PRACTICE AND PROCEDURE - Stay - Confidentiality Orders - ASIC Banning Order - financial services industry - breach of Corporations Act - financial services law - meaning of employee - breach of ASX market rules - private dealings of employees of financial services licensee - Staff Dealing Rules

Administrative Appeals Tribunal Act 1975

Australian Securities and Investments Commission Act 2001

Corporations Act 2001

Re Commonwealth of Australia and Quirke [1986] AATA 57; (1986) 9 ALD 92

Re Dart and Director-General of Social Services (1982) 4 ALD 553

Re Tweed and Australian Securities and Investment Commission [2007] AATA 1226

Re Labrador Liquor Wholesale Pty Ltd and CEO of Customs [2006] AATA 485

Re Secretary, Department of Workplace Relations and Nicholas [2006] AATA 497

Re VBJ and Australian Prudential Regulation Authority [2005] AATA 642

Shi v Migration Agents Registration Authority [2007] FCAFC 59

1. By a notice dated 25 September 2007, the Australian Securities and Investments Commission (ASIC) banned the applicant from providing any financial services for a period of three years.
2. On 3 October 2007 the applicant lodged an application for a review of the decision with the Tribunal. In addition, the applicant lodged an application, pursuant to s 41(2) the Administrative Appeals Tribunal Act 1975 (AAT Act), seeking that the operation and implementation of ASIC's decision made on 25 September 2007 be stayed and that ASIC not publish any media release or make any public disclosure regarding its decision. The applicant also sought orders under s 35(2) of the AAT Act that the name of the applicant not be disclosed; that publication of and access to the name of the applicant and any material tending to identify him be restricted to Members and staff of the Tribunal, the parties to the proceeding, the legal representatives and advisers and staff of any transcription service; and that all hearings be held in private.
3. On 3 October 2007 Deputy President S.A. Forgie ordered that the applicant be described by the letters XTWK for the purposes of this application and that publication of the name of the applicant, and of any material tending to identify him and any entities in which he has an interest, be restricted to Members and staff of the Tribunal, the parties and their representatives and professional advisers and staff of Auscript, the transcription service.

1. Between 2001 and 2006 XTWK was employed by Company A. Company A was a related body corporate of Company B which held an Australian Financial Services Licence, as that term is defined in Chapter 7 of the Corporations Act 2001 (Corporations Act).
2. XTWK worked on the institutional equity sales desk. In 2006, Company A terminated XTWK's employment on the ground that he had breached internal Staff Dealing Rules by conducting personal share trading with another stockbroking firm. He was also accused of causing a financial services licensee to enter into a financial product transaction on a licensed market without disclosing to the buyer that the licensee was acting on its own behalf in the proposed dealing. However, following investigation of this allegation, a delegate of ASIC who was authorised to hold hearings under Division 6 of Part 3 of the Australian Securities and Investments Commission Act 2001 (ASIC Act), determined that XTWK was not involved in a contravention of the Corporations Act by causing Company B to enter into a financial product transaction on the Australian Stock Exchange (ASX) without disclosing that it was acting as principal.
3. After conducting a hearing at which XTWK had the opportunity to make submissions, ASIC's delegate determined that XTWK had breached a condition of his employment with Company A which required him to comply with Staff Dealing Rules including the trading of securities and derivatives through an account kept with Company A, and only upon obtaining authorisation prior to trading. According to the delegate, that constituted a breach of s 991F(3) of the Corporations Act. The delegate also found that XTWK wilfully disregarded ASX Market Rule 7.8.2 and therefore may not in the future comply with a financial services law as that term is defined in s 761A of the Corporations Act.
4. Following his dismissal by Company A, XTWK spent approximately five and a half months attempting to find alternative employment in the stockbroking industry, without success. This was because he had to explain to prospective employers why he was dismissed by Company A.
5. Finally, in 2007, XTWK obtained employment with another broking firm, Company C. Company C is aware of the circumstances in which XTWK's employment with Company A was terminated. After commencing employment with Company C, XTWK transferred his private share accounts to the broker used by Company C for the purpose of employee trading. He did not trade on those accounts between the time he left the employment of Company A until those accounts were transferred to the broker used by Company C. Since obtaining employment with Company C, XTWK said that he has strictly adhered to the Staff Dealing Rules applied by Company C in respect of Employee Trades.
6. The problem that XTWK now faces is that because he has been banned from providing financial services for a period of three years from September 2007, his employment with Company C is in serious jeopardy. He is unable to continue in that employment while the Banning Order is operative. XTWK was also concerned that if he is prevented from continuing with his employment at Company C until his application for review of the decision to ban him has been completed, this fact would become well-known in the broking industry and his reputation would be severely damaged. Therefore, XTWK holds serious concerns that he would lose his client base and that prospective clients would be unlikely to deal with him even if his application for review is successful. For those reasons XTWK has applied to the Tribunal for a Stay of the operation and implementation of the decision of the delegate of ASIC dated 25 September 2007. XTWK also seeks an order pursuant to s 35(2)(a) of the AAT Act that the hearing be held in private so that his reputation can be protected. As I have already mentioned above, the Tribunal has made Orders restricting the publication of evidence and materials lodged with the Tribunal.

