have argued that the requirement to disclose changes to the substantial holdingsof a listed company within 2 business days signals the fund's investment moves to other traders. It isargued that this adds to the costs of investing.

ASIC has also suggested that one option to granting relief from the 20% threshold and substantialshareholding disclosure provisions may be to limit the relief to index funds ie, those funds that invest in aportfolio of securities that track a nominated market index. To find out more, click on the link above tothe discussion paper.

(Source: ASIC Media and Information Release, 01/411, 23/11/01. Click here for press release)

ASX and SGX cross border trading arrangement

ASIC and ASX have released a consultation paper seeking comments on the initiative between theSingapore Exchange Limited (SGX) and ASX to enter into a reciprocal market linkage portal service.This service will link both the stock exchanges of Australia and Singapore and facilitate trading of stockson each of the exchanges by the residents of both countries from their respective home countries.

Under the arrangement, an electronic co-trading and clearing arrangement will be established to providebrokers with a method to trade selected securities listed on the other stock exchange. The service will beavailable to all participating organisations (in the case of ASX) and trading member companies (in thecase of SGX) that meet the conditions of service. Both ASX and SGX will each use their wholly ownedsubsidiary entity to facilitate cross border execution, clearing and settlement of transactions. In the caseof ASX, its subsidiary ASXPD will act as executing broker on ASX and clearer, in relation to ordersplaced by the subsidiary of SGX, SGXPD on behalf of member firms in the Singapore stock exchangeand ASXPD will also place orders on behalf of participating organisations on ASX wanting to purchasesecurities quoted on the Singapore stock exchange via SGXPD. An Australian investor will continue toreceive CHESS statements for their holdings in Singapore.

It is anticipated that there will initially be 100 securities that will be approved for trading over this link,consisting of 50 ASX securities and 50 SGX securities (Eds: see next item). ASXPD will be admitted asa limited purpose participating organisation of ASX and will be required to comply with most of theexisting Business Rules. In addition, new rules have been formulated to address exchange linkages. Eachexchange will still remain the competent authority to regulate their own members and to prosecute forrule breaches.

AAR advised ASX on aspects of the service.

(Source: ASIC Media Release, 01/367, 15/10/01. Click here for copy of media release)

Co-tradeable shares

In a joint announcement, ASX and SGX has released the inaugural list of stocks that will be available forco-trading via the ASX-SGX link. The list of the securities can be found by clicking on the link to themedia release below. According to both parties, additional securities will be added to this list as marketinterest develops. Both ASX and SGX have also entered into a Memorandum of Understanding thataddresses:

the role of their respective market surveillance units;●

the sharing of market surveillance information; and ●

the core trading principles in both the ASX Business Rules and SGX-ST Rules regulating tradesmade via the link.

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(Source: ASX Media Release, 9/11/01. Click here for copy of media release)

Ensuring an independent audit watchdog

Recently, Professor Ian Ramsay released his report on audit independence which had been commissionedby the Minister for Financial Services and Regulation. According to Professor Ramsay, the report istimely due to developments overseas including the growth of larger accounting firms and the increase innon-audit services provided by these firms and the much publicised failure of a number of listedAustralian companies during the early part of this year. To better ensure the independence of auditors, thereport identified certain types of relationships which prima facie indicate that an auditor is notindependent. These include:

a current partner or professional employee of the audit firm is employed by the client or is apartner or employee of an employee of an officer of the client;

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an immediate family member of the audit team is a director or employee of the client who is in aposition to affect the audit engagement;

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a former partner or professional employee of the audit firm is a director or employee of the clientwho is in a position to affect the audit engagement and can influence the audit firm's operationsand policies, have capital balances in the audit firm or has some form of financial arrangementwith the audit firm;

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a retired partner of the audit firm, who has been directly involved in the audit of the client becomesa director of the client within 2 years of resigning as partner;

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any member of the audit team has been during the period covered by the audit report, employed bythe client

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any employee of the client in a position to affect the audit engagement receives remuneration fromthe audit firm for acting as a consultant to the audit firm on accounting or audit matters;

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the audit firm, any member of the audit team or their immediate family has a direct or materialindirect financial investment in the client;

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the audit firm has a material financial interest in an entity that has a controlling interest in theclient;

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a partner of the audit firm, an entity controlled by the partner or a body corporate where the partnerhas substantial holdings owes more than $10,000 to the client (unless it falls within an exceptionunder s324(3) of the Corporations Act 2001 (Cth));

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the audit firm, any member of the audit team or their immediate family accepts a loan from theclient, makes a loan to the client, has a loan guaranteed by the client or guarantee's a client's loan

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unless the loan is made in the ordinary course of business under normal lending procedures, termsand conditions; and

the audit firm or a member of the audit team has a business relationship with the client or itsofficers that is not insignificant to both parties.

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The report also recommends certain steps be taken to strengthen auditor independence. These include:

updating professional ethical rules to regulate for the provision of non-audit services by auditfirms;

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mandatory disclosure of non-audit services and fees paid for these services; ●

establishing an Auditor Independence Supervisory Board which has the task of:●

monitoring the adequacy of disclosure of non-audit services;●

advising the government on the international developments in this area;●

advising professional accounting bodies on appropriate standards dealing with auditorindependence; and

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monitor compliance by companies and audit firms with the standards; ●

amending the accounting standards (or alternatively amending Chapter 2M of the Corporations Act2001 (Cth)) to provide for:

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the inclusion into the financial report for the year the dollar amount of all non-auditservices provided by the audit firm to the client; and

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a statement from the audit committee of the board of directors or in the absence of thecommittee, the board of directors stating whether the provision of non-audit servicesis compatible with maintaining the auditor's independence; and

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amending the ASX Listing Rules to require all listed companies to have an audit committee●

The former Minister for Financial Services and Regulation, Mr Joe Hockey had indicated that thegovernment would be considering implementing the recommendations made in the report.

(Source: Minister for Financial Services & Regulation Press Release, No. FSR/077, 4/10/01. Click herefor press release)

Transaction processing for unlisted managed funds ASX style

ASX is in the midst of developing a transaction processing service for unlisted managed funds. The aimof this project is to facilitate electronic transaction processing between fund managers, custodians, masterfunds and distributors. According to ASX, the use of such a service will deliver significant cost savingsto the managed fund industry. At the date of publication of ITM, the ASX has yet to publish the details ofits proposed service.

(Source: ASX Media Release, 26/09/01. Click here for copy of media release)

Mullets and corporate collapses - are the 80s back?

Mr David Knott, the Chairman of ASIC, has in a recent Monash Law School Foundation Lecture,rejected calls by some commentators for the establishment of corporate governance board that is separatefrom the board of directors of a company. The corporate governance boards are modelled on theapproach taken by some European jurisdictions to strengthen the corporate governance of companies.The European model consists of a Management Board (made up of management representatives) and aSupervisory Board (made up of external representatives). According to Mr Knott, benefits of such amodel is overstated and that the reality is that the Management Board often controls the policy andgovernance framework and the Supervisory Board meets only infrequently to consider such issues. The

current model used in Australia is more appropriate and can be enhanced further by increased attention totraining and assessment with the aim of raising efficiency and as part of risk management frameworks.

He also touched on another issue that has been subject of much debate of late - that of auditorindependence. Mr Knott cautioned against taking the view that auditor independence is the single mostimportant issue in an audit. Rather there should be a broader debate - on just how rigorous andinvestigative audits should be; how much companies are prepared to pay for audits; and to what extentshould the accounting profession be responsible for failing to detect and report when financial statementsdo not reflect a true and fair view of the enterprise. There is some anecdotal evidence which suggest thatbusinesses have been placing decreasing value on audits and are unwilling to invest more in audits.Companies should seek to create a better balance between ensuring a more effective audit against therisks of potential shareholder loss and directors' liability that may follow from under-resourcing theaudit.

(Source: ASIC Speeches, "Corporate governance: 1980s revisited?", 23/08/01. Click here for copy ofspeech)

ASIC on what directors need to know about disclosure

In a speech to the Australian Institute of Company Directors conference in Sydney, Ms Jillian Segal, thedeputy chairperson of ASIC reported on 2 disclosure issues that have been priority areas for ASIC overthe past 12 months. They are corporate financial disclosure and continuous disclosure.

Corporate financial disclosure

According to Ms Segal, notwithstanding the changes introduced by the Corporate Law Economic ReformProgram Act 1999 (Cth) (CLERP) which removed the requirement that ASIC register prospectuses, thereare many retail and professional investors who are still confused about the responsibility of ASIC inrelation to prospectuses. Therefore, ASIC is undertaking a research project to ascertain whether investorunderstanding can be improved by including warnings in prospectuses about the risk of investment andthe limited role of ASIC in this regard.

Continuous disclosure

ASIC is of the view that the extension of civil penalty remedies is insufficient by itself to respond tocontraventions of the continuous disclosure obligations of public listed companies. Such contraventionsoften require a quick regulatory response. ASIC argues that civil proceedings are inappropriate tools toachieve the objective of ensuring price sensitive information is disseminated in a timely manner. ASICalso believes that greater emphasis should be placed on the training of directors on a continuing basis sothat directors are up to date on legal and accounting requirements. The emphasis on the training ofdirectors should lie with the relevant associations.

(Source: ASIC Speeches, "Everything the Company Director must know about Corporate FinancialDisclosure and Continuous Disclosure", 31/10/01. Click here for copy of speech)

Protecting research integrity

The Securities & Derivatives Industry Association (SDIA) and the Securities Institute of Australia (SIA)have jointly released a Best Practice Guidelines for Research Integrity (the Guidelines) which sets outbenchmarks for maintaining the integrity and quality of research reports and recommendations made byanalysts.

In the preface to the Guidelines, both the president of the SDIA and the chairman of the SIA noted that

the Guidelines have been put in place on the "premise that all market participants have a duty toestablish and maintain a corporate culture that protects and promotes the integrity of the market." TheGuidelines do not have the force of law and do not set out any disciplinary mechanism for breaches of theGuidelines. The then Minister of Financial Services and Regulation, Mr Joe Hockey has also welcomedthe introduction of the Guidelines.

There are 10 best practices identified in the Guidelines:

analysts should put the interests of the investors ahead of their own or their employer's interestsand the recommendations should be based on a reasonable basis and supported by proper researchand analysis;

●

if the analyst's firm offers corporate or other trading services, there should be separate reportingstructures in place to ensure that the integrity and independence of the recommendations made bythe analyst is not compromised. In addition, analysts in such organisations should not submit theirrecommendations for the approval of the trading department nor should the reports be distributedto companies, the subject of research other than for verification of facts (with anyrecommendations removed);

●

there should be appropriate and well defined Chinese Walls in place for firms that offer othercorporate or trading services;

●

analysts should disclose in their report or recommendation:●

any economic interest that the analyst or their immediate family may have which mayinfluence the report or recommendation;

●

whether the recommended corporate issuer had paid any fees in relation to publiclyannounced transactions in the last 12 months;

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definitions of the terms used in the report or recommendation; and●

disclose applicable risk factors;●

analysts should not trade in a security whilst they are researching it and that they not should nottrade in a manner inconsistent with their recommendations;

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the remuneration of analysts should not be directly linked to revenue received but should reflectthe analyst's overall performance, including the performance of their recommendations;

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recommendations should not be ambiguous and should be consistent and transparent;●

the research and changes to it should be disseminated timeously;●

firms should set out in writing their policies and procedures for managing conflicts of interest andthese policies should be regularly reviewed for relevance; and

●

firms should monitor compliance with their policies and procedures for managing conflicts ofinterests.

