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ASIC Releases New Immunity Policy for Market Misconduct

In Short

The Situation: In February 2021, the Australian Securities and Investments Commission ("ASIC") published a new policy which provides immunity to individuals from the market misconduct provisions in Pt 7.10 of the Corporations Act 2001 (Cth) ("the Act") when certain pre-conditions are met.

The Result: The policy provides immunity to the first person who reports an undetected breach of the market misconduct provisions to ASIC, and requires extensive co-operation by those individuals in the investigation and any ensuing court proceedings. The immunity only applies to individuals and applies in respect of both civil penalties and criminal prosecution.

Looking Forward: If the policy is as successful in encouraging reporting as the cartel immunity policy adopted by the Australian Competition and Consumer Commission ("ACCC"), we may see a significant increase in prosecutions for market misconduct.

Scope of the Policy

The policy released by ASIC in February 2021 provides immunity to certain reporting individuals in connection with contraventions of Pt 7.10 of the Act, which ASIC describes as some of the "most serious, complex and difficult to detect contraventions in financial markets". 

Pt 7.10 contraventions include: 

  • Insider trading, market manipulation, false trading and market rigging; and 
  • Dishonest, misleading and deceptive conduct in relation to financial products and services.

The policy applies to the first person who discloses misconduct to ASIC in which they, and at least one other person, are (or have been) involved, before an investigation into the misconduct has commenced (the discloser). Notably, the policy only applies to disclosers who are individuals and does not apply to corporate entities.

The discloser must admit involvement in the misconduct and must not be the instigator of, or have coerced any other person(s) to participate in, the misconduct. 

The discloser must also agree to cease their involvement in the misconduct and fully co-operate with ASIC by providing it with information which can be used in the investigations of others and in subsequent court proceedings. The level of cooperation must be extensive and includes providing detailed information to ASIC, continually updating this information, producing documents, attending interviews (which may be recorded), and giving truthful and accurate evidence at the trial of any criminal proceeding.

ASIC may also require that the discloser forfeit any profits of the wrongdoing or, where appropriate, make restitution to any victims of the wrongdoing.

Scope of the Immunity

The policy provides the discloser with immunity from both civil penalty and criminal proceedings. 

If ASIC is of the view that the discloser satisfies the policy, it will recommend that immunity be granted by the Commonwealth Director of Public Prosecutions ("CDPP") under s 9 of the Director of Public Prosecutions Act 1983 (Cth). 

The immunity which may be granted by ASIC or the CDPP applies not only to contraventions of Pt 7.10, but also to other contraventions of Commonwealth legislation that are connected with Pt 7.10 violations. This may include immunity from proceedings for breaches of directors' duties or the false accounting provisions if such breaches are connected to the Pt 7.10 contraventions.

The immunity does not apply to administrative actions such as applications for disqualification or revocation of an Australian Financial Services Licence ("AFSL"). The immunity also does not apply to applications by ASIC or individuals for compensation.

Analysis

The policy recognises that it is in the public interest to provide an incentive for individuals, who have combined with others to break the law, to reveal misconduct that may otherwise have remained undetected. The policy is consistent with ASIC's Strategic Priorities for 2020-2021, which include continuing to identify, disrupt and deter the most harmful conduct, including through enforcement action, with a specific focus on market misconduct.

The policy has been justified in light of the difficulties that regulators and prosecutors have faced in detecting and prosecuting white collar crime in Australia. Some of these difficulties prompted a number of recommendations by the Australian Law Reform Commission to reform laws around corporate criminal responsibility, which we explored in a previous White Paper, "The Future Direction of Corporate Criminal Responsibility in Australia." 

Market misconduct offences are particularly difficult to detect and prosecute. Detecting illegal trading activity in public securities markets is challenging, given the large amount of trades made on a daily basis and the proliferation of new trading platforms available to investors. This can make finding a "smoking gun" a daunting task in the absence of disclosure and co-operation by those complicit in the misconduct. 

By promulgating the policy, ASIC will be hoping to emulate the success of the immunity policy in respect of cartel misconduct introduced by the ACCC, which ACCC Commissioner Rod Sims has credited as central to the ACCC's recent increase in enforcement activity in prosecuting cartels. However, an important distinction between the ACCC and ASIC policies is that the ACCC policy applies to both corporations and individuals.

Three Key Takeaways

  1. ASIC's new immunity policy provides significant protection for individuals on a "first come, first served" basis, which is explicitly aimed toward incentivising such individuals to report market misconduct which may have otherwise gone undetected. 
  2. The policy requires a high degree of cooperation by individuals who seek to rely on it, and they must provide extensive assistance to ASIC or the CDPP throughout the whole of the subsequent investigation and any resulting court proceeding. However, the policy also provides extensive protection against prosecution to those individuals, not only against contraventions of Pt 7.10 of the Act, but also other contraventions which are connected to those contraventions, such as breaches of directors' or officers' duties.
  3. The policy, combined with ASIC's increased focus on market misconduct, will likely lead to an increase in enforcement action in this space. While corporations cannot be provided with the benefits of the immunity outlined in the policy, it is important that corporations, and their directors and officers, understand the prohibitions on market misconduct contained in Pt 7.10 of the Corporations Act and implement effective internal systems and processes to detect and deter such conduct. 

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