Thursday, 11 February 2010
Governance will work only with solid deterrence
Clearly, when it comes to regulating the Australian stock market, it’s a dictum heeded by the government Down Under. On Jan 28, sweeping changes were announced to the financial sector that put market manipulation, rigging and insider trading on a list of serious offences that include murder, drug trafficking and kidnapping.
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Governance will work only with solid deterrence
By R SIVANITHY
09 February 2010
John Quincy Adams, the sixth US president, once famously said that ‘Congress should not be palsied by the will of our constituents’.
Clearly, when it comes to regulating the Australian stock market, it’s a dictum heeded by the government Down Under. On Jan 28, sweeping changes were announced to the financial sector that put market manipulation, rigging and insider trading on a list of serious offences that include murder, drug trafficking and kidnapping.
For example, the government proposes to grant the Australian Securities and Investments Commission or ASIC the power to apply for court-approved warrants to conduct wire-tapping operations and to covertly track emails if there is suspicion of insider trading, market rigging or false statements being made. This, according to news reports, brings Australia in line with US practice and elevates these market crimes into the bracket of the other serious offences mentioned earlier for which the courts sanction such surveillance.
To augment these powers, hefty deterrents are also proposed.
For individuals, the penalties for insider trading, market rigging and manipulation are to be hiked up to A$500,000 (S$617,000) or triple the profit made or loss avoided, whichever is greater, and/or 10 years’ jail.
For corporations found guilty of these transgressions (including making false and misleading statements), the fine proposed is at least A$5 million or possibly 10 per cent of annual turnover, whichever is higher.
Clearly, the government is of the view that the existing penalties such as A$220,000 for insider trading and/or five years’ jail, or A$22,000 and/or five years’ jail for manipulation and rigging are too lenient.
Also clear from news reports is that the latest hardline shift is because of frustration at the ASIC’s poor record at securing convictions in the cases it has pursued. For example, the Australian Stock Exchange (ASX) referred 39 possible cases of insider trading, rigging, etc, to ASIC in 2009 but the latter managed to secure only three insider trading convictions and two for manipulation. Since 1999, the regulator has successfully won just 10 of 350 insider trading cases referred to it by ASX.
In unveiling the proposed changes, the Financial Services, Superannuation and Corporate Law Minister said: ‘The reforms I am announcing today do two things: they send the message that if you are thinking of engaging in market manipulation or insider trading, the penalty on detection will be significant. They also significantly increase the powers of the ASIC to investigate and successfully prosecute these crimes.’
(Last year, the government stripped ASX of most of its supervisory powers and transferred them to ASIC, so ASX does not face a conflict of interest in balancing regulatory and commercial objectives.)
Not surprisingly, the Australian corporate sector and brokers aren’t too happy with the changes; criticism centres on the government being heavy- handed. However, as Adams’ dictum goes, governing shouldn’t have to be about what constituents want, but about doing what’s necessary and right, even if it’s unpopular.
The next obvious point to consider is, of course: is there any place for similar reform here?
This issue has immediate relevance given that the Monetary Authority of Singapore (MAS) last week announced a new Corporate Governance Council to formulate fresh changes to Singapore’s Code of Corporate Governance.
It’s likely that the new council will look to strengthening the current disclosure-based framework that has been carefully installed over the past 10 years or so, taking into account imperatives surfaced by the financial crisis and the scandals surrounding China stocks listed here.
All of this is fine, but it’s worth bearing in mind that the best thought out code will have only minimal effectiveness without proper enforcement and deterrence.
All throughout the past decade, a perception has persisted that the authorities here are too lenient when dealing with market crimes and corporate governance lapses, and that the preference is for ‘low-hanging fruit’, or cases involving mainly small fry because these are easier to win. Right or wrong, this perception has to be addressed, perhaps in tandem with the new council’s efforts to structure a new code of best practice.
It may not be necessary to go as far as Australia and give investigators the power to tap phones and hack into emails. It is, however, necessary to ensure sterner punishment, more frequent enforcement and, overall, more deterrence. As we have emphasised many times before in this column, ‘let the buyer beware’ is only one side of the disclosure-based coin; the other equally important dimension is to ‘make the seller beware’, too.
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