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Prospectus advertisement clarification obtained

Clarifying advertisements will be issued for the Gasnet Australia Trust (Trust) after ASIC expressed itsconcern that advertisements for the prospectus for the Trust may have been misleading. Theadvertisements stated that there would be an 11% yield and referred readers to the prospectus for theTrust. According to ASIC, the advertisements did not repeat statements in the prospectus that:

the yield was a combination of distributions of income and of amounts classified as capital foraccounting purposes;

●

the yield was a forecast and were for the periods ending 31 December 2001 and 31 December2002; and

●

no forecast of earnings and distribution could be provided for the period beyond 2002.●

The responsible entity for the Trust has agreed to place the clarifying advertisements with equalprominence as the original advertisements and will offer investors the right to withdraw their applicationand receive a full refund of their investments prior to the listing of the Trust on ASX.

(Source: ASIC Media Release, 01/431, 5/12/01. Click here for press release)

Effect of recent amendments to the ASX Listing Rules

Some of the amendments to the ASX Listing Rules took effect on September 2001 and some of thesechanges require listed companies to provide ASX with information by the start of 2002. To understandhow they might affect you, click here.

Legislative developmentsComing to a computer near you - trading of government backed securities●

Making offshore debt issues easier●

Coming to a computer near you - trading of government backedsecurities

The Federal Government has introduced amendments to the Commonwealth Inscribed Stock Act 1911(Cth) (the Act) which will provide for the electronic issue and transfer of Commonwealth GovernmentSecurities (CGS) through the ASX's clearing system, CHESS. Currently, under the Act, CGS are issuedin paper form. The Commonwealth Inscribed Stock Amendment Bill 2001 (Cth) (CIS Bill) will amend theAct to provide for the:

issue of CGS by electronic means;●

creation of equitable interests in CGS;●

electronic transfer of legal and equitable interests in CGS (this may done be by incorporating someof the provisions of the Corporations Act 2001 (Cth));

●

recognition of private clearing and settlement facilities regulated under the Corporations Act 2001(Cth) as registrars under the Act instead of the Reserve Bank of Australia;

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operating rules of a clearing and settlement facility appointed as registrar to apply to the transfer ofCGS; and

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inclusion of Treasury Bonds and Treasury Notes in the definition of "stock" under the Act.●

The CIS Bill has been passed by the House of Representative and is currently before the SenateEconomic Legislation Committee which will report on the CIS Bill by 6 December 2001.

Making offshore debt issues easier

A number of recent developments on the Australian tax front make it easier to sell an offshore debtcapital markets issue by an Australian issuer in the primary and secondary markets. Matthew Barnard, apartner in our Hong Kong office takes a look at what these changes mean.

Section 128F of the Income Tax Assessment Act 1936 (Cth) (ITAA) provides for exemption from interestwithholding tax provided that the "public offer" test is satisfied. That test is not satisfied if the issuerknew, or ought to have known, that the relevant instruments would be purchased by its associates.

The changes to the tax law take effect from the date of the Australian Treasurer’s announcement on 29August 2001. From that date the fact that instruments will or could be purchased by:

Australian onshore associates of the issuer; or●

non-resident associates of the issuer who act as the clearing house, paying agent, custodian or●

funds manager, is no longer relevant for the public offer test.

Unfortunately the Treasurer’s announcement makes reference to the fact that associates who act as theclearing house, paying agent, custodian or funds manager do not normally hold debentures to their ownaccount. While the holding of the debentures on the account of others is not stated to be a requirement,until clarified it would be prudent to treat it as such.

Changes to taxation of discounted instruments

Under present law, the gain on the sale of a discounted instrument by a non-resident to an Australianresident was deemed to be interest, but could not benefit from the s128F exemption, even if the issue ofthe instrument had satisfied the public offer test, because the deemed interest was not paid by the issuer.

The Treasurer's announcement included the extension of the s128F exemption to this deemed interest ifthe instrument would otherwise have qualified for that exemption. This should facilitate the integration ofoffshore and onshore trading in discounted instruments.

Australian Tax Office determination on bearer debentures

On 8 August 2001, the Australian Taxation Office confirmed that when a bearer global instrument is heldin a clearing system such as Clearstream or the Hong Kong CMU, the holder will be the clearing system.Many practitioners already took this view, but the existence of some doubt made some issuers cautious.

Some transactions for Australian issuers can only be achieved if the pool of investors consists of offshoreinvestors as well as Australian based investors. Typically, however, offshore investors usually wantbearer notes lodged with Euroclear or Clearstream, while the issuer wants to issue registered notes toAustralian investors, not bearer notes.

The issuer has preferred to issue registered instruments to onshore investors because of s126 of theITAA. Where the issuer does not give the Commissioner of Taxation the name and address of the holderof a bearer debenture, the issuer could be liable to pay income tax (known as bearer debenture tax) at therate of 47% on the interest. This was a problem for the issuer if an investor was an Australian resident orcarried on business at or through a permanent establishment in Australia. The problem also existed if thenotes were sold in the secondary market to Australian based investors. Bearer debenture tax does notapply to non-resident holders of debentures if the initial issue satisfied the public offer test under s128F,but it is difficult in practice for issuers to ascertain the resident status of holders.

On the basis of the new determination, however, distribution and secondary sales to Australian basedinvestors are no longer problematic. Bearer instruments - or more precisely, indirect interests in globalbearer instruments - can be issued to, and sold in the secondary market to, Australian based investorswithout attracting bearer debenture tax provided the global instrument is held in a clearing system and therelevant details of the clearing system are given to the Commissioner.

(For completeness, please note that the investor will become a holder of the note if the global hasbeen exchanged for definitives. In most programmes, this can only occur if there has been apayment default.)

(Source: Assistant Treasurer Press Release, No. 042, 29/08/01. Click here for copy of press release)

Around the worldHong KongNew rules for contract notesCorporate finance adviser code of conduct

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United StatesA blueprint for responsible changeActively managed ETFs - a chance to comment

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MalaysiaGuidelines for trustees of debenture holdersShorter white knights - SC relaxes listing, fund raising and restructuring rules

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SingaporeComprehensive rulebook on capital markets

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New Zealand2 become 1 - reforming the law on investment advisers

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ChinaIn at last - China becomes a member of the WTO

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Hong Kong

New rules for contract notes

The Securities and Futures Commission of Hong Kong (SFC) recently released a draft Rules on contractnotes. The Rules are expected to come into effect when the Securities and Futures Bill (Bill) is enacted.The Bill does not set out the detailed requirements in relation to the issuance of contract notes, statementsof account or receipts. SFC has been entrusted with this responsibility under the Bill.

The aim of the Rules is to ensure that clients obtain timely and meaningful information about transactionsconducted on their behalf. Under the Rules:

all intermediaries will now be required to issue contract notes whenever they enter into a contractor provide financial accommodation in the course of a regulated activity;

●

introducing brokers and asset managers will not be required to issue contract notes where anexecution broker has already issued such notes to the client;

●

the requirement to issue contract notes applies across all types of securities and futures contractsincluding options trading and securities borrowing or lending;

●

intermediaries may issue contract notes that quote average price of dealings in securities or futurescontracts if requested by clients;

●

an intermediary may issue a consolidated contract note for all regulated activities entered into on●

the same business day; and

contract notes may be transmitted via electronic means. ●

(Source: SFC Press Releases, 28/09/01. Click here for copy of press release)

Hong Kong

Corporate finance adviser code of conduct

After extensive public consultation, the SFC has formulated its Corporate Finance Adviser Code ofConduct which sets out guidelines for the persons and corporations giving advice on compliance with theListing Rules, Takeovers Code, Share Repurchase Code and any offer to buy or sell securities from or tothe public. The Code does not apply to solicitors, accountants, the media and various other entitiesexempted by the relevant securities regulations. Although the Code does not have the force of law,nevertheless it will be used by the SFC as a benchmark to judge whether a Corporate Finance Adviser isa fit and proper person.

The Code sets out what is proper conduct in 7 areas. They are:

conduct of business. A Corporate Finance Adviser (Adviser) should ensure that there are properfinancial and operational controls, there is adequate expertise and supervision of staff and that aneffective compliance system is in place which should be independent of the other businessfunctions and report directly to senior management;

●

competence. the Adviser should act with high standard of integrity and fair dealing;●

conflicts of interest. A Corporate Finance Adviser should take all reasonable steps to avoidconflicts of interest. Where the Adviser undertakes other activities or is part of a group ofcompanies that undertake other activities, there should be an effective Chinese wall system inplace with physical barriers to prevent the flow of price sensitive and confidential information;

●

standard of work. the Adviser must act with due skill, care and diligence and observe properstandards of market conduct;

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duties to client. the Adviser must act in the best interests of its clients at all times. In addition, theyare required to understand the business of the clients including the investment and corporateobjectives in relation to the particular transaction and when acting for a client, ensure that it hasmade adequate disclosure of all relevant and material information;

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communication with regulators. the Adviser must deal with the regulators in an open andco-operative manner; and

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personal account dealings. All personal account dealings should be properly conducted. Thereshould be a system of restricted list where dealings in securities in that list are prohibited. Further,all personal account dealings should be separately recorded and clearly identified in theaccounting records of the Adviser if the transactions were made via the Adviser.

●

(Source: SFC Press Release, 1/11/01. Click here for press release)

United States

A blueprint for responsible change

The development of electronic communications network and alternative trading systems and globalcompetition among exchanges have led to numerous changes in the trading of securities. An efficient andorderly market is underpinned by the public availability of market information. Recognising thesignificance of timely and accurate market information, the Advisory Committee on Market Information(the Committee) was asked by the US Securities and Exchange Commission (SEC) to evaluate issues

relating to public availability of market information in equity and options markets and makerecommendations on the best model for collecting, distributing and pricing market information. (Eds: theUnited Kingdom recently concluded a similar study and the results of that study can be found in ITM No.5)

The Committee in its Report reaffirmed the importance of price transparency and recommended that:

the SEC continue to require that certain market information (such as best quote and last sale data)be provided to market participants in a consolidated format (ie, information on quotes, trade pricesand volumes to be collected and consolidated from the various stock and option exchanges, andfrom the NASD for Nasdaq stocks);

●

competition should be encouraged and permitted for the distribution of market information byallowing each market to sell its market information data to any other competing informationconsolidator (under the current model, there is only 1 consolidator); and

●

a consolidated market information (consisting of best bid and offer, size and market identifier) foroptions in the options market be instituted once effective linkage has been established among theoption exchanges.

