Controversy over last year's disastrous BrisConnection's float has prompted market regulators to change rules governing partly paid securities, imposing a new requirement for an agreement to be signed between a broker and a retail investor.
Controversy over last year's disastrous BrisConnection's float has prompted market regulators to change rules governing partly paid securities, imposing a new requirement for an agreement to be signed between a broker and a retail investor.
The Australian Securities and Investment Commission and the Australian Securities Exchange today announced the change, which comes on the back of the BrisConnections legal wrangling.
Some BrisConnections investors bought partly paid securities for less than one cent, however did not realise that they would be obliged to pay future instalments which have the potential to total millions of dollars.
BrisConnections has a concession to build and operate the Airport Link toll road in Brisbane.
ASX today said brokers will be required to obtain from retail clients a signed agreement that their clients are aware of responsibilities associated with partly paid securities.
Similar rules already apply for existing complex products including options, futures and warrants.
Federal Minister for Superannuation and Corporate Law Nick Sherry has already approved the change.
"The Government shares the concerns of ASIC and the ASX that retail investors have not fully understood their potential obligations with regard to partly paid securities," Senator Sherry said.
"A falling sharemarket this year has meant that some securities that looked like a bargain actually had huge liabilities attached to them that were not understood by retail investors who purchased them.
"Today's announced rule changes will greatly assist in ensuring retail investors more fully appreciate the implications of this type of security, and that aligns with the Government's overall focus on market integrity."
The change will come into effect on May 1.
The new market rule doest not apply to no liability companies, because the companies do not have a contractual right to recover calls on the unpaid issue price of their shares, ASIC said.
In these cases, the shareholder has the option of paying the call or forfeiting the shares.
There are five partly paid securities listed on ASX that will be subject to the new rule.
ASIC and Senator Sherry's announcements are below:
shares
ASIC and the Australian Securities Exchange (ASX) have agreed that ASX will implement changes to its market rules relating to partly paid securities and instalment receipts 'Partly Paid Securities'.
The proposed amendments are aimed at improving disclosure for retail investors to ensure they are adequately aware of potential liabilities when making investment decisions.
ASIC is aware that a number of securities quoted on the ASX are partly paid securities with future obligations to contribute further capital. Therefore ASIC believes that the enhanced investor protection embodied in this new measure helps address current market concerns.
The specific operating rule changes agreed to are:
A new definition of 'Partly Paid Security' is to be included in the Definitions section of the market rules.
A new requirement for market participants and retail clients to enter into a Partly Paid Security Client Agreement prior to the retail client buying Partly Paid Securities for the first time.
The new market rules do not apply to no liability ('NL') companies, as NL companies do not have a contractual right to recover calls on the unpaid issue price of their shares; the shareholder has the option of paying the call or forfeiting the shares.
ASIC and ASX have been in direct contact with several market participants to ensure that they have contacted their clients with current orders to buy Partly Paid Securities and communicated their potential obligations to them.
Changes to the ASX market rules are subject to Ministerial approval and that approval was received today. The new rules are effective from 1 May 2009.
Senator Nick Sherry, Minister for Superannuation and Corporate Law, has today allowed changes to the Australian Securities Exchange (ASX) market rules to boost retail investor disclosure and protection in relation to "partly paid securities".
Partly paid securities, or instalment receipts, are securities that require that on a future date or dates to be specified by the issuer, that the holder may have a legal obligation to pay the balance of the previously uncalled issue price.
The ASX, the market supervisor, and the Australian Securities and Investment Commission (ASIC), the market regulator, put forward a market rule change to insert a new definition of a partly paid security and impose a new requirement for market participants and retail investors to enter into a Partly Paid Security Client Agreement before the retail client buys partly paid securities for the first time.
"The Government shares the concerns of ASIC and the ASX that retail investors have not fully understood their potential obligations with regard to partly paid securities."
"A falling sharemarket this year has meant that some securities that looked like a bargain actually had huge liabilities attached to them that were not understood by retail investors who purchased them."
"Today's announced rule changes will greatly assist in ensuring retail investors more fully appreciate the implications of this type of security, and that aligns with the Government's overall focus on market integrity," said Minister Sherry.
These changes to the ASX market rules were lodged with the Government on Friday, April 3. Under the Corporations Act 2001, the Minister has 28 days to choose whether the rule changes should be disallowed. The Minister has chosen not to disallow these rule changes.
