Proposals to introduce ‘safe harbour’ protections should have reporting entities that choose to delegate their derivatives reporting obligations breathing a sigh of relief.
On 25 July 2014, the Australian Securities and Investments Commission (ASIC) issued a consultation paper (CP 221) seeking industry feedback on certain proposed amendments to theASIC Derivative Transaction Rules (Reporting) 2013 (Reporting Rules) that came into effect in July last year.
CP 221 proposes some amendments to the Reporting Rules to address a number of issues raised by the financial services industry regarding compliance costs and undesirable gaps in the reporting regime. One of the key proposals that will be of interest to reporting entities, particularly those caught by ‘Phase 3’ of the reporting regime, is the proposed introduction of a ‘safe harbour’ from enforcement action if a reporting entity chooses to delegate its reporting obligations to another party.
Under the existing Reporting Rules, a reporting entity may delegate its obligation to report derivatives transactions to another entity. However, it still remains primarily liable for the information reported and the reporting entity must take all reasonable steps to ensure that information reported on its behalf (and any change to that information) remains complete, accurate and current. Industry participants have raised concerns to ASIC about their exposure to liability for their delegates’ breaches of the Reporting Rules and have been seeking clarity around the requirement to take ‘reasonable steps’.
The proposed amendments to the Reporting Rules seek to limit the enforcement action that could be taken by ASIC against a reporting entity where that reporting entity has delegated its reporting obligations to another entity and certain conditions have been met. The conditions that must be satisfied are:
- the terms of the delegate’s appointment and any related arrangements must be documented in writing;
- the terms of the delegation must provide that the delegate will report on behalf of the reporting entity the reportable transactions and reportable positions in accordance with the Reporting Rules;
- the delegate must take reasonable steps to ensure that the information reported on behalf of the reporting entity remains complete, accurate and up-to-date; and
- the reporting entity must make regular inquiries that are reasonably designed to determine whether the delegate is discharging its obligations in accordance with the terms of its appointment.
The news of ASIC’s proposed amendments to introduce a ‘safe harbour’ for delegated reporting are likely to be welcomed by participants in the financial services industry who will be required to commence reporting in “Phase 3” of the reporting regime.
If the proposals are implemented in their current form, the key will be to ensure that appropriate delegation agreements are in place in order to take advantage of the ‘safe harbour’. A number of issues will need to be considered. For example, an entity delegating its obligations should focus on the scope of the delegate’s role. Does the delegate unconditionally agree to report all derivatives transactions or only those that fall within the scope of the agreement, keeping in mind that only reporting that falls within the written delegation agreement will be eligible for ‘safe harbour’ protection. In addition, the delegate will be required to contractually agree that it will take reasonable steps to ensure that the information is true, complete and up-to-date. It remains to be seen whether delegates will be willing to give such assurances.
The reporting entity will also need to have in place procedures that are ‘reasonably designed’ to ensure their delegates are fully complying with the delegation agreement. The level of enquiries required to meet this reasonableness standard remains a question which industry participants will no doubt seek further clarity and ASIC may provide further guidance as part of this consultation process.
The proposed amendments are intended by ASIC to encourage the use of delegated reporting. Although there are questions that may arise from the proposed amendments, all in all, the conditions prescribed for the ‘safe harbour’ provides more clarity and certainty regarding the actions reporting entities can take to reduce their exposure to potential enforcement action by ASIC should they chose to delegate their reporting obligations.