●

(Source: SEC, Report of the Advisory Committee On Market Information: A Blueprint For ResponsibleChange, 14/09/01. Click here for Report)

Actively managed ETFs - a chance to comment

The SEC is seeking public comments via a concept release on actively managed exchange-traded funds(ETFs). Unlike index based ETFs, actively managed ETFs would not track the return of a particularindex but will instead select securities that are consistent with the investment objectives and policies ofthe fund without reference to the composition of the index. As such, actively managed ETFs may havegreater turnover in its portfolio securities, which could result in higher expenses (in the form oftransaction fees) and less tax efficiency (in the form of capital gains) than index based ETFs. Accordingto the SEC, actively managed ETFs do not currently exist in the US. Comments are sought on:

the potential structure and operation of such funds;●

the benefit and uses of such products; and●

potential regulatory issues.●

(Source: SEC Press Release, 2001-133, 7/11/01. Click here for press release)

Malaysia

Guidelines for trustees of debenture holders

The Securities Commission of Malaysia (SC) issued its guidelines on when it will approve theappointment of a trustee to act for debenture holders in a situation of conflict of interests as defined unders69(2) of the Securities Commission Act 1993 (the SCA).

Section 69(2) prohibits the appointment of a person who is under a conflict of interest from being atrustee for debenture holders unless the SC has approved the appointment. "Conflict of interest" isdefined under s69(2) of the SCA as a situation where the person is a shareholder of the borrower, is owedmoney by the borrower, has entered into a guarantee in relation to the amount payable or is a relatedcorporation of the borrower. Under the Guidelines, blanket approval will be given to a person to act astrustee if:

at least 1/3 of the board of the trustee consist of independent directors (with express provision inthe Articles of Association to that effect);

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the officers carrying out the functions of trustee must be subject only to the direction of itsmanagement and directors; and

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any provision of non-financial resources to the trustee by any member of the borrower's groupmust be on an arms length basis or on normal commercial terms.

●

(Source: SC Press Release, 17/09/01. Click here for press release)

Malaysia

"Shorter white knights"- SC relaxes listing, fundraising and restructuring rules

Amid weak economic conditions, the SC has decided to relax some of the rules relating to fundraising,listing and restructuring of companies in Malaysia. The relaxation of the rules will, according to thechairman of the SC, "lower the height of the [white knight... but would still ensure that the white knightwill be] able to carry the fair damsel away from the dragon."

The relaxation applies to the following situations:

in the case of IPOs:●

companies seeking listing on the Kuala Lumpur Stock Exchange (KLSE) will nolonger be required to offer at least 15% of the issued and paid-up capital of a companyseeking listing to the public;

●

the restriction on the placement of securities for companies with issued and paid-upcapital of less than RM100 million has been removed;

●

companies can now issue and list any type of securities including preference shares,options and convertible securities provided that (i) the public shareholding spread of25% is maintained when the options or convertibles issued are converted; (ii) theexercise/conversion price of the options or convertibles should be set at a price notlower than the public offer price of the ordinary shares of the company; and (iii) thereis full disclosure in the prospectus of the effect of conversion/ exercise on the earningsper share and net tangible asset per share of the company, how the proceeds will beutilised and the rights attaching to the securities; and

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for the purposes of determining the shareholding spread, statutory institutions andcollective investment schemes holding up to 15% of the issued and paid-up capital ofthe company will meet the requirements of the shareholding spread and be treated asbeing the public.

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in the case of restructuring of distressed companies:●

a reduction in the pro forma net tangible asset position of distressed listed companiesundertaking restructuring schemes from at least 50% of the par value of their ordinaryshares to 33% of the par value of their ordinary shares; and

●

the removal of the restriction on the issue of convertible securities with nominalvalues of less than RM1.00. Previously, only companies placed under the purview ofDanaharta Nasional Bhd or the Corporate Debt Restructuring Committee (CDRC)were permitted to issue such securities. (Eds: Danaharta Nasional Bhd is a statutorycorporation set up by the Malaysian government to assist in debt restructuring. It isempowered to take over the defaulting debt from a lender. The CDRC is a nonstatutory body under the purview of Bank Negara, Malaysia's central bank, that assistsin debt restructuring. Unlike Danaharta, CDRC mediates by getting parties to agree onthe debt restructuring plan and does not have legislative authority to take over baddebts. Both bodies were set up as a result of the 1997 financial crisis.)

●

(Source: SC Press Release, 3/09/01. Click here for press release)

Singapore

Comprehensive rulebook for capital markets

The Government of Singapore has placed before its Parliament 3 bills that will update and consolidatethe disparate legislations that govern Singapore's capital markets, financial advisory and insuranceactivities. These Bills were first released for public consultation and the comments from industry groupshave been incorporated into the Bills. (Eds: the terms of the consultation on the draft Bills were reportedin ITM 4)

The 3 Bills which are referred to as Acts are:

The Securities and Futures Act 2001 (SFA);●

The Financial Advisers Act 2001 (FAA); and●

The Insurance (Amendment) Act 2001.●

We will concentrate only on the first 2 Bills.

SFA

The SFA will consolidate all legislation dealing with capital markets into a single piece of legislation.The changes that will be introduced by the SFA include:

updating the definition of markets and regulated activities to include electronic trading systems andoverseas stock exchanges that target Singaporeans;

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the introduction of a single licensing framework with a tiered level of capital and compliancerequirements depending on the risk exposure of that particular licensed activity. Marketparticipants will be required to hold only 1 licence instead of multiple licences;

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all collective investment schemes offered to the public must be approved by the MonetaryAuthority of Singapore (MAS) and permission may be granted for foreign funds to be offereddirectly to Singaporeans;

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migrating the fund raising provisions in the Companies Act and enhancing the disclosure basedapproach to regulating capital markets. These include introducing a requirement that prospectusesare to be exposed to the public for 2 weeks before they are registered with the MAS;

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making the requirement to make continuous disclosure by listed companies a statutory requirementinstead of a requirement imposed under the Singapore Exchange's Listing Manual; and

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all clearing and settlement institutions shall be subject to the regulatory control of MAS andexceptions will be made to the insolvency laws of Singapore to prevent the disruption to clearingand settlement trades in the event of insolvency of a clearing house.

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FAA

Financial advisory activities in respect of investment products, distribution and marketing of investmentproducts will now be regulated by the FAA. The changes introduced by the FAA include:

the requirement that a financial adviser (anyone advising others concerning investment products,the issue of analyses or reports concerning investment products, the marketing of collectiveinvestment schemes and arranging contract of insurance in respect of life policies) be licensed;

●

the maintenance by licensed financial advisers of prudential requirements such as minimumpaid-up capital and financial resource requirements;

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giving MAS the power to issue prohibition orders forbidding a person from providing financial●

advisory services permanently or for a specified period; and

giving MAS the power to inspect licensed financial advisers or persons suspected of carrying on abusiness of providing financial advisory services.

●

(Source: Monetary Authority of Singapore Press Release, 25/09/01. Click here for press release)

New Zealand

2 become 1- reforming the law on investment advisers

In a move to strengthen the existing legislation dealing with investment advisers, the SecuritiesCommission of New Zealand (SC) has canvassed a proposal (through its discussion paper) to improve thecontents of the disclosure statements made by investment advisers and the abolition of the two-tierdisclosure model currently in place in New Zealand.

Currently, investment advisers are not required to be licensed to practice as investment advisers. They arehowever subject to certain disclosure requirements under the New Zealand Investment Advisers(Disclosure) Act 1996 (the Act). The system of disclosure is described as being a two-tier system. Underthis system, an investment adviser must disclose information concerning any conviction of an offenceunder the Act or any crime involving dishonesty, any prohibition from taking part in the management ofany company or business and whether they have been adjudicated as a bankrupt. This type of informationis mandatory and must be given irrespective of any request from a customer.

The second level of information that must be disclosed by an investment adviser is information regardingtheir qualifications and experience and whether the investment adviser stands to receive an interest ingiving the advice or recommendation. This information is only provided if it is requested by a customer.According to the SC, such a situation is unsatisfactory as many investors are unaware of their right torequest the disclosure of the second level of information.

The SC therefore has recommended that such information be provided by investment advisers beforeinvestment advice is given. In addition, the SC has also put forth the following proposals:

that the categories of information required to be disclosed under the Act be extended to cover thedisclosure of all material benefits received by the investment adviser in giving that advice;

●

making it an offence for anyone to recommend or assist a client to acquire securities knowing thatthe offer of the securities are not in compliance with the Securities Act 1978. The aim is to coverscams originating outside of New Zealand; and

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giving the SC the power to prohibit any person from giving investment advice and to takeenforcement action on behalf of investors.

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(Source: SC Discussion Documents, "Law Reform: Investment Advisers: A Discussion Paper", 27/08/01)

In at last - China becomes a member of the WTO

China is set to become the newest member of the World Trade Organisation (WTO) on 11 December2001. The entry into WTO will open the doors of one of the world's biggest markets to foreign investors.This article by AAR's Kate Axup examines the implications of WTO membership for foreign investors inthe banking and insurance sectors in China. To read this article, click here.

Recent dealsRestructuring of Burns, Philp●

Meridian Energy credit wraps MTN program●

A$174.5 million sale and leaseback: Amcor●

Macquarie Airports Group●

Melbourne Airport refinancing●

Newcrest Mining Limited share placement●

Crusade Global Trust No. 2 of 2001●

D&D Tolhurst corporate reconstruction●

Equity West Limited●

Jumbo placement for QBE Insurance Group Limited●

Ascending the skies - placement of $450 million Qantas shares●

Restructuring of Burns, Philp

AAR acted for Burns, Philp & Company (Burns Philp), as part of our continuing involvement with itsdebt restructuring, in the A$240m equity raising, and the refinancing of its A$1.1b senior debt facilitywith a new five-year US$450m (A$900m) bank facility.

This complex and high profile corporate restructuring was highly successful. The deal is just one of themany episodes of Burns Philp’s recovery since 1997. From the beginning AAR, as the legal counsel forthe company, has been instrumental in the innovative and carefully considered restructuring and hasassisted the implementation of its long term recovery strategies.

The AAR team included: EQUITY: Warwick Painter; Peter Tillman; Carl Bicego; Susan McKendry;Mary-Jane Harvey; Jennifer Neale; Chris Peadon; Justin Plummer; Charles Armitage (Tax); AnthonyJohnston (Stamp duty). DEBT: Ian Wallace; Tom Highnam; Elizabeth Vuong; Tony Sheehan (Stampduty).

Meridian Energy credit wraps MTN program

AAR is acting for Meridian Energy Limited on the establishment of a new medium term note (MTN)program in Australia and in its native New Zealand. The program will be credit wrapped by XL CapitalAssurance and will represent its first foray into the Australian and New Zealand credit wrap market.

The AAR team, consisting of David Clifford and Michael Rodrigues, is advising Meridian Energy on allaspects of the deal.

A$174.5 million sale and leaseback: Amcor

Closing in mid August, AAR acted for paper and packaging group Amcor Packaging (Australia) PtyLimited on its A$174.5 million securitisation deal. The deal involved the sale and leaseback of 17packaging plants in NSW, Victoria, South Australia, Western Australia and Tasmania. Funds raisedthrough the sale will be used to retire debt and other projects.

