Market Integrity Update - Issue 103 - April 2019

Issue 103, April 2019

• Former financial adviser sentenced to 10 years imprisonment

• Strengthening UK regulatory ties post-Brexit
• Equivalence outcomes to assist cross-border business
• Identifier required when reporting OTC derivative transactions
• New Rules to apply to NSXA market participants
• Funding announced to implement Royal Commission recommendations
• Civil proceedings against GetSwift Limited continue

Former financial adviser sentenced to 10 years imprisonment

Gabriel Nakhl, a former financial adviser, has been sentenced to 10 years imprisonment (six years non-parole) for engaging in dishonest conduct.

The District Court of NSW convicted Mr Nakhl on eight charges of engaging in dishonest conduct with investor funds. The conduct affected 12 investors while Mr Nakhl was a representative of Australian Financial Services Limited (in liquidation) and as sole director of SydFA Pty Ltd (deregistered).

The court found Mr Nakhl advised clients to set up self-managed superannuation funds and to invest their superannuation and other funds in products such as shares, managed funds and high interest rate bank accounts. Rather than investing the 12 investors’ funds in these products, Mr Nakhl used these funds ‘as he pleased’ and for his own purposes.

Mr Nakhl then lied to the investors, telling them that he had invested their funds in accordance with his advice and that their investments were performing well. Mr Nakhl also tried to cover up his wrongdoing by having these 12 investors sign documents that supposedly authorised Mr Nakhl to use the funds in the way he did.

These 12 investors allowed Mr Nakhl to invest approximately $6.7 million on their behalf, of which he lost approximately $5.1 million.

• Read the media release

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Strengthening UK regulatory ties post-Brexit

Have you considered the potential impact to your firm of the United Kingdom leaving the European Union (Brexit), now extended until 31 October 2019?

To assist business continuity post-Brexit, we have agreed to two memoranda of understanding (MoU) with the UK Financial Conduct Authority (FCA). The MoUs cover trade repositories and alternative investment funds (AIFs).

These agreements provide reassurance by ensuring arrangements are in place for cross-border cooperation between ASIC and the FCA.

MoU on trade repositories

A new MoU on trade repositories is required because the FCA will acquire functions and supervisory powers in relation to trade repositories, which are currently supervised at the European level by the European Securities and Markets Authority (ESMA).

The MoU on trade repositories will ensure that ASIC can continue to access data on derivatives contracts held in UK trade repositories, where the information is needed for ASIC to fulfil its responsibilities and mandates.

MoU on AIFs

The MoU on AIFs has been updated to reflect the regulatory regime that will apply in relation to AIFs in the United Kingdom post-Brexit. The MoU on AIFs provides a framework for us to work together with the FCA to ensure alternative investment fund managers and AIFs that operate on a cross-border basis are properly supervised in Australia and the United Kingdom.

The MoU will cover Australian managers that manage or market AIFs in the United Kingdom, and UK managers that manage or market AIFs in Australia, as well as their delegates and depositaries.

• Read the media release

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Equivalence outcomes to assist cross-border business

Derivatives clearing

Australian firms will no longer be subject to duplicative regulation between Australia and the United States for margin requirements for non-centrally cleared derivatives, after the US Commodity Futures Trading Commission (CFTC) approved a comparability determination on Australia’s regime on 27 March 2019. This means firms complying with their Australian Prudential Regulation Authority requirements will also comply with the CFTC’s non-centrally cleared margin requirements.

Benchmarks

Earlier in March, the European Commission published a draft decision that the Australian regime for benchmark administrators in Australia is equivalent to that in the European Union. This follows the implementation of the ASIC benchmarks regime in 2018. When finalised, this decision will mean that users of Australian licensed financial benchmarks will comply with EU requirements, without Australian licensed benchmark administrators needing to be dually-licensed in the European Union.

• Read the CFTC media release

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Identifier required when reporting OTC derivative transactions

If you’re required to report trades in over-the-counter (OTC) derivative transactions (under the ASIC Derivative Transaction Rules (Reporting) 2013), then since 1 April 2019 you must report using a standard identifier. This includes:

• any company (and a party that reports on your behalf, if applicable)
• any other entity (excluding individuals), namely your counterparty, and if applicable, your broker and clearing member.

The identifiers to meet this requirement are:

• Legal Entity Identifier (LEI)
• if no LEI, an international business entity identifier issued by Avox Limited (AVID)
• if no AVID is available, a Business Identifier Code (BIC).