1. Generally, the making of an application to the Tribunal for review of a decision does not affect the operation of that decision or prevent the taking of action to implement the decision (s 41(1) AAT Act).
2. However, an applicant aggrieved by an agency decision may seek a Stay in accordance with s 41(2) of the AAT Act. It provides:

...

(2) The Tribunal may, on request being made, as prescribed, by a party to a proceeding before the Tribunal (in this section referred to as the relevant proceeding), if the Tribunal is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review, make such order or orders staying or otherwise affecting the operation or implementation of the decision to which the relevant proceeding relates or a part of that decision as the Tribunal considers appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.

...

1. A detailed analysis of the principles underlying the exercise of the power contained in s 41(2) of the AAT Act are set out in the decision of Deputy President S.A. Forgie in Re VBJ and Australian Prudential Regulation Authority [2005] AATA 642. In that case, Deputy President Forgie was dealing with a decision by Australian Prudential Regulation Authority (APRA) to disqualify a person from being a trustee, investment manager or custodian of a superannuation entity in the context of the Superannuation Industry Supervision Act 1993. Those principles are equally applicable in this case. As DP Forgie said, s 41(2) of the AAT Act requires a number of matters to be considered when determining whether to grant a Stay. They are whether:

(a) in the opinion of the Tribunal, it is desirable to do so after taking into account the interests of any persons who may be affected by the review; and

(b) it is appropriate for the purpose of securing the effectiveness of the hearing and the determination of the application for review.

1. In taking into consideration the interests of any persons who may be affected by the review, I am required to look beyond the interests of the parties in making a decision. I accept that the reason Parliament granted ASIC the power to make a Banning Order is the protection of the public. Chapter 7 of the Corporations Act, which deals with financial services and markets, sets out the objects of the chapter as follows:

760A Object of Chapter

The main object of this Chapter is to promote:

(a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

(b) fairness, honesty and professionalism by those who provide financial services; and

(c) fair, orderly and transparent markets for financial products; and

(d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

1. In considering what matters should be taken into account when determining whether a Stay should be granted, a number of factors have been consistently enunciated by the Tribunal as being relevant (see VBJ and APRA; Re Tweed and Australian Securities and Investment Commission [2007] AATA 1226; Re Secretary, Department of Workplace Relations and Nicholas [2006] AATA 497; and Re Labrador Liquor Wholesale Pty Ltd and CEO of Customs [2006] AATA 485) Those factors may be summarised as follows:
   • (a) the prospects of success or the merits of the applicant's case on review;
   • (b) whether there will be prejudice to the parties or anyone else if a Stay was not granted;
   • (c) whether it is in the public interest to grant a Stay; and
   • (d) whether the review application, if successful, would be rendered nugatory or pointless if the Stay was not granted.
2. It is also necessary to mention that no party in a proceeding before the Tribunal bears a burden of proof to establish facts or to make out the case for review. However, an applicant for review before the Tribunal must provide to the Tribunal sufficient evidentiary material to enable it to exercise its discretion in accordance with law (see McDonald v Director-General of Social Security [1984] FCA 57; (1984) 6 ALD 6). Put simply, the Tribunal must have sufficient evidence before it to enable it to come to a conclusion, after considering all relevant matters, that the discretion should be exercised in favour of the applicant for the Stay.

