On 31 March 2023, the Markets Disciplinary Panel (MDP), a peer review and enforcement body set up by the Australian Securities and Investments Commission (ASIC), issued an infringement notice to a Market Participant (the Participant) for alleged contraventions of the ASIC Market Integrity Rules (Securities Markets) 2017 (MIRs). The conduct occurred in September 2021, when the Participant was involved in conducting an on-market buy-back of shares on behalf of a listed client (the Listed Client).
Today, we’ll break down the MDP’s findings and why this matters for other Market Participant firms.
Two alleged contraventions
Although the infringement notice contains a wealth of detail related to the background and the relevant conduct, today we would like to hone in on what we believe are the most important takeaways:
First Alleged Contravention — Rule 3.3.1(b)
In September 2021, the Participant purchased shares of the Listed Client at higher prices than allowed under the relevant Australian Securities Exchange (ASX) Listing Rules related to buy-backs. Although the Participant’s authorised representative was alerted to these impermissible transactions on the same day, this adviser failed to notify management. The MDP found that the Participant didn’t derive commercial benefit and considered this event an inadvertent and genuine error.
MIR 3.3.1 relevant provides, “A Market Participant must not:
…(b) enter into a Market transaction for a Client, except in accordance with the instructions of the Client, or of a person authorised in writing by a Client to give such instructions, or pursuant to an exercise of discretion in respect of that particular Client’s Managed Discretionary Account or as otherwise permitted by these Rules or the operating rules of the relevant Market;…”
The recommended penalty was $111,000 for this contravention.
Why it matters
In this case, ASIC incorporated the element of Rule 3.3.1 (b) related to an apparent breach of the ASX Listing Rules to address an allegation of not acting in line with the client’s instructions and hence not acting in the best interests of the client. This highlights that ASIC takes a broad view of its role in providing oversight of market activities and is pursing a regulatory approach seeking to ensure consistency, transparency and accountability in the enforcement of market integrity standards.
This could also be ASIC’s way of preventing participants from exploiting gaps or ambiguities between different sets of rules. By ‘looking through’ to the underlying listing or operating rules of exchanges and its overarching market integrity objectives, ASIC aims to maintain a level playing field and deter actions that might undermine market fairness or disrupt orderliness. It also reflects ASIC’s proactive stance in ensuring that market participants adhere to both the letter and the spirit of the rules governing their activities, regardless of whether those rules are categorised under different regulatory frameworks.
Key takeaways for market participants
The case serves as a reminder to adopt a holistic perspective on regulatory compliance, recognising that adherence to Part 3 of the MIRs, particularly as it relates to client instructions and acting in the best interests of the client, includes a responsibility to ensure compliance with relevant listing and operating rules of the exchange. Always maintain a comprehensive understanding of the broader regulatory landscape and the potential implications of your actions across different rule frameworks.
Second Alleged Contravention — Rule 5.9.1
Toward the end of September, the Participant conducted transactions that matched the Selling Client’s asks for shares with the Listed Client’s bids, resulting in pre-arranged trades. These actions were considered to not be in the “ordinary course of trading” and were deemed unfair and non-compliant, particularly because they put other Listed Client shareholders at a disadvantage. The MDP found that this conduct was intentional and serious.
The recommended penalty was $777,000 for this contravention.
MIR 5.9.1 relevantly provides: “A Market Participant must not do anything which results in a market for a financial product not being both fair and orderly, or fail to do anything where that failure has that effect.”
Why it matters
ASIC’s pursuit of an alleged breach incorporating the ‘fair’ element of the ‘fair and orderly market’ requirement in Rule 5.9.1 is the first time this has been used under ASIC’s MDP framework.
By emphasising the ‘fair’ aspect of the rule, ASIC underscores the broader responsibility of market participants to consider not only their own interests but also the interests of clients, other participants and the overall health of the market. It reinforces the notion that maintaining a fair and orderly market is not solely about compliance with technical requirements related to ‘orderliness’ and price or volume anomalies, but also about fostering a culture of ethical behaviour and responsible trading practices.
Key takeaways for market participants
You should always understand the importance of conducting your activities in a fair and equitable manner when it comes to carrying out client instructions and consider the broader implications of your actions on market dynamics and other participants. Keep in mind that, in this particular case, the contravention was further exacerbated by the lack of appropriate compliance procedures and a failure to adequately investigate, report and remediate the issue in a timely manner; this also indicates that arrangements for communicating incidents between front office, operations and compliance should be clearly defined and executed quickly in these types of scenarios.
The costs of failing to act
Failing to act in compliance with the MIRs — which are designed to uphold fairness, integrity and the orderly functioning of financial markets — can have significant consequences for market participants. These consequences can be both immediate and long-term:
- Financial impact.
- Reputation damage.
- Legal liability.
- Regulatory scrutiny.
- Loss of market access.
- Business disruption.
- Higher costs.
- Impacted market stability.
Given these potential consequences, particularly the increase in potential penalties, it’s now more important than ever for Participants to create a robust culture of compliance, establishing effective internal controls and continuously monitoring and enhancing adherence to the MIRs.
Need help creating a compliant culture protected against regulatory change and risk? Contact us today to see what our experts can do for your firm.
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