It is important that reporting entities ensure that required reporting of transactions is complete, accurate and current, including one of the standard identifiers above. A failure to do so is a breach of your obligations.

We’ve granted a conditional short-term extension of relief from using one of the above identifiers for your counterparty and, if applicable, your broker or clearing member. The relief requires you to report an internal client code for that party and make reasonable efforts (including documenting procedures) to:

1. request that your counterparty and, if applicable, your broker and clearing member obtain one of the standard identifiers and provide it to you
2. obtain one of the standard identifiers on behalf of these parties.

We can request reporting entities relying on this relief to show us how they comply with the condition.

This relief ends on 30 September 2019 for non-reporting counterparties that are:

• incorporated or formed in Australia, or
• a branch located in Australia.

Otherwise, the relief applies to transactions with other non-reporting counterparties until 31 March 2020.

• See the Global LEI Foundation’s website for more information on LEIs
• Read the OTC derivatives FAQs

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New Rules to apply to NSXA market participants

National Stock Exchange of Australia (NSXA) market participants that are not participants of any other securities market must comply with the ASIC Market Integrity Rules (Securities Markets – Capital) 2017 (Securities Capital Rules) from Monday 6 May 2019 – as well as with the ASIC Market Integrity Rules (Securities Markets) 2017. 

NSXA market participants should be aware that:

• the Securities Capital Rules contain additional requirements to those in the previous NSXA rule book
• they have new obligations and there is new guidance under Regulatory Guide 265 Guidance on ASIC market integrity rules for participants of securities markets (RG 265)
• they need to have plans in place to implement changes to their compliance arrangements before 6 May 2019.

Some of the additional requirements for NSXA market participants under the Securities Capital Rules are to:

• comply with the risk-based capital requirements, including maintaining minimum capital levels
• provide ASIC with monthly risk-based returns detailing capital levels
• provide ASIC with annual audited risk-based returns including statutory accounts and signed auditor’s reports.

Refer to Securities Capital Rules and RG 265 in the first instance.

Further information can be obtained by contacting your Intermediary Supervisor.

• Read the media release on our consolidated market integrity rules

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Funding announced to implement Royal Commission recommendations

The Government has announced more than $400 million in additional ASIC funding over the next four years. This funding will assist ASIC to expand our intensive supervisory approach and pursue stronger penalties and sanctions against those who breach the law.

The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry contained 12 recommendations – directed at ASIC or where the Australian Government’s response required immediate action by ASIC – without the need for legislative change.

The additional funding will assist in the implementation of these recommendations, supporting:

• our new Office of Enforcement and our ‘why not litigate’ enforcement stance. For companies and licensees and their senior management and directors, this means that if we think you’ve broken the law, there is a much greater chance that the courts will now decide whether you have, and if so, how.
• a boost to our supervisory initiatives, particularly the onsite Close and Continuous Monitoring (CCM) program for large financial institutions. A primary goal is to modify the behaviour of large institutions, encouraging them to place consumers first in their decision-making, and quickly identify and respond to conduct that produces unfair outcomes.

This funding is crucial as we continue with our change agenda that includes implementing the recommendations of the Royal Commission.

• Read the media release

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Civil proceedings against GetSwift Limited continue

We commenced civil penalty proceedings in the Federal Court of Australia in Melbourne against GetSwift Limited (GetSwift) and its directors Bane Hunter and Joel Macdonald on 22 February 2019. A former company director, Brett Eagle, was joined as a co-defendant on 15 March 2019.

Our case relates to a series of ASX announcements made by GetSwift between February and December 2017, involving agreements with clients for the use of the company’s software-as-a-service (SaaS) platform. We allege that these announcements were misleading, and that GetSwift failed to notify the ASX of material information in relation to the client agreements.

Further, we contend that Mr Eagle, Mr Hunter and Mr Macdonald were involved in the failure of GetSwift to meet its obligations and failed to execute their duties to GetSwift with the requisite degree of care and diligence that a reasonable person in their respective positions would exercise.

We’re seeking:

• declarations that GetSwift, Mr Eagle, Mr Hunter and Mr Macdonald contravened provisions of the Corporations Act
• orders that GetSwift, Mr Eagle, Mr Hunter and Mr Macdonald pay penalties to the Commonwealth
• that Mr Eagle, Mr Hunter and Mr Macdonald be prohibited from managing a corporation for such period as the court thinks fit.

The hearing is set to continue on 8 June 2020.

• Read the media release

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