1. In considering an applicant's prospects of success in their substantive application for the purposes of a Stay application, it is not the role of the Tribunal to conduct a preliminary hearing of the substantive matter based on the evidence. As Davies J (President) said in Re Dart and Director-General of Social Services (1982) 4 ALD 553 at 555:

... It is not convenient or appropriate that on this application for a stay there should be any preliminary trial of the issues that will ultimately have to be considered by the Tribunal...

1. However, it is relevant for the Tribunal to consider whether there are facts and circumstances which, if established at the substantive hearing, would provide a basis for the applicant's success in the review application; or whether there are points of law raised which, if sustained, will lead to that conclusion (see Re Commonwealth of Australia and Quirke [1986] AATA 57; (1986) 9 ALD 92 at 95).
2. It appears that there is no serious dispute about the facts which caused the Banning Order to be made. In his affidavit, XTWK said that he had engaged in personal trading, in his own name and in the name of a corporate superannuation trustee of which he was a director, through an external broking firm. There was no dispute that that was in breach of a Company A's internal Staff Dealing Rules concerning personal share trading. XTWK did not have prior approval from Company A for personal trading and he did not disclose to any of his supervisors the fact that he was involved in personal trading outside the Staff Dealing Rules. However, XTWK said that his trading was not manipulative trading, insider trading or front running (ie buying shares ahead of client orders). In fact XTWK said that his personal trading was simply long term investment trading in shares and did not involve any other form of security. In his findings, ASIC's delegate said that there was no question that XTWK traded in shares listed on the ASX. The delegate also accepted XTWK's submissions that there was no misconduct such as insider trading, short selling or day trading and that no one suffered losses.
3. ASIC's power to make a Banning Order is set out in s 920A of the Corporations Act. Insofar as it is relevant, s 920A(1) provides:

(1) ASIC may make a banning order against a person, by giving written notice to the person, if:

...

(e) the person has not complied with a financial services law; or

(f) ASIC has reason to believe that the person will not comply with a financial services law.

1. The term financial services law is defined in s 761A (Chapter 7) of the Corporations Act as follows:

...

(a) a provision of this Chapter or of Chapter 5C, 6, 6A, 6B, 6C or 6D; or

(b) a provision of Chapter 9 as it applies in relation to a provision referred to in paragraph (a); or

(c) a provision of Division 2 of Part 2 of the ASIC Act; or

(d) any other Commonwealth, State or Territory legislation that covers conduct relating to the provision of financial services (whether or not it also covers other conduct), but only in so far as it covers conduct relating to the provision of financial services.

1. ASIC contended the XTWK breached s 991F(3) of the Corporations Act which is found in Chapter 7. Section 991F(3) provides:

(1) Subject to the regulations, a financial services licensee and an employee of the licensee must not, on their own behalves, jointly acquire a financial product.

Note: Failure to comply with this subsection is an offence (see subsection 1311(1)).

(2) Subject to the regulations, a financial services licensee must not give credit to an employee of the licensee, or to a person who they know is an associate of an employee of the licensee, if:

(a) the credit is given for the purpose of enabling the person to whom the credit is given to acquire a financial product; or

(b) the licensee knows or has reason to believe that the credit will be used for the purpose of acquiring a financial product.

Note: Failure to comply with this subsection is an offence (see subsection 1311(1)).

(3) Subject to the regulations, a person:

(a) who is an employee of a financial services licensee that is a participant in a licensed market; and

(b) who is so employed in connection with a business of dealing in financial products;

must only, on their own behalf, acquire or agree to acquire a financial product of a kind that is able to be traded on that market if the licensee acts as the agent of the person in respect of the acquisition.

Note: Failure to comply with this subsection is an offence (see subsection 1311(1)).

(4) In this section, a reference to an employee of a financial services licensee includes, for a licensee that is a body corporate, a reference to an officer of the body.