Amcor’s properties were securitised via a property investment trust, funded in three tranches: tranche onein notes of A$51.5 million; tranche two of A$26.2 million in credit lease-backed notes; and tranche threea A$104.7 million issue of commercial mortgage-backed securities. All three tranches received a BBB+rating from Standard & Poor’s.

One of the largest and one of the very few securitisation programs undertaken in Australia exclusively forindustrial properties, this deal is also the first rated capital markets transaction to include under the sameissuer both credit lease-backed and commercial mortgage-backed securities (CMBS).

The AAR team, advising Amcor on all aspects of the deal, was led by David Boyd and included StuartWeir, Richard Bartlett, Bill Rimmer, Kelvin Choy, David McLeish and Dominie Banfield.

Macquarie Airports Group

AAR acted on the establishment of Macquarie Airports Group Limited (MAG), a Bermuda mutual fundcompany (with Euro denominated capital) for Macquarie Bank Limited and the establishment of a Eurodenominated Australian feeder trust.

MAG is an international airports private equity investment company that is seeking to raise 600 millionEuro. There are plans to have MAG listed in Australia and Europe either as soon as it is fully invested orin 2003. AAR drafted all documentation relating to the transaction, including foreign law documentation.

The AAR team included Susan Burns, David Cohen, Victoria Holthouse, Johanna Moore and KarenGregory.

Melbourne Airport refinancing

AAR acted for the lead arrangers and credit wrapper of the bond facility, as well as the financiers of thebank debt on the refinancing of Melbourne Airport. The A$700 million bond issue received a “AAA”rating by Standard & Poor and “AAA” by Moody’s, having been credit wrapped by MBIA. The amountof bank debt involved was A$500 million.

This was the refinancing of a significant infrastructure in Australia.

The AAR team included Phillip Cornwell and Stephanie Beaumont who advised the lead arrangers ABNAMRO, Deutsche Bank and Westpac in relation to the bond issue. Mark Kidston and Vanessa Ly whoacted for the credit wrapper, MBIA Insurance Corporation. Mark Russell and Patricia Tsang, advisedNational Australia Bank and Westpac in relation to the bank debt.

Richard Gordon further provided advice on the complex intercreditor issues while Geoff O'Dea alsoprovided vital assistance in relation to the bond issue and the bank debt.

Newcrest Mining Limited share placement

AAR advised Newcrest Mining on its $138 million placement of ordinary shares in an Issuer quoted on ASX. AARreviewed the underwriting agreement and provided advice on the ASX Listing Rules, specifically in relation to the possibleissue of further securities. The AAR team included Jon Webster; Gadi Bloch (corporate) and Errol LaGrange (tax).

Crusade Global Trust No. 2 of 2001

AAR acted for St George Bank Limited on its third global issue of mortgage-backed securities (MBS)through its “Crusade” program. AAR had also advised on the bank’s two previous successful globals, allof which were managed by Credit Suisse First Boston. The securities (with a 3.17 year average life) wereissued to US and European investors under a single senior tranche of US$800 million, rated AAA byStandard & Poor’s, Moody’s and Fitch.

Having set up a very flexible Crusade programme, St George has been able to issue MBS in a variety offorms in order to suit the market conditions. Whereas the second global was achieved via the powerfulmulti-tranche structure, this one was based on the more conventional single tranche structure.

It was another highly successful issue, and confirmed St George’s status as the leading Australian MBSissuer. Though the securities were issued after the tragic events in New York, and the deal was completedwithin a tight time frame, the issue was twice oversubscribed and a new pricing benchmark of 17.5bpover Libor was set.

The AAR team advised St George on all aspects of the deal. Led by Andrew Jinks, the team also includedCharles Armitage, Thomas McAuliffe and Julian Donnan.

D&D Tolhurst corporate reconstruction

on of General Gold Resources NL (GGR), a companygement. The transaction was a good example of the circumstances of a listed entity’s administration.

e Company, the Administrator, the proposed newn of the Company (and a consolidation of its issuedvency, the prospectus provisions of the Corporationslisation of the Company, the reconstruction involvedsts held by the Company in Mauritania into a trust

Equity West Limited

AAR recently acted for Equity West Limited and Equity Westappearance before the Takeovers Panel and associated ASIC inapplication and ASIC investigation arose out of circumstancesWest Securities Pty Ltd of an IPO issued by Namakwa DiamoEquity West Securities Pty Ltd in relation to that underwriting

The AAR team included Steven Cole, Tony Kuhn and Jon Sta

Jumbo Placement for QBE Insurance Gro

AAR acted for QBE Insurance Group Limited (QBE) on its twcapital raising including the lodging of the prospectus for the n

AAR advised D&D Tolhurst in relation to the corporate reconstructiformerly in administration and subject to a Deed of Company Arraninterdependence of capital markets and fund raising principles in the

The negotiation and drafting of the Reconstruction Deed, by which thBoard of the Company and the Underwriter agreed the recapitalisatioshare capital) required AAR’s lawyers to consider principles of insolAct and the ASX Listing Rules. As well as providing for the recapitathe Administrator excising certain gold mining and exploration interefund for the benefit of certain unsecured creditors of the Company.

The AAR team included Bill Manning, Jon Stagg and Tim Lane

Securities Pty Ltd in relation to itsvestigation. The Takeovers Panel

surrounding the underwriting by Equitynd Company NL. AAR also acted for.

gg.

up Limited

o part 'Jumbo Placement' $663 millionon-renounceable rights issue.

AAR advised on the structure for the innovative method of raising capital without the requirement ofshareholder approval. The offering comprised an institutional undocumented tranche and a retail trancheoffered under prospectus. One of the benefits of such a structure is that it facilitates quicker access to theequity markets.

The AAR team included Ewen Crouch, Dean Carrigan, Alex Ding, Gim Tan, Andew Murray, JohnEdmond and Heidi Squarcini.

Ascending the skies - placement of $450 million Qantas shares

AAR advised the joint lead managers, UBS Warburg Australia Ltd, Merrill Lynch International(Australia) Limited and Deutsche Bank AG on the placement of $450 million worth of Qantas shares toinstitutions in Australia and US. The transaction is significant for its inclusion of 'market out clauses' inthe underwriting agreement reflecting the post September 11 market.

The AAR team included Jon North and Peter Tillman.

Articles of interestPatenting financial products - a brave new world●

Holistic risk management and investing in nature-linked securities●

Regulating rating agencies - a defence of laissez-faire ●

Beat the market - use geared beta strategies●

The adequacy of Australia's auditor independence regime●

Risky business - can fiduciaries invest in hedge funds? ●

Patenting financial products - a brave new world

At first glance, patents and financial products appear to be incompatible. After all patents have not beentraditionally granted for financial products in Australia. Recent developments in Intellectual Property lawsuggest that a wide range of new financial products should be patentable in Australia. Methods of fundmanagement, securities trading, financing arrangements and even security structures themselves may bepotentially patentable. Many financial service organisations are now considering patent assets, and patentrisks, as part of their business strategy. Andrew Christie, one of AAR's patent partners, considers thetrend in the application for patent protection of financial products and the changes in Australian laws thathave made this possible.

Traditional concepts of Intellectual Property favour patent protection for tangible rather than intangibleinventions, particularly those that are physical rather than intellectual in their overall effect. However,modern legislation and interpretation of patent law are catching up in most countries, to matchdevelopments in technology and changes in the fundamental reasons for granting and enforcing patents.

The four main requirements for patentability of a new idea are:

it must be an “invention” lying in an acceptable field of technology or commerce;1.

it must be novel in view of existing public knowledge such as found in prior published documentsor prior events;

2.

even if novel, it must involve a sufficient step from existing knowledge; and3.

it must not have been the subject of prior commercial arrangements.4.

The detailed requirements vary from country to country, with many variations and exceptions. InAustralia and the United States requirement (1) has been increasingly relaxed as Courts determine thatnew and commercially useful ideas of all kinds should be capable of patent protection. New ideas inagriculture, biotechnology, computer software, medical treatments have all become patentable over thepast few decades. Most recently, decisions by the US Court of Appeals for the Federal Circuit and by the

Australian Federal Court have suggested that business processes such as financial systems, and perhapseven financial instruments themselves, should also be patentable.

The number of patents sought and granted for business processes has accelerated in the United States,with several hundred having been granted in 2000, and several thousand applications filed, due for grantover the next few years. Financial organisations have begun to differentiate their products on the basis ofpatent rights, and litigation between banks for patent infringement has also occurred. The consequencesof an action for patent infringement can be disastrous, including not only an award of costs and accountof profits, but also an injunction against further operation of a system that might already have beenpromised to customers.

The situation in Australia

The increase of business patenting in Australia has been more modest, with most applications for patentshaving arrived as imports from US organisations under international conventions. The number ofAustralian organisations that have taken advantage of the current possibilities appears surprisingly few,although many applications are pending and not yet open to public inspection. Australian banks and otherfinancial organisations still appear content to compete on service, reputation and price, rather thanthrough exclusive ownership of leading ideas. Export of ideas to other countries using the internationalpatent system is slow to take hold in current banking practice.

The move to an "innovative" step

During 2001 Australia has also changed requirement (3) for patentability in a way that is more dramatic,and is well suited for incremental improvements to business processes. The Patents Act 1990 (Cth) nowdistinguishes between an “inventive” step, which is necessary for a “standard” patent, and an“innovative” step, which is a lower threshold enabling grant of an “innovation” patent. In general terms,an inventive step signifies an invention of greater ingenuity for which patent rights may be granted for aperiod of up to 20 years in most countries. An innovative step provides a lesser standard for inventions inwhich the new idea makes a “substantial contribution”, and are able to be protected in Australia for up to8 years.

Conversely, under the Patents Amendment Bill 2001 (Cth), the requirements (2) and (3) are to betightened by extending the range of existing knowledge against which novelty, inventive step andinnovative step must be assessed, to include almost everything known anywhere in the world. Anobligation is also imposed on the Australian Patent Office, to be satisfied that the invention is patentablebefore granting a patent, rather than simply giving the benefit of any doubt to an applicant. There are alsostronger obligations on patent applicants to disclose information that might be relevant to the PatentOffice assessment.

No prior commercial use

One of the most important requirements, that is often fatal to validity of patents, remains untouched.Namely the bar against prior commercial use. An application for patent protection must be made early onthe development cycle of new and potentially valuable idea, before publication by the inventor, beforecompetitors elsewhere in the world apply or publish first, and especially before any arrangements forcommercial operation of the idea are initiated in Australia.

The effects of an expansion in the availability of patent protection for ideas in the financial servicesindustry has yet to be seen. However the advantages for those willing to explore the possibilities seemimmense.

Holistic risk management and investing in nature-linked securities

Holistic risk management is a new risk management technique that identifies and hedges against discreterisks of business and evaluates the relationship between those risks. In contrast, traditional riskmanagement does not factor in any inter-relationship between the risks preferring instead to treat eachrisk as a discrete and separate. According to this article, holistic risk management has the potential todeliver more efficient risk management and substantial cost savings. Nature-linked securities are oftenused to manage holistic risks.

