In 2004, the commonwealth legislature introduced Part 9.4AA into the Corporations Act 2001 (Cth) (the Act).  This part empowers the Australian Securities and Investments Commission (ASIC) to, amongst other powers, issue infringement notices comprising fines of up to $100,000 to listed disclosing entities for an alleged contravention of the ASX continuous disclosure requirements. [1]

Pursuant to this power:

  1. ASIC is not required to prove that the alleged conduct has actually occurred before issuing an infringement notice; and
  2. the issuance of the notice does not represent a finding that the Act has been breached.

In ASIC's words, an infringement notice "simply signals [ASIC's] view of the alleged conduct". [2]

'Continuous disclosure' obligations - how do they work?

Section 674(2) of the Corporations Act gives statutory force to ASX Listing Rule 3.1, being the principal rule relating to an entity’s continuous disclosure obligations.

An entity’s primary obligation under Listing Rule 3.1 and s 674(2) is to give market sensitive information to ASX for release to the market promptly and without delay. Specifically, disclosing entities are obliged to provide to participants in the market (through ASX as the market operator) any information that a “reasonable person would expect … to have a material effect on the price or value" of the entity’s securities, as soon as an officer of the entity becomes aware of that information. [3]

Section 677 of the Act provides some further guidance with respect to assessing what information is likely to have a ‘material effect’ on the price of securities. Pursuant to this section, if the information is likely to influence investors in deciding whether or not they should acquire or dispose of the entity’s securities, it is assumed that a reasonable person would expect that information to materially affect the value of the securities, thereby requiring immediate disclosure.

Under the Corporations Act, failure to comply with the continuous disclosure obligations can result in both criminal and civil sanctions. [4] However, as noted above, it is open to ASIC to issue a fine even if there is only a perceived failure to comply with the continuous disclosure rules.

ASIC 'Speeding tickets' - what can you expect?

The first sign that your business may be ‘in ASIC’s sights’ and susceptible to the issuance of an infringement notice will be the arrival of an ‘aware query’ letter from the market operator. ‘Aware query’ letters are, generally speaking, issued by ASX in response to an ‘anomaly’ detected in the price of the entity’s securities via ASX’s market surveillance software.

If, following the entity’s response to this letter, it appears that there may have been a breach of the continuous disclosure obligations, ASIC must first consult with ASX before exercising its own enforcement procedures. The following summarises the investigative process that will then be followed once ASIC is involved:

  1. ASIC will issue a 'price query' letter to the entity, seeking further information with respect to the uncharacteristic change in price;
  2. an ASIC delegate will then examine all available information and, on the basis of that information, “form a belief” as to whether the entity “may have” breached its obligations;[5]
  3. if the delegate forms a positive belief with respect to an entity’s possible breach of the continuous disclosure rules, a ‘hearing notice’ will be issued summarising ASIC’s reasons for holding that belief;
  4. the entity will then have an opportunity to (a) submit written submissions, including expert reports, to support its position; and (b) attend a hearing before the ASIC delegate to discuss same;
  5. it is at this point that the delegate may make a decision as to whether or not an infringement notice should be issued.

As stated above, the delegate need only have ‘reasonable grounds to believe’ that a breach has occurred in order to issue a ‘speeding ticket’. That is, there is no requirement that an ‘actual breach’ be established.

Once the infringement notice is served, the entity will have 28 days within which it must comply with the notice.

Consequences of not complying with an infringement notice

An entity's decision as to whether or not it should pay the fine prescribed in an infringement notice will often be swayed by the consequences of compliance

Click here to view the table.

In McCabes' experience, given:

  1. complying with the notice provides the entity with some form of closure; and
  2. the alternative may expose the company to protracted and costly litigation,

listed entities more often than not elect to comply with the infringement notice, even in circumstances where they contend there is evidence available to establish that no actual breach occurred.

Given that the regulator has previously considered a delay of only 60 minutes may constitute a breach of the ‘immediacy’ standards of the continuous disclosure obligations, it is imperative that listed entities have systems in place to remain ‘on top of’ potentially price sensitive information and remain compliant with the strict continuous disclosure requirements.

In McCabes' experience, publically listed companies consider there is utility in properly engaging in the process of preparing written submissions, expert reports and obtaining legal representation for the ASIC hearing as such steps demonstrate to ASIC, and the marketplace, that the entity takes seriously its continuous disclosure obligations.