1. According to Mr S. Rubenstein of counsel, who appeared on behalf of XTWK, there are significant legal difficulties with ASIC's approach. Mr Rubenstein said that s 991F(3)(a) of the Corporations Act refers to an employee of a financial services licensee. The problem for ASIC is that the financial services licensee, which is defined to mean a person who holds an Australian Financial Services Licence, is in fact Company B. XTWK was employed by Company A. The word employee is not defined for the purposes of Chapter 7 of the Corporations Act; nor is it defined in the General Definitions section of the Corporations Act. It is defined in Chapter 5 of the Corporations Act; but those definitions are strictly limited to s 556 and to Part 5.8A. ASIC's delegated accepted that the term employee was not defined in the Corporations Act for the purposes of s 991F(3) but said:

I do not consider that it was intended in the Act that the term employee be strictly defined in the terms put forward by Mr Rubenstein.

1. ASIC's delegate also examined the ordinary meaning of the word employee as defined in the Oxford English Dictionary (2nd edition). The delegate noted that employee was defined as the person employed for wages. He also noted that the Macquarie Dictionary (4th edition), defined employee as a person working for another person or a business firm for pay. ASIC's delegate then indicated that XTWK in fact worked for Company B for a wage or salary. This was despite the fact that his employment agreement was with Company A. The delegate determined that employment with Company A was merely an administrative arrangement between related companies and therefore should not detract from the purpose of s 991F(3) of the Corporations Act. This argument appears to disregard the rules of statutory interpretation.
2. ASIC's delegate also referred to Regulation 7.8.21(4) of the Corporations Regulations 2001 (the Regulations). Regulation 7.8.21(4) provides:

...

(4) For subsection 991F (3) of the Act, a person who is:

(a) an employee of a financial services licensee that is a participant in a licensed market; and

(b) employed in connection with a business of dealing in financial products;

may, on the person's own behalf, acquire, or agree to acquire, a financial product that is able to be traded on that licensed market, without the licensee's acting as an agent in respect of the transaction, if the person's employment is not directly connected with the licensee's business of dealing in financial products on that licensed market...

1. It is difficult to understand the purpose of the delegate's reference to Regulation 7.8.21(4). It also makes reference to an employee of a financial services licensee. It provides that such a person who is employed in connection with the business of dealing in financial products may acquire a financial product that is able to be traded on the licensed market in which the financial services licensee participates, without acting through the licensee as his or her agent if the person's employment is not directly connected with the licensee's business of dealing in financial products on that licensed market. In my view, that does not take the matter any further. Regulation 7.8.21(4) only applies if the person concerned is an employee of a financial services licensee. It also only applies where a person's employment is not directly connected with the licensee's business of dealing with financial products on the licensed market. It does not appear to have any relevance to XTWK. Therefore, on the face of it, XTWK does have an argument that s 991F(3) did not apply to him at the time he was an employee of Company A.
2. In the alternative, ASIC's delegate said that he was satisfied that because of XTWK's wilful disregard of ASX Market Rules and the company's compliance policies and procedures, he may not comply with a financial services law in the future. For the purposes of this matter, it is sufficient for ASIC to demonstrate, by evidence, that XTWK may not in the future comply with any provision set out in Chapter 7 of the Corporations Act.
3. It is of some significance to determine whether ASX Market Rules fall within the definition of a financial services law. Section 761A defines operating rules of a financial market to mean any rules (however described) including the market's listing rules (if any) that are made by the operator of the market or contained in the operator's constitution and that deal with:
   • (a) the activities or conduct of the market; or
   • (b) the activities or conduct of persons in relation to the market.
4. ASX is the holder of an Australian Market Licence granted under the Corporations Act and it has published the ASX Market Rules.
5. Section 793B of the Corporation Act sets out the legal effect of the operating rules. It provides:

The operating rules (other than listing rules) of a licensed market have effect as a contract under seal:

(a) between the licensee and each participant in the market; and

(b) between a participant and each other participant;

under which each of those persons agrees to observe the operating rules to the extent that they apply to the person and to engage in conduct that the person is required by the operating rules to engage in.

The operating rules may be enforced by an application made to the Court (s 793C).