Nature-linked securities, explains Paul Ali, the article's author, are debt securities used to providecompanies with liquidity to cover losses that may be incurred as a result of the occurrence of a naturalcalamity such as an earthquake or typhoon. There are 2 types of nature-linked securities:

contingent surplus notes; and●

catastrophe-linked bonds.●

Investors in contingent surplus notes would expect to receive an enhanced coupon consisting of incomegenerated by the investment of the subscription proceeds (often in OECD government bonds) and apremium for an option to finance. When the stipulated catastrophe occurs, the company may exercise theoption and exchange the notes with preference shares in the company. This enables the company toutilise the subscription proceeds to meet any losses incurred from the catastrophe. If the stipulatedcatastrophe does not eventuate by the maturity date, the subscription proceeds are repaid to the investors.Catastrophe-linked bonds are similar to contingent surplus notes with a major difference being the use ofa special purpose vehicle ("SPV") to indemnify the sponsoring company for losses incurred as a result ofthe stipulated catastrophe. The SPV is paid a periodic fee by the company for this indemnity. Indemnitypayments are triggered by an actual loss, an adverse movement in an index or the general magnitude ofthe catastrophe. The bonds are immediately redeemed from investors when the stipulated catastropheoccurs and investors will receive an amount that is net of their subscription and the indemnity paymentby the SPV.

The author examines the legal issues surrounding the investment by fund managers, trustees ofsuperannuation funds and other fiduciaries entrusted with investment assets in these securities. He notesthat the courts in the United Kingdom and United States have permitted fiduciaries when consideringprospective investments, to take into account the impact of an investment on the whole of the fiduciary'sinvestment portfolio instead of considering the investment in isolation. Although there has not been anyAustralian judicial pronouncement supporting such a "whole-of-portfolio" approach, the author is of theview that Australian courts might be inclined to follow the approaches taken by the courts in the UnitedStates and United Kingdom.

(Source: P Ali, "Holistic risk management, nature-linked securities and investors" (2001) 29 AustralianBusiness Law Review 246)

Regulating rating agencies - a defence of laissez-faire

The author, Mr Steven Schwarcz, argues in this essay that rating agencies should not be regulated for avariety of reasons. Rating agencies play an important role in the issuance and trading of debt securitiesbut they remain largely unregulated entities. They make rating determinations of the likelihood of timelypayment on securities. Such determinations are made based primarily on the information provided by theissuer of the securities. The significance of a rating depends on the reputation among investors of aparticular agency. Due to the role played by rating agencies, they become in effect the gatekeepers of thetypes of securities that investors will buy.

According to the author, one rationale for regulation should be to improve efficiency ie, by improving theperformance of rating agencies or limiting the negative consequences of its actions. Rating agencies have

had a very good track record of the success of their ratings without regulation and increased regulation isunlikely to improve this performance. The author further contends that as the reputation of ratingagencies depend on their accuracy, the move to regulate rating agencies will not bring any significantadvantages to the improvement in the performance of agencies.

The argument in favour of regulation rests on the fact that the current rating agency system isconservatively biased against innovation. The author argues that this bias is evident in the area ofsecuritisation where rating agencies have a very limited view of what constitutes a "true sale" irrespectiveof the legal criteria governing a true sale. In addition, rating agencies are also reluctant to rate innovativenew securitisation structures even where the innovation promises to increase efficiency and reducetransaction costs. Despite this limitation, the author is of the view that regulation will not reduce orameliorate this problem and could reduce competition thereby giving rating agencies less motivation tobe innovative.

(Source: Steven Schwarcz, to be published in 2002 University of Illinois Law Review, Issue 2. Thearticle can be found on the Duke University web-site by clicking here)

Beat the market - use geared beta strategies

In times of lacklustre market performance, geared beta strategies have been attracting considerableinterest in the United States. Geared beta strategies are a form of enhanced index strategies which seek tocombine the benefits of tracking the market/ sector index and at the same time seeking to outperform thatindex by relying on the use of derivatives to generate the excess returns. According to the author, MrPaul Ali, there are 2 common methods by which derivatives are used to enhance the performance of anindex fund. They are:

derivatives arbitrage; and●

option overwriting.●

The author explains that derivatives arbitrage involves continuous switching between the constituentsecurities of an index with the derivatives linked to the index or index securities (such as options orwarrants). By comparison under the option overwriting method, there is no switching of the constituentsecurities of the index but out of money call or put options over the index or constituent securities aregiven by the fund manager. Investors in geared beta funds have a primary exposure to the performance ofthe underlying index.

The author also discusses the fact that fund managers are required by law to adhere to the prudentinvestor rule. Under this rule, fiduciaries have to invest the assets entrusted to them in a manner that isconsistent with the return objectives and risk profile of the particular scheme. As geared beta strategiesrely heavily on derivatives, consideration must be given as to what is an effective derivatives exposure inlight of the overall investment strategy and objectives of the fund.

(Source: P Ali, "Using the market to beat the market: a look at "Geared Beta" strategies and implicationfor fiduciaries", 19 Co & SLJ 379)

The adequacy of Australia's auditor independence regime

The authors of this article examine the different approaches to ensuring auditor independence in the US,UK and Australia. The article was written before the report by Professor Ramsay on auditorindependence and as such does not examine the recommendations made by Professor Ramsay. As theauthors point out, the rationale for ensuring auditor independence is to reduce the risk of corporatefailure. While the auditor's report is prepared for the shareholders of the company, the integrity of theauditing process affects other stakeholders such as creditors, employees and participants in financialmarkets.

An analysis of the situation in the US, UK and Australia indicate that there are 2 approaches to regulatingauditor independence. The first is the prescriptive approach using detailed rules and prohibitions. This isthe approach adopted in the US.

The other is the conceptual approach using a more general approach to ensuring auditor independencethrough the use of principles instead of prescriptive rules and laying the onus of ensuring independenceon the individual auditors. This is the approach favoured by the UK and to some extent Australia. Thereis also a divergence in approach in the area of enforcement. The US favours using an externalgovernment body - the SEC. The UK has a two-tiered system called the "non-statutory independent"system of regulation whereby the rules relating to auditor independence are formulated by anindependent body together with the relevant professional accounting bodies and enforced partly by anindependent body (the Investigation and Discipline Board) and partly by professional accounting bodies.

Australia favours the self regulation approach with the professional accounting bodies developing andenforcing accounting rules. The authors criticise the current approach of not requiring listed companies toset up an audit committee to appoint the auditors for the company. The current Listing Rules only requirelisted companies to disclose in their annual report whether it has an audit committee. This falls short ofthe requirements in the US and UK.

(Source: G Stapledon & J Fickling, "The adequacy of Australia's auditor independence regime", 19 Co &SLJ 472)

Risky business - can fiduciaries invest in hedge funds?

The Australian hedge funds industry has experienced rapid growth in the last couple of years.Worldwide, an estimated US$550-600 billion in assets are being managed by hedge funds. This article byPaul Ali, examines the nature of hedge funds and considers whether fund managers, superannuationtrustees and other fiduciaries can invest in hedge funds. Hedge funds are generally pooled investmentvehicles that are subject to very little regulatory supervision. In addition, there a very limited restrictionson their investment strategies or in the classes of assets that these funds may invest in. Due to thesecharacteristics, hedge funds have substantial flexibility in their investment strategies unavailable toconventional investment funds.

There term "hedge fund" is not defined in the Corporations Act 2001 (Cth) (the Act). However,registration under Chapter 5C of the Act may be required if the fund falls within the definition of aregistrable managed investment scheme unless offers made by the fund are excluded offers. The authorstates that any single responsible entity (SRE), superannuation trustees and other fiduciaries wishing toinvest in hedge funds should firstly ascertain whether it has the legal capacity to make such aninvestment. The consequences of a lack of legal capacity to invest in hedge funds will result in thefiduciary being personally liable to the unitholders and beneficiaries for the unauthorised investmentincluding any losses suffered.

A more contentious issue relates to the "prudent investor rule" under the general law requiring a fiduciaryto take "such care as an ordinary prudent man would take if he were minded to make an investmentfor the benefit of other people for whom he felt morally bound to provide." The author states that underthe "prudent investor rule", a fiduciary must assess the risk attaching to each proposed investment inisolation ie, the fiduciary is required to examine each security and instrument that forms the portfolio ofinvestment by the hedge fund instead of viewing the entire portfolio of the fund as a whole. According tothe author, modern portfolio theory has found judicial acceptance in the United States and UnitedKingdom. Modern portfolio theory permits the inclusion of speculative of volatile investments in a fundso long as the collective risk profile is consistent with the fiduciary's investment objectives.

The author is of the view that the courts in Australia would follow the lead of the US and UK courts and

permit fiduciaries to assess prospective investments in the context of their likely impact on the riskprofile and return objectives of the fund. He argues for the modernisation of the "prudent investor rule"on the grounds that unlike traditional trusts with multiple beneficiaries and each having a successiveinterest in the trust estate, each beneficiary in a modern commercial trust has a present interest that iscontemporaneous with the interest of the other beneficiaries. In this situation, there are no futurebeneficiaries for whom the trustee must safeguard the trust estate from the depredations of the presentbeneficiaries.

(Source: P Ali, "Adding Yield to Stable Portfolios: Regulating Investments in Australian Hedge Funds",19 Co & SLJ 414)

CasesSubstantial shareholdingNature of the relationship matters

●

Corporate governanceAlways put the interest of the company firstNo breach of duty if other company benefits

●

SecuritiesHYENAs are not securities

●

Nature of the relationship matters ASIC v Merkin International Limited and Rubicon Nominees Pty Ltd (Supreme Court, VIC, 25 July2001 [2001] VSC 211)

Corporations - contraventions of provisions of Corporations Law relating to substantial shareholdingand tracing beneficial ownership - degree of knowledge of relevant interests - whether contraventionsshould be excused - orders including remedial orders - Corporations Law ss671B, 672B, 1325A

Tracing beneficial ownership of shares: Information to be disclosed is limited to that within a person'sknowledge

This case addressed the issue of whether the defendant company Merkin International Limited (Merkin)had breached the provisions on tracing beneficial ownership of shares by failing to disclose details ofother persons who had a relevant interest in the shares in circumstances where Merkin claimed that it hadno knowledge of these matters.

Tracing beneficial ownership of shares

Section 672A of the Corporations Act allows ASIC or a listed company to direct a member of thatcompany or a person named in a previous disclosure to make a disclosure of:

its relevant interest in the shares of that company,●

the name and address of each other person who has a relevant interest in the shares of thatcompany and the circumstances which gave rise to their interest,

●

and the name and address of each person who had given instructions to the person receiving thenotice in relation to the shares and details of those instructions.

●

A relevant interest in shares is broadly defined. The basic rule is that a person has a relevant interest insecurities if they:

are the holder of the securities; or●

have power to exercise, or control the exercise of, a right to vote attached to the securities; or●

have power to dispose of, or control the exercise of a power to dispose of securities.●

The facts in this case are that, in response to a notice under s672A of the then Corporations Law (theLaw), Merkin was named as having a beneficial interest in 680,000 in Bligh Ventures Limited (the BlighShares).