1. ASIC's delegate contended that XTWK contravened and/or caused Company B to contravene ASX Market Rule 7.8.2. Market Rule 7.8.2 sets out a procedure for obtaining consent from a responsible executive, director or partner of the market participant for trading by persons connected with the market participant. In the rules, a reference to a connected person includes a reference to an employee (Rule 7.8.1). An employee is defined in Rule 2.10 to include a representative of a market participant. A representative in respect of a market participant is defined in Rule 2.10 to mean a representative within the meaning of s 910A of the Corporations Act. Section 910A defines a representative of a person, in the context of a financial services licensee, as an employee or director of a related body corporate of the licensee. There seems to be little doubt that Company A is a related body corporate of Company B, which is the financial services licensee. It follows that a failure by XTWK to obtain permission for his private transactions would have caused Company B to breach the ASX Market Rules.
2. However, it is arguable that the ASX Market Rules do not form part of Chapter 7 of the Corporations Act. In other words, they do not constitute any part of a financial services law as that term is defined in the Corporations Act. Despite this, ASIC's delegate found that because XTWK caused Company B to breach the ASX Market Rule, he may not in the future comply with a financial services law. With the greatest respect to the ASIC delegate, that seems to be a non sequitur. The consequences of breaching an operating rule such as the ASX Market Rules is that the Court may order compliance (s 793C(2) of the Corporations Act). On the other hand, a breach of a financial services law could result in that person being banned from providing financial services, either permanently or for a specified period. Because the consequences in each case are significantly different, it is arguable that XTWK's breach of ASX Market Rule 7.8.2 is not sufficient, on its own, to enable a view to be formed about whether he will not comply with a financial services law. It is therefore at least arguable that such a breach does not lay the foundation for ASIC to make a Banning Order under s 920A of the Corporations Act.
3. Mr Rubenstein also submitted that even if there had been a contravention of s 991F(3) of the Corporations Act, there was no risk that there would be any future contravention of that section because XTWK had now regularised his personal trading; had disclosed his personal trading to Company C; and was now conducting all personal trading in accordance with Company C's Staff Dealing Rules. Because XTWK had taken these actions before the Banning Order was made on 25 September 2007, it is a relevant matter to take into consideration when determining whether a Banning Order should have been made (see the Majority in Shi v Migration Agents Registration Authority [2007] FCAFC 59. Although the delegate has considered the fact that XTWK disclosed to Company C the reasons for his termination of employment with Company A, he does not appear to have considered the fact that XTWK has, since joining Company C, complied with its Staff Dealing Rules. In my view, it is strongly arguable that this should have been taken into account when considering whether a Banning Order was required for the protection of the public.
4. Mr Rubenstein also argued that taking into account XTWK's co-operation with the enquiry into his personal trading, and the fact that his private trading was not used for improper purposes or to obtain some improper advantage, it was not appropriate for a Banning Order to be made in his circumstances. ASIC's delegate dealt with these matters and referred to the decision of the Full Court of the Federal Court in Australian Securities Commission v Kippe and Another (1996) 67 FCR 499. The Full Court (von Doussa, Cooper and Tamberlin JJ) said that:

The immediate and direct legal effect intended by a banning order is not to impose a penalty or punishment on the person concerned, but to be preventive in that it removes a perceived threat to the public interest and to public confidence in the securities and futures industry by removing that person from participation therein.

Although I have no doubt that it is arguable that XTWK does not constitute a threat to the public interest, I accept that XTWK's continued participation in the industry may affect public confidence in financial markets. However, this should be the subject of full argument at the substantive hearing of this matter.