ASIC issued a further notice under s672A directing, in accordance with the Law, that Merkin disclose thematters addressed above within 2 business days. Merkin failed to comply and ASIC began proceedings inVictorian Supreme Court.

Did Merkin have knowledge?

By affidavit an authorised officer of one of Merkin's corporate directors stated that the corporateshareholders in Merkin, Teak Limited and Pine Limited held their shares in Merkin as nominees or baretrustees for an undisclosed beneficiary and therefor did not have a relevant interest in the Bligh Shares.On this basis Merkin argued that it had no knowledge of any persons with a relevant interest in the BlighShares.

In reply, ASIC submitted that:

Merkin was managed by PITCO, a company who was in the business of supplying and managingoffshore companies on behalf of other persons, through its corporate directors; and

1.

the directors, secretary and shareholders of Merkin were all companies controlled by PITCO andsupplied by it as part of the service that it provides to its client; and

2.

it is PITCO's client who engaged and pays for the services of PITCO to supply and manageMerkin, financed the acquisition of shares and could instruction Merkin through PITCO andMerkin's corporate directors; and

3.

PITCO's client was the "real directing mind and will" of Merkin.4.

ASIC argued that it followed that the knowledge of the identity of this client should be attributed toMerkin and that Merkin should comply with s672B by disclosing the name of PITCO's client.

The Court held that without evidence as to the chain of command or the precise relationships involved itwas not satisfied that knowledge of the PITCO's client should be attributed to Merkin and so rejectedASIC's argument on this point. It held that Merkin had not contravened s672B other than by failing tocomply within 2 business days.

Other grounds

It was accepted that Merkin had contravened the s709 (now s671B) of the Law which required it to givenotice of its relevant interest a substantial holding (more than 5%) in Bligh from 1994 when it acquiredits relevant interest to November 2000 when it lodged a notice under s671B of the Law.

Held: The court found that neither Merkin's failure to respond to the s672A notice within 2 business daysor Merkin's contravention of s709 should be excused, ordered that the Bligh Shares be vested in ASICand sold by tender and for deduction of ASIC's and Bligh's costs on an indemnity basis.

In making these orders, the Court noted that the fact that Merkin did not know the names of the personswho beneficially owned the shares, and who therefore have a relevant interest in the Bligh Shares, was afactor in favour of making remedial orders. Mandie J further stated that the legislation made clear thatignorance of such matters can be a basis for appropriate orders, and that this ignorance demonstrated thatthe contraventions were not just technical breaches which were now cured.

Always put the interest of the company first

Australian Securities & Investment Commission v Doyle & Anor(Supreme Court, WA, 20 July 2001, [2001] WASC 187)

Companies - Director - Placement of Shares - ASX directs shares cannot be voted nor traded - Return ofplacement monies to placement shareholders - Director acting for allottees - Whether improper use ofposition contrary to s232(6) of the Corporations Law - Whether purpose to cause detriment to companyor advantage to other persons - Corporations Law ss232(4), 232(6) and 233A(1) (Eds: these provisionswere amended by the CLERP Act 2000 (Cth))

If a director prefers the interests of third parties to those of the company it is not necessary to showdetriment to the company to establish that the director made improper use of his position.

This case involved an action brought by ASIC that Mr Doyle breached s232(6) of the Corporations Law.Section 232(6) states that an officer of a corporation must not make improper use of his position to gain,directly or indirectly, an advantage for himself or for any other person or to cause detriment to thecorporation.

Doyle was a director of Chile Minera NL, which was listed on ASX (the Company). Doyle was also adirector of Doyle Partners Pty Ltd (DCP), of which he owned 50 per cent of the issued shares. In August1996, the Company entered into an agreement to purchase a mining concern. DCP was engaged toprovide professional independent advice and to assist in capital raisings. It was to be paid a fee of 6 percent of new capital raised. The Company issued 8,000,000 shares to DCP and clients of DCP, raising$400,000, for which DCP was paid $24,000. The ASX, however, determined that that this was in breachof Listing Rule 7.1 which prohibited a company from issuing more than 10 per cent of its capital in any12 month period without the approval of ordinary securities. The Company stated that it would rectify thesituation at the AGM by voting on the issue. The ASX informed the company that the 8,000,000 sharesallotted to DCP would be unable to carry a vote in the AGM.

As a result, Doyle wrote to the directors of the Company stating that DCP, on behalf of its clients,demanded the repayment of the $400,000, as the shareholders took the shares in the belief that they hadequal voting rights with existing shares. Preliminary legal advice stated that the money should be put intoa trust account, although this was pending advice from counsel, and there was reason to believe that themoney could not be returned to DCP other than by way of an authorised reduction of capital.Nevertheless, at a directors meeting involving Doyle and one other director, Mr Satterthwaite, it wasresolved that the $400,000 be returned to a trust account of DCP, conditional upon the return to theCompany of the 8 million shares. Doyle, a director of DCP, was unable to vote on this due to the conflictof interest.

The AGM was held. However without the DCP and related vote the allotment was not approved. Afurther meeting of directors took place, involving Doyle, Satterthwaite, and another director, Mountford.Doyle explained the situation to Mountford, stating that the preliminary legal advice allowed the moneyto go into a trust account. Both Mountford and Satterthwaite then voted in favour of cancelling the 8million shares placed with DCP. Doyle did not vote.

The ASX informed the Company that the 8 million shares could only be returned to DCP by way of anauthorised reduction of capital. ASIC sought a declaration that Doyle had contravened ss232A(1) and232(6) of the Law and that Satterthwaite was knowingly concerned in one of the contraventions by Doyle(or in the alternative, that Satterthwaite himself contravened s232(4)). ASIC pleaded that Doyleimproperly used his position as a director of the Company to cause detriment to the Company;alternatively it was pleaded that he did so to gain an advantage for the allottees (including DCP, of whichhe was a 50 per cent shareholder).

Held: Although no actual vote was made by Doyle at the directors meetings, by demanding the money bepaid to DCP, by persuading the other directors to agree to it, and by proposing that the preliminary legaladvice could be accommodated by putting the money in the DCP trust account, Doyle was an activeparticipant in the decision making of the meetings, amounting to voting in favour of the resolution. Doylewas therefore held to have exercised his vote as a director of the company.

To establish a breach of s 232(6) it is not necessary for the applicant to prove the accrual of an advantageor the suffering of a detriment. What does have to be proved is that the use of his position by the officerwas improper and it was done for the purpose of gaining an advantage or causing detriment. Thisincludes establishing that the officer believed that the intended result would be an advantage for himselfor some other person or a detriment to the corporation.

What is improper for the purposes of s232(6) is to be determined by reference to the powers and duties ofa person in Doyle’s position, namely a director of the Company, including the duty to act in the bestinterests of the Company and its shareholders.

The relevant time at which the director’s purpose and state of mind is to be considered is that when theconduct occurred. Doyle was aware that Nash’s advice that the funds were to be held in trust pendingcounsel’s opinion was preliminary advice. He was also aware the $400,000 was needed for thepreliminary work in the mining venture and that without it the Company did not have funds to do otherthings. He knew the payment of the $400,000 to DCP would be a detriment to the Company since itwould be depriving the Company of that money which it then controlled and which it may have been ableto keep and apply to its own activities.

However, Doyle did not engage in the relevant conduct in order to cause detriment to the Company,rather he did so to obtain an advantage for the allottees. On this basis, the return of the money to DCPand Doyle’s control when the allottees had no established lawful entitlement to it, or when any suchentitlement to it was in question, was an advantage to them. Therefore, as he put the interest of theallottees ahead of those of the Company, Doyle’s use of his position as a director was found to beimproper.

No breach of duty if other company benefitsMaronis Holdings Ltd v Nippon Credit Australia Ltd (Supreme Court, NSW, 7 June 2001, [2001]NSWSC 448)

Directors' duties - common directorship - directors caused company to mortgage its principal asset tosecure a loan to its parent - whether directors liable for breach of duty - does the test in Charterbridgeapply?

Where a person is a director of 2 or more companies in a group, the test for whether that person hasbreached his or her fiduciary duties when acting for a company in an inter-group transaction is not thetest in Charterbridge (see below); the benefit to the company and the director's state of mind must beconsidered.

Girvan Corporation Limited (Girvan Australia) controlled 74% of Girvan Corporation (New Zealand)Limited (Girvan NZ) (a company listed on the New Zealand Stock Exchange). Maronis HoldingsLimited (Maronis) was a 100% owned subsidiary of Girvan NZ. The 2 directors of Maronis were alsodirectors of Girvan Australia. The 2 directors of Maronis caused Maronis to mortgage its principal assetto Nippon Credit Australia Limited to secure a $15 million loan to Girvan Australia. No cross-security orother arrangement was entered into to protect the interests of Maronis. One of the issues considered waswhether the test in the Charterbridge case was the proper test to determine whether the directors hadbreached their fiduciary duty to Maronis.

The test applied in Charterbridge Corporation Limited v Lloyds Bank Ltd & anor [1970] Ch 62 at p74(Charterbridge) was “whether an intelligent and honest man in the position of a director of thecompany concerned, could, in the whole of the existing circumstances, have reasonably believed thatthe transactions were for the benefit of the company.”

The test in Charterbridge was formulated in relation to a claim that the actions were outside the powers ofthe company.The test was not created to determine whether the directors of the company had breachedtheir fiduciary duties. The New South Wales Supreme Court of Appeal considered the application of thetest in Charterbridge in Equiticorp Finance Limited (in liq) v Bank of New Zealand (1993) 32 NSWLR 50(Equiticorp).

In Equiticorp, it was alleged that the directors had breached their fiduciary duties to the company byapplying the company's liquidity reserve to discharge the debt of a related company and that the Bank ofNew Zealand had constructive knowledge of this breach. To prove that the Bank of New Zealand hadconstructive knowledge of the breach of fiduciary duties, the plaintiff resorted to the test inCharterbridge. In the Court of Appeal, Clarke and Cripps JJA observed that they applied the test inCharterbridge because the parties advised the court that the same test should be applied on appeal only,and they had considerable reservations about adopting the test.

Held: Bryson J considered the Charterbridge and Equiticorp decisions and concluded that the test inCharterbridge had not received endorsement from the Court of Appeal. Considering the authorities,Bryson J concluded that the test in Charterbridge should be applied when determining whether, as aquestion of fact, the directors were abusing their powers, such as in Charterbridge, and not whenconsidering whether the directors have breached their fiduciary duties.

According to Bryson J, when directors have regard to an advantage that will flow to another company isnot always an indication of abuse of power if the transaction benefits the company that is entering into it.The benefit need not be direct and immediate. Consideration must be given to understanding therelationship among the companies in question and the advantages which the transaction is seen to bebringing before one can determine whether the directors have breached their duty to the company.

The court found both directors of Maronis to be in breach of their duty as directors in committingMaronis to granting the mortgage.