1. XTWK contended that if the operation and implementation of the Banning Order was not stayed, significant prejudice would arise. ASIC did not suggest that it would suffer any prejudice or that any client of either Company A or Company C would be prejudiced by a Stay.
2. In affidavit evidence XTWK said that if a Stay of the operation and implementation of the decision were not granted, that would result in the immediate termination of his employment with Company C. XTWK said that if it became known in the industry that he was under an ASIC ban, his reputation would be severely damaged and he would lose his current client base and prospective clients would be unlikely to deal with him. Ms K. Judd of counsel, who appeared for ASIC, argued strongly that other than XTWK's affidavit, there was no evidence of the likely consequences of ASIC's Banning Order. While that clearly was the case, and some evidence from XTWK's current employer would have put the question beyond doubt, in an urgent application for a Stay such as this, some latitude must be given to applicants because the consequences of not granting a Stay could be disastrous in the event that the decision of ASIC were overturned at final hearing.
3. For the purposes of this application, I am prepared to accept that the operation and implementation of the Banning Order made by ASIC would have very serious consequences on XTWK's reputation and his ability to continue to work in the securities industry. If the Banning Order were to stand, ASIC is required to publish a notice in the Commonwealth Government Gazette as soon as practicable after making such an order (s 920E(2) Corporations Law). The effect of that publication on XTWK's reputation would be very serious and the confidence that his clients have in him would most likely evaporate. I accept XTWK's evidence that even if he was successful at the substantive hearing of this matter, the damage would have been done and he will have great difficulty in re-establishing a client base or gaining employment in the securities industry. XTWK's evidence was that he had already experienced difficulty in gaining employment in the securities industry after his employment with Company A was terminated.

1. As I have outlined above, there is a public interest in ensuring confidence in the securities market. Consumers of financial products and services are entitled to expect that those who deal on their behalf in this industry do so with honesty and professionalism. Markets for financial products should be fair, orderly and transparent. Therefore, the public has a right to expect that persons who provide financial services and markets do so with scrupulous attention to any statutes and rules which govern the provision of those services or that market. Furthermore, s 1(2) of the ASIC Act requires ASIC to strive to promote the confident and informed participation of investors and consumers in the financial system. ASIC is also required to take whatever action it can take and which is necessary in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers upon it.
2. While I have no doubt that ASIC has acted in accordance with its legislative charter, the question at this stage of the proceeding is whether it is necessary, in order to maintain the confidence and informed participation of investors and consumers, to ban XTWK from providing financial services and to publish the fact that a Banning Order has been made. Given XTWK's co-operation with ASIC's enquiry regarding his private trading and the fact that he has now brought his private trading within his current employer's Staff Dealing Rules, the risk to the confidence and integrity of the financial services market is slight. There is no evidence before me to suggest that the public at large or the financial markets will be imperilled if a Stay was granted.

1. Although the evidence is scant, XTWK has indicated that without a Stay Order prior to the final hearing of this matter, his employment with Company C would be terminated and he would effectively lose the opportunity to regain employment in the securities industry even if he were successful at the hearing. I accept Mr Rubenstein's submissions that a person's reputation as a dealer in the financial services industry is of the utmost importance. I therefore accept his submission that it may be that without a Stay of the operation and implementation of the Banning Order, the review application would be rendered nugatory.

1. After examining all the relevant factors which need to be considered in applications for a Stay of the operation and implementation of the Banning Order made by ASIC against XTWK, I am of the opinion that the balance favours the grant of a Stay. There are a number of serious issues which need to be canvassed regarding the making of a Banning Order under s 920A of the Corporations Act. XTWK's arguments regarding his prospects of successfully demonstrating that a Banning Order should not have been made, are not without merit. Serious questions have been raised about the operation of s 920A of the Corporations Act. Serious questions are also raised about the effect that a breach of ASX Market Rules may have on any belief ASIC has that XTWK will not comply with a financial services law in the future. A breach of the ASX Market Rules does not appear to be a breach of a financial services law.
2. Because XTWK has now brought his private trading within the rules for that activity, there is no reason to believe that he currently constitutes a threat to clients or to the public in general. It does not seem to be necessary in the public interest to uphold the Banning Order at this time. Finally, there is some evidence before me that the operation and implementation of the Banning Order may well render a review of the application, if successful, nugatory. The damage to XTWK's reputation would have been done and I accept that irrespective of a successful outcome at the final hearing of this matter, he is likely to have serious difficulty in resuming his employment in the securities industry.
3. Therefore, I am of the view that the operation and implementation of the decision of ASIC's delegate made on 25 September 2007 should be stayed. I am also of the view that the hearing of this matter should be held in private and that restrictions be placed on the publication of XTWK's name and the evidence given before the Tribunal in this matter.

I certify that the forty-two [42] preceding paragraphs are a true copy of the reasons for the decision herein of

Solicitor for the applicant: Rockman & Rockman Barristers and Solicitors

Solicitor for the respondent: Australian Securities and Investments Commission