HYENAs are not securitiesMacquarie Bank Limited v ASIC (Administrative Appeals Tribunal, 18 October 2001, [2001] AATA868)

Issue of unsecured short term notes referred to as HYENAs - a hybrid investment priced by reference tounderlying listed share investments - put option in favour of the issuer - whether HYENA a debenturewithin s9, whether a security within s92(3) of the Corporations Law - whether a prospectus is required -review of ASIC determination - Corporations Law ss9, 92(3) and 708(19)

The prospectus provisions of Chapter 6D of the Corporations Law which regulate the offering ofsecurities did not apply to an issue of complex hybrid short term notes involving a put option in favour ofthe issuer because the notes were not securities as defined in s92(3).

Macquarie Bank Limited (MBL), an Australian authorised deposit-taking institution (ADI) offeredunsecured short term notes principally to sophisticated investors by way of an Information Memorandumwhich was not lodged with ASIC. These notes were known as High Yield Equity Notes (interestinglynamed HYENAs), the terms of which are described as follows:

A HYENA was priced by reference to an underlying ASX listed share selected by MBL.●

The investor was offered a HYENA for a purchase price equal to between 85-95% of the marketvalue of the underlying security. The term of a HYENA was fixed, usually 3 months, and at theend of the term the investor received interest at a specified rate.

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If at the end of the term the market value of the underlying security exceeded the purchase pricepaid by the investor, then the investor received his or her original principal back plus interest. Ifhowever the market value of the underlying security was less than the purchase price then one ofthe two things could happen:

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the investor would receive from MBL an amount equal to the ASX closing price ofthe relevant security plus interest; or

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MBL was entitled to place the relevant number of underlying shares with the investor.The placement right was given in the form of a revocable purchase order from theinvestor to MBL for the purchase of the relevant number of shares. The order becameirrevocable in MBL’s favour 20 days before the maturity of the HYENA.

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MBL sought an exemption from ASIC from the prospectus provisions of Chapter 6D of the CorporationsLaw (now Corporations Act 2001 (Cth)) (the Act). ASIC refused and MBL applied to the AAT for areview of ASIC’s decision.

Before the Tribunal MBL argued that a HYENA was not a security as defined by s92(3) and thereforenot subject to regulation under the prospectus regime which applied to securities as defined in s92(3). Itwas argued that it was not a debenture as defined in s9 (or in the event that it was a debenture it fellwithin the s708(19) exemption for debentures issued by an Australian ADI such as MBL). MBL alsoargued that a HYENA resulted in a put option for MBL, the issuer - it did not grant an option to purchaseshares to an investor (ie, a call option) which fell within s92(3) whereas by the wording of s92(3) a putoption clearly did not.

Held: Ultimately the Tribunal accepted the argument by MBL that a HYENA did not fall within thedefinition of security in s92(3) and that therefore the prospectus provisions of the Chapter 6D fundraisingregime did not apply. However it differed in its reasoning on the debenture question.

The Tribunal acknowledged that the HYENA was a complex hybrid product with both debenture andoption elements. The question was whether a HYENA, when its component elements were analysed, fellwithin the s92(3) definition particularly s92(3)(b) a debenture and/or s92(3)(e) an option to acquire ashare.

The Tribunal focussed principally on the HYENA option issue - whether the terms offered an option forthe investor to acquire the underlying shares. The debenture issue was dealt with quite briefly with theTribunal acknowledging that the complex hybrid character of a HYENA took it outside the ordinarycourse of banking business of an Australian ADI. The effect of the Tribunal’s decision was the debentureaspect of the HYENA did not attract the s92(3) securities definition.

Are put options a security for the purposes of s92(3)?

The Tribunal found that a HYENA involved a Put Option in that MBL had a right to place shares withthe investor if the underlying value of the shares fell below the purchase price at the maturity date. Theinvestor had no enforceable right to acquire shares because the decision to place shares with the investor,if the underlying value of the share at the maturity date was less than the original purchase price, waswithin the absolute discretion of the issuer MBL. The HYENA did not offer the investor an option toacquire a share ie, a call option but rather gave the issuer a right to put the shares to the investor. Section92(3)(e) applied only to call options but not put options.

The Tribunal was sympathetic to ASIC’s proposition that the very complex nature of HYENA andvarious “risk” factors not disclosed in the Information Memorandum, made them just the sort of securitythat should be regulated by the prospectus regime in order to afford investor protection. However the

literal meaning of the words of s92(3) were clear and the Tribunal suggested that legislative amendmentwould be required for MBL HYENAs to be covered by this definition.

The Tribunal remitted the matter to ASIC with a direction that HYENAs were not “securities” within themeaning of s92(3) of the Act.

FSR updateStart date for FSR●

Get set for the transition to the FSR era●

FSR related policy statements released●

Draft policy statement for Australian financial service licence holders●

It's raining FSR regulations●

ASIC's guide to FSR transition●

Australian market licences - a policy proposal●

Start date for FSR

The bulk of the provisions of the Financial Services Reform Act 2001 (Cth) (FSR Act) will nowcommence on 11 March 2002. Some parts of the FSR Act have already commenced operation from 27September 2001 (see below).

The starting date of the FSR Act was delayed due to amendments made to the FSR Bill arising from theReport of the Parliamentary Joint Statutory Committee (PSJC) which suggested that some of the originalprovisions of the FSR Bill be amended. (Eds: a summary of the recommendations from the PSJC wasreported in ITM No. 5) The FSR Bill received royal assent on 27 September 2001.

As a result of the recommendations made by the PSJC and representations from industry, variousamendments were made to the FSR Bill in September before it was passed. These include:

a clarification that additional contributions to superannuation products, RSA products (Eds:retirement savings account as defined under the Retirement Savings Accounts Act 1997 (Cth)), lifeinsurance products and deposit products will not constitute an "issue situation" giving rise to theneed to provide a Product Disclosure Statement;

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an exclusion from the definition of financial product (and therefore regulation under the FSR Act)for foreign exchange contracts that are settled immediately;

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an exemption for lawyers and registered tax agents from the definition of providing "financialproduct advice" if the advice given is in the ordinary course of carrying out their professionalactivity as a lawyer or registered tax agent (as the case may be). The effect of this is to excludethese categories of professionals from the need to be licensed under the FSR Act;

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an extension of the meaning of dealing to cover the conduct of an agent acting on behalf of aperson who is dealing in a financial product will also fall within the definition of dealing;

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the inclusion of a materiality test as to when an updated Financial Services Guide (FSG) is to begiven to a retail client. An updated FSG is required if it would be materially adverse to a

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reasonable person in the position of a retail client if the FSG does not contain that newinformation; and

the power to pass regulation specifying the circumstances in which a right to return a financialproduct and be repaid can be exercised. The regulation may provide for an increased as well as areduced amount of money to be repaid. This is relevant to market-linked products that increased invalue between the time at which they were acquired and the time the client exercised a right toreturn the product.

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Operative from 27 September 2001

The most significant changes in effect from 27 September 2001 are:

the definition of associate in s9 of Corporations Act 2001 (Cth) (the Act) now has the meaninggiven to it by ss10-17 of the Act;

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replacing the definition of continuously quoted securities in the Act with a new definition toinclude securities of an entity to which no order under ss340 or 341 covered the entity, its directoror auditor at any time in the last 12 months;

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replacing s12 of the Act with a new definition of associate for the purposes of Chapters 6-6C;●

the Corporations and Securities Panel has been renamed as the Takeovers Panel.●

(Source: Minister for Financial Services & Regulation Press Release, No. FSR/068, 30/08/01. Click herefor press release)

Get set for the transition to the FSR era

The Financial Services Reform (Consequential Provisions) Act 2001 (the Act) received royal assent on27 September 2001 and commenced operation on that date. The aim of the Act is to provide a transitionalperiod before certain provisions of the Financial Services Reform Act 2001 (Cth) (FSR) take effect. Inparticular, under the Act:

all current financial service providers will have up to 2 years from the commencement of the FSRto obtain a new licence for their existing activities. The pre-FSR regulatory regime will continue toapply to these providers;

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new financial service providers who begin their business after the commencement of the FSR willneed to be licensed under the FSR;

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existing license holders who begin new areas of business after the commencement of the FSR willneed to be licensed under the FSR;

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holders of licences to run authorised stock and futures markets will be issued with an Australianmarket licence from the date of commencement of the FSR and the conditions of the licence willreflect the financial products in which the holders are entitled to provide services to.

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(Eds: The Act also amends various other Commonwealth Acts such as the Australian Securities andInvestments Act 2001 and Superannuation Industry (Supervision) Act 1993 which are not examined here.See also the related article below.)

FSR related policy statements released

Are you confused about the plethora of policy statements and draft policy statements that have beenreleased by ASIC?

This table sets out in concise format the 7 FSR related policy statements and draft policy statement thathave been released so far. In addition, to these policy statements, a guidance paper on the scope of the

licensing regime for financial product advice and dealing has also been released.

Policy StatementNo. Subject area Key details

146Licensing: Training offinancial productadvisers

all natural persons who providefinancial product advice to retailclients have to meet the trainingstandards by completing approvedtraining courses listed on the ASICTraining Register;

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licensees will have the obligation ofensuring that training standards aremet; and

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licensees are required to developpolicies and procedures to ensure thatthey and their advisers undertakecontinuing training.

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164Licensing:Organisational capacities

licensees will be responsible forensuring compliance with theirlicensing obligations includingensuring compliance by theirrepresentatives;

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licensees remain responsible even forfunctions that have been outsourced;and

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other measures to ensure compliancesuch as the level of organisationalexpertise, the need to have clearwritten policies and the need to havein place adequate non-financialresources such as appropriate ITsystems and human resources.

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165Licensing: Internal andexternal disputeresolution

entities subject to the disputeresolution provisions of the FSR(licensees, unlicensed product issuersand unlicensed secondary sellers) arerequired to have both an internal andexternal dispute resolution madeavailable to aggrieved clients;

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internal dispute resolution proceduresmust contain the essential elementsidentified in ASIC's AS 4269-1995standards;and

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licensees, unlicensed product issuersand unlicensed secondary sellers arerequired to be members of approvedexternal dispute resolution schemes.

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166 (draft only)Licensing: Financialrequirements

For a summary, see next item

167 Licensing: Discretionarypowers and transition

The factors that ASIC will take intoaccount when exercising its powers to grantmodifications or exemptions to thelicensing provisions of the FSR Act arewhether:

strict compliance would beimpossible or disproportionatelyburdensome;

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persons to whom financial servicesare provided would still be protectedas intended by the legislature; and

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those whom relief applies willreceive any benefits.

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168

Disclosure: Productdisclosure statements(and other disclosureobligations)

ASIC will not vet any productdisclosure statements (PDS) prior toits release to consumers;

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in preparing PDS, product issuersshould ensure that the disclosure:

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is timely;●

is relevant andcomplete;

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will promote productunderstanding;

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will promotecomparison;

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will highlight importantinformation; and

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have regard to the needsof consumers.

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169 Disclosure: Discretionarypowers and transition

ASIC will grant relief formcompliance with the hawkingprohibition of Div 8, Part 7.8 and 7.9of the Corporations Act 2001 (Cth)as amended by the FSR Act byconsidering whether:

strict compliance would beimpossible ordisproportionatelyburdensome;

❍

persons to whom financialservices are provided wouldstill be protected as intendedby the legislature; and

❍

those whom relief applies will❍

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receive any benefits.

relief from the anti-hawkingprovisions will not be available toissuers of warrants; and

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operators of an IDPS must give theirretail clients an IDPS guide thatmeets the requirements of PS 148 inorder to get relief from the managedinvestment scheme provisions.

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(Source: ASIC Media Release, 28/11/01. Click here for copy of media release)

Draft policy statement for Australian financial services licenceholders

ASIC has released for consultation, its draft policy statement (PS 166) on the financial requirementsexpected from holders of Australian financial services. Consultations should reached ASIC by 30November 2001.

The policy statement does not apply to a body regulated by APRA even if only parts of a body's financialservices business is an activity regulated by APRA. The obligations imposed on Australian financialservices licensees will be imposed as a licence condition. These are that:

all licensee must have in place risk management systems that addresses the risk that the licensees'financial resources will not be adequate to comply with their licence obligations;

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all licensees (except for participants in a licensed market who can satisfy ASIC that the market'srequirements are adequate substitute to the financial requirements) have positive net assets, solventand sufficient cash resources to cover the next 3 month's expenses;

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responsible entities of managed investment schemes, operators of investor directed portfolioservices and licensees of custodial and depository services must have net tangible assets of aminimum requirement of $50,000 and up to a maximum of $5 million;

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participants in a licensed market must meet the requirements in the market's operating rules;●

licensees holding client money or property must have surplus liquid funds of at least $50,000unless the value of the money or property held is less than $100,000;

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licensees transacting with clients as principals must have an adjusted surplus liquid funds (with amaximum of $100 million) of at least:

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$50,000; plus●

5% of adjusted liabilities between $1 million to $100 million; plus●

0.5% of adjusted liabilities in excess of $100 million.●

foreign exchange dealers are required to have $10 million of tier one capital (similar meaning to atier one capital requirement for an ADI)

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(Source: ASIC Media Release, MR01/403, 16/11/01. Click here for media release)

It's raining FSR regulations

Some of the regulations dealing with certain aspects of the Financial Services Reform Act 2001 (Cth)(FSR) have been promulgated but they have yet to be gazetted. They cover:

licensing of financial markets and clearing and settlement facilities;●

licensing of providers of financial services; ●

financial product disclosure; and●

consequential and transitional matters.●

Another round of consultation will be undertaken in respect of the following matters:

the operation of the exemption given to media companies;●

the treatment of derivatives, particularly warrants; and●

whether regulations are needed for the disclosure of labour standard claims and environmental,social or ethical considerations of investments,

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before regulations are promulgated for these matters. As a result of the passage of the FSR, amendmentswere also introduced to both the Australian Securities and Investments Commission Regulations 2001and the Corporations Regulations 2001. Some of the amendments made to the Corporations Regulation2001 include:

listing those products which do not fall within the definition of a "financial product". These areexempt public sector superannuation schemes, credit facilities, surety bonds and bank drafts;

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setting out a different product-value tests for certain types of financial products such as derivativesin order to determine whether a client is a retail or wholesale client (Eds: the level of consumerprotection is lower for wholesale clients);

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setting out the obligations to be met by applicants for an Australian market licence and thecontinuing obligations of licensee;

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the exclusion of certain entities such as the Stock Exchange of Newcastle Limited, the BendigoStock Exchange Limited and their participants in facilitating direct broker-settlement transactionsentered into on these exchanges from being a "clearing and settlement facility";

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setting out the obligations to be met by applicants for an Australian clearing and settlement facilitylicence and the continuing obligation of licensees;

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setting out those parties that are exempt from the requirement to hold an Australian financialservice licence in providing financial services. These are trustees of, non-public offersuperannuation entities and pooled superannuation trusts, persons whose provision of financialservices consists solely of referrals to a financial services licensee, parties who arrange forcontributions to be paid into a superannuation fund or retirement savings account and personsinvolved solely in insurance claims handling on behalf of insurers;

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the manner in which the disclosure of financial information is to be provided to a client and thecontents of that disclosure.

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(Source: Minister for Financial Services & Regulation Press Release, 10/10/01. Click here for a copy ofpress release)

ASIC's guide to FSR transition

To assist in the transition to the new licensing regime under the FSR Act, ASIC has released a guideentitled "Licensing and disclosure: Making the transition to the FSR regime". The guide explains how thetransitional provisions under Part 10.2 of the Corporations Act 2001 (Cth) as amended by the FinancialServices Reform (Consequential Provisions) Act 2001 (Cth) will apply to:

financial services licensing under Parts 7.6-7.8 of the FSR Act; and●

financial product disclosure under Part 7.9 of the FSR Act.●

Financial services licensing

According to ASIC, current financial service providers will have up to 2 years from 11 March 2002 toapply for an Australian financial services licence (AFS). Licensees who are currently:

holders of a securities dealers licence;●

holders of an investment advisers licence;●

holders of a futures brokers licence;●

holders of a futures advisers licence;●

bodies regulated by APRA;●

registered insurance brokers and life insurance brokers;●

registered foreign insurance agents; ●

holders of a general authority under regulation 38A of the Banking (Foreign Exchange)Regulations; and

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not subject to the licensing regime under the Corporations Act but whose activities will be subjectto the requirement to hold an AFS licence such as an operator of an exempt stock and futuresmarkets, persons operating custodial services, providers of non-cash payment facilities,underwriting agencies and representatives of a financial service provider who plan to operate as aprincipal under the new regulatory regime;

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will have to obtain an AFS. Applicants should apply early to prevent the risk of ASIC failing to processthe application by the deadline. If current financial service providers engage in new activities, they willhave to obtain an AFS licence before engaging in the new activity.

In the case of new financial service providers ie those who do not currently possess a licence as statedabove, they will have to obtain an AFS before undertaking the activity. ASIC has indicated that newfinancial service providers will not be able to avail themselves to the benefit of the transitional provisionsand should instead apply under the new regulatory regime. Any application received after 11 January2002 is unlikely to be processed by ASIC.

Current financial service providers will still be subject to their old regulatory regime for their existingactivities during the 2 year transition period. The new regulatory regime will apply to those new activitiescarried out by current financial service providers which are not covered by the terms of the licence underthe old regulatory regime. In the case of new financial service providers, the new regulatory regime willapply to them. Representatives of financial service providers will continue to be subject to the sameregulatory regime as their principal at all times.

An AFS licence will be granted to current financial service providers as a matter of course (legislativestreamlining) unless they fall within those categories of persons that will not be entitled to legislativestreamlining. They include:

person or body corporate who is or have been insolvent for the last 5 years;●

if the person has been convicted of fraud for the last 10 years; and●

if the person has had their authorisation, registration or licence to engage in financial servicesactivities cancelled or revoked by the regulator for the last 5 years.

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Product disclosure

The transitional period to the new regulatory regime for existing financial products will end either on 11March 2004 or when the product issuer chooses to adhere to the new financial product disclosure regime(whichever occurs first). If a person offers a new financial product after 11 March 2002, (ie one that wasnot offered by the issuer prior to 11 March 2002), they will not be entitled to rely on the transitionalperiod. There are however, certain obligations that will immediately be subject to the new regulatoryregime. These are:

information to existing holders of superannuation products;●

confirming transactions;●

dealing with money received for financial products before the product is issued;●

cooling-off period for the return of financial product; and●

short selling of securities, managed investment products and certain other financial products●

During the transition period, existing financial products that are subject to the old disclosure regulatoryregime will continue to be subject to that regime. To move to the new product disclosure regime, productissuers will need to lodge a notice with ASIC indicating their intention to opt to the new financial productdisclosure requirements.

(Source: ASIC Media Release, MR01/380, 25/10/01. Click here for copy of media release)

Australian market licences - a policy proposal

ASIC recently released its proposed policy on the regulation of financial markets in Australia forconsultation. The new policy is expected to replace the existing policy statements - PS 100 (Stocksmarkets) and PS 70 (exempt futures markets). Comments on the policy proposal are due on 30 November2001.

The policy proposal sets out the key regulatory outcomes that ASIC hopes to achieve in respect of:

market information;●

trading;●

participants;●

market supervision;●

market stability; and●

clearing and settlement.●

The policy proposal also sets out ASIC's approach:

to its determination of what constitutes a financial market as set out under s767A of the FSR Act.Broadly, a facility will not constitute a financial market if it is a step in the process that will resultin the eventual making or acceptance of offers or invitations (for example, an order routing systemthat routes offers to another person for execution on another facility);

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to its determination of when a financial market is be operating in Australia and therebynecessitating an Australian market licence. Section 791D defines when a financial market isconsidered to be operating in Australia. The policy proposal flushes out in more detail theapproach taken by ASIC in determining when a financial market is deemed to be operating inAustralia. Such a market is operating in Australia if:

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it is operating in Australia ie a significant part of the market infrastructure is locatedin Australia or participants have secure remote access through proprietary marketscreens;

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a person in Australia is able to acquire or dispose of a financial product through thatmarket without intervention from an intermediary; and

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it is targeted at Australian investors through advertising in Australian publications,direct mail to Australian addresses or email to Australian addresses, where the pricesare in Australian dollars and where the market is regularly used by Australianinvestors.

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in exempting a market that falls within the definition of a financial market. Its approach is thatexemptions should be granted only in rare and exceptional circumstances and only if the market

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does not require regulation to meet the regulatory outcomes set out in the policy;

to the obligations of market licensees and ASIC's annual assessment of each licensees compliancewith its obligations; and

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on how to obtain an Australian market licence. ASIC has indicated that it aims to provide theMinister with advice about the application within 12 weeks of receiving all the requiredinformation and documents.

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(Source: ASIC Media Release, MR 01/390, 2/11/01. Click here for copy of media release)

You can keep up to date with FSR developments by visiting our FSRwebsite.

Our Capital Markets teamThe AAR Capital Markets Group draws on the expertise and resources of more than 123 lawyers inAustralia and the South-East Asian region. The group is led by Michael Greig, backed by deputy leaderCraig Henderson.

We operate as one cohesive group covering the corporate and finance law and tax aspects of the issuanceof debt, equity and hybrid securities. As well as securities issuance, we cover the entire capital marketsfield, including capital management, trading systems, trading behaviour regulation and corporategovernance.

This is achieved in part through smaller product focussed teams such as:

the Convertibles Team ●

the Warrants Team●

the Corporate Governance Team ●

the Private Equity Team●

Securities Issuance Team●

Each Team has regard not only to Australian law and practice but also to law and practice in theSouth-East Asian region and in the key developed capital markets of the US and the UK. We can do thisbecause many of our lawyers have studied, trained or worked in one or more of these countries. In thisway we can provide in depth coverage of the whole capital markets field.

If you are interested in finding out more about our Capital Markets practice please contact:

Sydney Melbourne Brisbane Perth AsiaMichael Greig

+ 612 9230 4418Craig Henderson+ 613 9614 8899

Andrew Knox+ 617 3334 3356

Steven Cole+ 618 9488 3743

Ewen Crouch+ 612 9230 4958